Investor · Baltimore, MD · Member since 2019 · 164 posts · 46 votes
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?
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
7mo
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.
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
7mo
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.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7mo
She can “promise” any return she wants—but she can only deliver the returns that the cash flow will support. A common belief is that the cap rate is equivalent to the rate of investor return in an all-cash deal, however that is untrue. The total cash outlay for any all-cash acquisition is greater than the purchase price—there are closing costs, upfront CapEx, and cash reserves to raise as well. The actual return is less than the cap rate if income and expenses remain static.
The only way that the return on an all-cash deal can exceed the cap rate is if the income can be increased, but that’s more of a bet than an investment. In some cases it’s a good bet, but in markets like this where there has been negative year over year rent growth the hill is a bit steeper to climb.
Investor · Baltimore, MD · Member since 2019 · 164 posts · 46 votes
7mo
Thank you to Benjamin and Brian. I wanted a "reality check" and you gave it. I can certainly understand how NOI equals cap rate if there is no leverage or extra costs. But there are costs: management fees; closing costs; selling costs; repairs which exceed projections; or vacancies or evictions which exceed projections. again, thank you!!!
Specialist · Greeley, CO · Member since 2026 · 36 posts · 18 votes
6mo
Great question — and the short answer is: cap rate and investor return are only the same number on Day 1, in a static deal, with no leverage. After that, they diverge.
A 5% cap rate means Year 1 NOI / Purchase Price = 5%. If nothing ever changes, your unlevered return is 5% forever. But things do change, and that's where the math gets interesting.
How an all-cash buyer can plausibly target 8%+ returns on a 5-6% cap:
1. NOI growth compounds. If you buy at a 5% cap and grow NOI by 3% annually through rent bumps and expense management, your yield-on-cost in Year 3 is already ~5.5%, Year 5 is ~5.8%. Not 8% yet, but trending.
2. Value-add repositioning. This is the real play for most syndicators. Buy at a 5% cap with below-market rents or deferred maintenance, invest capital to reposition, push rents up 15-20% over 2-3 years — now your stabilized yield-on-total-cost could be well above 6%. The exit is where the big return comes from: sell the stabilized asset at a market cap rate and the spread between your basis and sale price drives IRR into double digits.
3. Exit cap rate compression (or at least stability). If she buys at a 5.5% cap and sells at a 5% cap after growing NOI for 3-5 years, the combination of higher NOI + lower cap rate at exit = significantly higher sale price. That terminal value is where unlevered IRR gets from 5% to 8%+.
The catch: All three of those require assumptions to go right. And this is where the "no-risk" framing falls apart. She's removing interest rate risk (no debt), but she's loading up on execution risk (can she actually grow NOI that much?) and market risk (will cap rates cooperate at exit?). No leverage doesn't mean no risk — it means different risk.
The real question for her investors: What does that 8% actually represent? Is it cash-on-cash yield (annual distributions), or IRR (which includes the exit)? Because promising 8% annual cash distributions on a 5% cap rate asset with no leverage means she needs to grow NOI by 60% — and that's a very specific business plan, not a passive hold.
Honestly, for an all-cash deal, I'd want to see the full hold period model — year-by-year NOI projections with realistic rent growth and expense escalation, not just "we'll get 8%." The assumptions behind that number matter more than the number itself.