Where to find high cap rate apartments in class B-/C+ areas

9 Replies

Hello BP. 

I'm a "green investor" from Orange County CA and I'm looking to do a 1031 exchange for my 3plex in Chicago for a property that can cash flow better.   I'm doing research on different MSA to narrow down to 1 or 2 areas to focus on. I've been looking at net migration/job growth/unemployment/job diversity/vacancy rates, etc.  

I've considered LA/OC/IE, but the cap rates are so low and it's very hard to find any property that will cash flow in my price range that's not in D/F class neighborhoods.  I'm not really ready to take on war zones. Plus the negative net migration and unfavorable landlord environment in CA is not very attractive.

My goal is to buy a C class value-add building in B-/C+ neighborhood that has 8% cap rate for $1M-$1.5M with 25% down.  I want to purchase for cash flow, and not for appreciation potential.  The main goal is forced appreciation rather than market appreciation.  

Is this at all feasible in this hot market without stepping into a war zone?  Where do I have the best chance of accomplishing this?  


I would appreciate any suggestions.

@Ki Lee, I'm in a very similar position (sans the 1031 funds). I've also been researching MSAs and have compiled a pretty extensive spreadsheet which I'm happy to share. I've found a few markets that have the robust growth we're looking for with much higher cap rates -- places like Fayetteville-Springdale-Rogers, AR and Lexington, KY are at the top of my list. I visited Fayetteville last month and am active with a team there. The Springdale area just outside of Fayetteville has what you're looking for: C+ neighborhoods, 8-caps, about $40-50k per door purchase price.

All of my data is from the Census Bureau. Where are you getting your data, especially the net migration numbers?

Thanks so much!

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@Jon Schwartz Along with some data from census.gov, I've also looked at Comprehensive Housing Market Analysis from HUD for different MSA's. Also datausa.io has good reports for different MSAs. To be honest I've had a little bit of trouble navigating the Census.gov website and some tables have too much other data that are not relevant. Also different charts seem to present conflicting data at times. I've been considering Columbus, Cincinatti, and Indianapolis. higher cap rates seem possible, but appreciation potential seems minimal (which I am okay with ESP during this hyper inflated market). The vacancy rates are slightly high compared to areas like SOCAL and Denver, but the trend is declining. I will definitely check out Lexington and Springdale. What do you like about these areas?

@Anthony Dooley thanks.  I will check it out.  Loopnet only showed a 32 unit for $2.5M and a 10 unit for 375K and a 4 unit for $190k.  I would love to learn a little more about Columbus GA.

I'll throw in a vote for Texas. Many "working class" apartments have very strong cash flow and with conservative underwriting, i.e. cut expenses only, no rent increases, you can earn very high cash on cash returns. 

You mentioned net outflow as a concern for CA, well, they are migrating to Texas and will need housing. I always come across deals that seem to fit your criteria as well.

@Ki Lee, I like Lexington and Springdale both because they have lots of growth and a relatively small amount of new development.

I just took a look at your sources. datausa.io is all Census data, and HUD's Comprehensive Housing Market Analyses, while FANTASTIC, are sporadic. Most of HUD's data comes from the Census Bureau and the Bureau of Labor Statistics, it looks like.

Census.gov is difficult to navigate! It took me a solid month to figure out what I was doing. Once I did, I compiled a spreadsheet with the following metrics, over both a short term (2012-2017) and long term (2005-2017) for every MSA with a population above 100,000:

  • Population Growth
  • Median Household Income Growth
  • Job Growth
  • New Unit Construction
  • Supply (as measured by persons per unit)
  • Median Rent Growth

I also found each MSA's volatility as measured by its standard deviation of growth, and including other pertinent metrics, like industry diversity and education attainment numbers.

You message me your email, so I'm going to send you the spreadsheet later today. If anybody else wants it, shoot me a message with your email! I'm happy to share.

All the best,

Jonathan

@Ki Lee, I'm just curious, why the high cap rate unless only looking for yield? Purchasing multifamily at a higher or lower price based on cap rate is a bit of an illusion. The objective for private investors is typically to add value and force appreciation regardless of the price paid. The price paid then becomes a competitive advantage.

Cash flow is generated over time with value add. Yield play is typically for institutional (very large) investors with lots of cash to buy unleveraged.

Underwriting reveals opportunity in making returns and determines what cap rate (or purchase price) can be paid to meet your target. If your target is not met in a competitive market (i.e. cap rate), you move on to the next one.

Investors are still making lots of money in low cap rate areas like Dallas.