CAP Rate versus return to investors

[Arthur Schwartz]

In an interesting video on Youtube, a lady is interviewed saying that she's raising money to buy apartment buildings for all cash (no mortgage) because of her religious beliefs.  She talks about investing in markets like Atlanta or Charlotte where my understanding is, cap rates are relatively low, say 4% to 6%; yet she claims that she is promising returns to investors of 8%.  She's just starting out but is attracting interest from investors wo don't want risk.  How can she get returns of 8% or better if she's using no leverage.  Cutting costs and raising rents would seem unlikely to bring a 6% cap rate (for example) up to 8% or better on large multifamily.  Or is there a difference between cap rate and return to investors if there is no leverage?

[Benjamin Aaker]

These promises are based on value-adds and appreciation and are banking on refinancing or selling to give the (not) promised return. You'll occasionally see some people raise extra and use the money from that raise to pay people's returns, which ultimately decreases returns. These are ways to get that initial return to look good. That's not to say there's anything shady going on in this deal, but potential investors should do their diligence and not expect returns immediately.