Where are the 10% CAP rate markets?

49 Replies

Since I can't get any more conventional loans, I am trying to venture in multi family investing to add to my monthly cash-flow. I am looking to get around a 10% CAP or better however it seems that most people are very happy with the 3-4% CAP rate they get here in SF Bay-area.

Any suggestions on markets/metro areas where I can get a 10%+ CAP rate with an investment of around $2M or less?

I am also on the lookout for brokers and lenders for that market so if you are willing to work with a newbie commercial investor, do reach out!

thanks in advance!

Keyur

Midwest.

Keyur N. like james stated most of the midwest can achieve much high cap rates. Fort Wayne is a growing economy with good things going for it. If interested in Fort Wayne I can help you out.

Youngstown, Ohio (and a lot of midwest)- but you have to be in a desireable area (in the surrounding suburbs), where people will WANT to rent and where you wont struggle terribly with vacancy.

Coastal South Carolina real estate from Myrtle Beach to Charleston is red hot right now and you can still find 10% cap rates.

Hey Keyur N. , I agree with Blake. Charleston, SC is red hot--of course some areas hotter than others. Contact me if I can help you.

Mike

10% cap rate markets exist on paper not so much reality today. Midwest? Maybe if you live there and are very competent at property management AND have the knowledge of street to street value in each neighborhood. 

If you think you can fly in for a weekend and achieve those returns consistently, I would talk to investors that have been there and done it for more than 5 years. Numbers look wildly different over 5 years than they do over 1 year or on an excel spreadsheet.

Finally - look at IRR which is your rate of return over your projected hold and not just cap rate. Cap rate is a lure and not much else.

If your in SJ - look at Richmond, Pittsburg, Sacramento suburbs and central valley.

Originally posted by @Serge S. :

10% cap rate markets exist on paper not so much reality today. Midwest? Maybe if you live there and are very competent at property management AND have the knowledge of street to street value in each neighborhood. 

Agreed!  I have not looked at an apartment cap rate with the intention of using it for anything in years.  But then again, I am not looking for cashflow like most people on this forum.  I look at the cost per unit for the purchase and then try to figure out what the cost per unit is for the future sale. 

In the 18 years that I have been investing in the apartment market, it is doubtful that I have ever purchased higher than a 7 cap. 

But beware.  Properties can easily be listed at 10 caps and be no more than a 6 or 7.

@Steve Olafson  nothing higher than a 7 cap on what appears to be a value add play? Sounds like you're competing against the big boys. 

Keyur N. Many smaller and midsize cities have stabilized class c properties throwing off cap rates above 10%, especially on smaller properties. Once you start crossing 50-75-100 units then the cap rates compress significantly for similar class c product in the same market. 

Hey @Derek Carroll  

I'm not positive that I understand your comment.  But, everyone does their own underwriting.  I see that you are a lender.  I let the lenders do their underwriting and there is no doubt that they have different numbers than me. 

I don't really see any big difference between the 25 unit properties and the 125 unit in my area.  Perhaps there is a bit more compression in the larger size but I think it is simply misrepresentation at the smaller sizes.

I make my living off of buying decent properties in good locations.  I will put some money into them but usually just enough that a buyer can see potential.

And yes, I have competed against the big boys.  I bought a 324 unit property from Berkshires down in Houston a few years ago.

Come on guys!  10% cap rates are easy to find. Just listen for the gunshots. 

I just had a 210 unit "class C+" off-market deal sent to me today. Google search reveals three homicides on-property in the last three years (and those are just the three that I found easily). Two buildings are burned and not from the same fire. One was arson.  Class C+, huh?  More like D-.

If you want 10 cap, put on your seat belt because because you're about to embark upon a wild ride. By the way, put on some Kevlar too.

Originally posted by @Brian Burke :

Come on guys!  10% cap rates are easy to find. Just listen for the gunshots. 

Now that's funny!

Ha ha I came across similar class d properties. One was in Roanoke va and the other SW DC. The Roanoke one pro forma at 18 cap but in reality the stuff you need to deal with in management is just not worth it. The DC one had this black powder on the wall of one unit. I had no idea what it was unless I saw the crime scene tape, that is was charcoal used to find fingerprints.

I recently bought a small 4 unit in the town of Quantico. Not the wealthiest of neighborhoods but it being right next to the Marine base and the FBI crime labs, I think I am pretty safe. This one actually performs at 9.96% cap. Would love to find something bigger but it isn't easy in the DC area.

@Jeremy Tillotson Lets connect. Would love to learn more about Fort Wayne

@Jen Kurtz   Lets connect and chat. I do like Ohio and its prospects

@Blake Burgess @Michael Limina: How do these areas get impacted with hurricanes etc? For a long distance investor like myself, should I be worried about it?

@Serge S. Eventually I will look at IRR, but I have to start somewhere to do an apples to apples comparison and CAP rate seems like a good number to compare properties against one another. I am looking closer to home too, like Sacramento, Folsom, etc...Thanks!

@Derek Carroll Where are you funding 10% CAP rate properties? Is there a pattern you see?

