How are people buying investments with low yields?

Question

Maybe I am missing something, but I am not understanding how people are buying properties yielding < 4,5,6 percent gross. What am I missing here? If a mortgage is around 5%, then add taxes and other fees, how do people make cashflow and pay for expenses?

Mary M. · Answer

The property may not cash flow well the first year, but by year 5 it may bring in bank. Also depreciation can help where cash flow is slim in the beginning.

And finally, when the asset sells in year 10 it will be worth much more as long as rents have been increased over time. ,

Its a time game. And why commercial MF is so valuable as an investment

Mary M. · Answer

Appreciation in commercial MF is all about rent increases since properties are priced based on the amount of $$ the property throws off. This is very different than buying a SFH.

Also CAP rates are area dependant so a 6 CAP is great here but terrible some where else

Alex Coundouriotis · Answer

Lol perfect Account Closed seems to have better advice.

Russell Brazil · Answer

You are operating under the assumption that everyone wants cash flow. Not everyone does.

Also, many low yielding assets have high rent growth.

Jameson Sullivan · Answer

Lots of good ideas here. @Joel Owens consistently brings thoughtful and complete responses and hit it on the head. STNL assets are likely going to be more of someone looking to safely protect already generated wealth. Lots of people make money outside of real estate and then decide to bring it into real estate as a preservation technique. If you're looking at MF assets, the CAP rate is only a small part of the overall picture. I've seen things trade in my market at 4% CAPs on actuals going in but the Buyer knew that by pulling on a few levers they could increase the return to 8 or 9% because either the property was not being managed/operated at it's full capacity OR there was some other piece to the deal (ie adjoining raw land to develop).

If you're looking at STNL assets, then your thought on CAP vs Interest rates does have some teeth (at least for the individual looking to grow wealth through RE rather than preserve it). However, I would caution you not to look ONLY at CAP rates when evaluating a different type of asset such as MF or Storage as there are frequently underperforming parts of the property not quantified in the asking price.

Best of luck.

If you're looking at STNL assets, then your thought on CAP vs Interest rates does have some teeth (at least for the individual looking to grow wealth through RE rather than preserve it). However, I would caution you not to look ONLY at CAP rates when evaluating a different type of asset such as MF or Storage as there are frequently underperforming parts of the property not quantified in the asking price.

Best of luck.

Joel Owens · Answer

Yeah it's all relative.

If someone is making 60k a year at a job and looking for a 50k investment to throw off high multiples then stabilized commercial is not your game.

Commercial real estate specifically retail has these types of players.

1. Docs such as surgeons making 1 million a year or more income ( other medical fields I also have clients making 400k,500k,600k) a year.

2. Business owners with ongoing high cash flow from business operations and want to jump into real estate.

3. Business owners who have sold off for a hefty sum and now want to invest and get more passive return.

4. Retirees who simply want ultra safe investments with predictable returns so they can collect a check each month.

5. People in the tech space that have lots of company stock to cash out and have high net worth with annual income.

There are other instances and situations but these are the bulk of my clients. Some additional ones are family offices, funds, inheritances, sports and music figures, etc.

For STNL for instance a 7 Eleven A credit investment grade tenant might be selling for a 5.25 cap rate but the loan can be currently around 3.75 to 4.00 percent with a 25 year amortization with a newer lease in place. Rental increases can be 10% every 5 years NNN.

It's a different mindset once people become worth millions to tens of millions of dollars. They want to growth wealth in a somewhat safer and more conservative way. If they have 10 million today if the 10 is worth 17 to 20 in 10 year span then many are happy with that. A 6% yield at 10 million is 600,000 annually pre-tax. They want to outpace inflation and keep dollars growing. People that have high cash flow already look more at tax depreciation and equity multiple for total IRR over time versus high cash flow today. It's just more tax for them to pay. Some would like to take more gains in future years where the tax laws might be even more in their favor. So it can also be about timing strategies as well.

John Thedford · Answer

These buyers are bigger players that usually pay cash. They are happy with 5 caps NNN AAA rated tenants rather than leaving cash in the bank.

How are people buying investments with low yields?

How are people buying investments with low yields?

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