Originally posted by @Brian Burke :

Come on guys!  10% cap rates are easy to find. Just listen for the gunshots. 

LOL! Richmond and some part of Oakland might fit that criteria for sure!
Is Praxis buying multifamilies anywhere other than Texas? What CAP rates are you seeing there?

Based on this discussion it sounds like I missed a deal on a 16 unit property that has a 9.5% Cap Rate in Texas? Or is 16 units still small enough that it should look more like SFR?

Originally posted by @Keyur S.:

Is Praxis buying multifamilies anywhere other than Texas? What CAP rates are you seeing there?

I haven't bought other than TX recently, but I'm looking at other markets.  TX cap rates range from the 5's for A class up to the 9's for D class with a point up for tertiary markets (at least that's what I've seen). 

But who cares about cap rate?  People say it's a great way to compare one deal to another. Fine. As long as you are comparing your own analysis of each property and are consistently applying the same logic in each analysis, you are accurately comparing one to another. But that's not the way people talk about cap rates in the context of "what are cap rates in X area".  In that context people are asking about cap rates reported in broker proformas, offering memorandums, and by data analysts.  

For every person that analyzes a property they can arrive at several different cap rates. Pro forma. Trailing 12. Trailing 90 annualized. Trailing 90 annualized with T12 expenses. And again with those same four with an adjusted property tax assessment. There's eight cap rates and they're all different. Which one do you want? Which one do you think you are looking at when someone quotes you a cap rate? Do you think they're all consistent?

Now you see why I don't care about cap rates. I just care about where I can get good deals. Prevailing "cap rates" are only a 30,000-foot barometer.

Mostly in the Midwest and South or in smaller towns throughout the country

Originally posted by @Brian Burke :
Originally posted by @Keyur S.:

Is Praxis buying multifamilies anywhere other than Texas? What CAP rates are you seeing there?

But who cares about cap rate?  People say it's a great way to compare one deal to another. Fine. As long as you are comparing your own analysis of each property and are consistently applying the same logic in each analysis, you are accurately comparing one to another. But that's not the way people talk about cap rates in the context of "what are cap rates in X area".  In that context people are asking about cap rates reported in broker proformas, offering memorandums, and by data analysts. 

 This is golden advice

I've just got to laugh and shake my head at some of the comments and misconceptions. I may have a different perspective since I spent several years living in the high priced markets in CA, and now live in Dayton, OH.

In our market a true "C" property is around a 10 cap on using realistic expenses and reserves. No gunshots, but a few alcoholics.

A "B" property in a nice area goes for a 7-8% cap rate.

I haven't seen any "A" properties go through the market recently.

At the bottom of the barrel, a "D" property can be at a 15-18% cap or more, but who wants that drama? The potential added return isn't worth the hassle to me.

I see a lot of people marketing  properties with the wrong class, financials, etc. That doesn't change what the property is. Once you put the right numbers in place, the cap rates above hold. In our market.

For comparison, my single family properties in "C" neighborhoods are running at 12% cap, and "B" neighborhoods 8-9% cap.

Structured and managed correctly, an out of the area investor can do well, but obviously will have some added travel expenses.

Keyur N. is giving about looking at a deal deeper than just the cap rates.  

Now, if your strategy depends on buying a property to add value and then doing a signifiant cash out refi once stable, then you'll want to pay a lot more attention to what the cap rates in your target market are, as the comps that the appraiser uses will directly impact the loan proceeds that you'll be able to get.

Let me follow up on my previous comments because @Derek Carroll  brings up a good point.

What is the cap rate on an unstabilized multifamily deal that is 50% occupied at below market rents?  Using a calculator and six of the eight cap rates I talked about in my previous post, it's less than zero.  The only positive cap rate you get is using the broker's proforma and who cares about that one?

This is the instance where I pay attention to cap rate.  I'll build my own model on an as-stabilized basis...so I'm calculating the income based on reasonable physical occupancy and normalized expenses.  Then, I look at "prevailing cap rates" and calculate a value.  This isn't the value in which I'm placing on the property for my acquisition.  NO--it's the value I'm placing for my exit.  I can calculate this exit value for each year as far out as I want, whether it's two years (immediately after stabilization is achieved and trailing income has caught up) or five years, or ten...whatever.  Or perhaps that "exit" is a refinance and this number will give me guidance as to loan sizing.

So this is why I say that cap rate is irrelevant--you can buy at a negative cap rate and get a great deal (you don't have to buy a 10 cap!).  But I concede that cap rate is relevant when planning your exit or refinance.

Thanks Brian, I got through this thread without having to say anything at all, ooops, just did!

Well Brian is correct IMO, I've talked about cap rates before, those that will look at actual cap rates are future lenders, future buyers will be pretty much like me or Brian, they won't use them and are correct not to. :)

In most cases if you getting a 10 caprate it's usually a property that is in distress and is taking in high-risk marginal tenants at a higher rental rate or in rough shape or bad location. In other words be careful. I try to stay around 7 to 8 which is higher than the norm I think.

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