Where are the 10% CAP rate markets?

Multi-Family and Apartment Investing
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Where are the 10% CAP rate markets?

Keyur S.
Investor · san jose, CA · Member since 2010 · 21 posts · 1 vote

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

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
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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.

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  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
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    Brian Burke is right on the money with regards to cap rates. I look at several deals every week and really good brokers will say what the cap rate is based on (typically seller's trailing 12 or projected year 1), but even that needs to be taken with a grain of salt. Cap rates are nothing but a guide. People always brag about what cap rate they bought at, but Brian and Steve Olafson are correct -- many good deals are actually low to negative cap rates! The opportunity lies in improving and stabilizing the property.
    2Reply
  • Ryan Ball
    Rental Property Investor · Chicago, IL · Member since 2014 · 108 posts · 49 votes
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    We invest in the Cincinnati area and I would agree with @Darin Carey regarding the numbers we see.  I have a spreadsheet with 185 listed or sold multi-families in the Cincinnati area and most that are 10% or above (33 out of 185) I would not buy.  We have actually looked at 9 multi-families (primarily 4 families) that projected a cap rate of 10% or more over the last couple years and made an offer on one.  We ended up cancelling the contract because the inspection revealed major foundation issues.  All the rest were junk and/or in rough areas.  We focus on cash on cash returns and I think finding decent properties with greater than a 10% cash on cash return has gotten pretty challenging.  Although we did just put an 4 family under contract this week that we project to be 13% cash on cash (7.8% cap rate).

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  • Rurik Schutte
    Marshfield, WI · Member since 2015 · 2 posts · 0 votes
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    "Newbe"  When would you use:

    Cash on Cash -

    ROI -

           Cap Rate -

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Brian Burke - that's why I'm always packin'

    lol

    That other 120+ unit that we looked at - the nice lady at the one of the city offices told me that a couple of the buildings would work better being burnt...lol  That's not necessarily a negative is what I mean to say.  @Serge S. would say - stop being so negative.  A few murders, a few squatters, a few burnt buildings, a little arson - it's all good...  C'mon man!

    2Reply
  • Roy Oliphant
    Rockwall, TX · Member since 2014 · 380 posts · 211 votes
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    @Brian Burke 

    Not to be argumentative; I am really trying to learn

    You don't care about Cap Rates because it is a term that can mean different things.  How useless is the call for 'a good deal'?  That's not even measureable between investors because 'good' is subjective and has different values based on context and motivation.

    Please relate an objective measurement that you use to define a good deal.   

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  • Dan B.
    Rental Property Investor · St Paul, MN · Member since 2013 · 91 posts · 45 votes
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    Originally posted by @Rurik Schutte:

    "Newbe"  When would you use:

    Cash on Cash -

    ROI -

           Cap Rate -

    It depends. But usually when you want to impress someone you use the most inflated one. For instance, I got a 115% ROI, 85% CoC, with a 9.28% CAP rate on my duplex last year (real numbers - I bought it owner occ). The CAP rate is pretty good, and in this case probably the best measure of this asset, but I would tout my ROI (or CoC), that's outta this world!

    #toungueincheek

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  • Frank McGovern
    Philadelphia, PA · Member since 2009 · 97 posts · 31 votes
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    10% cap rates are very realistic in the Philadelphia market in C class neighborhoods

    0Reply
  • Michael Sobotka
    Real Estate Agent · Buffalo, NY · Member since 2014 · 23 posts · 12 votes
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    I am returning a 13-16% CAP Rate in quality suburbs of Buffalo, NY

    In the city of Buffalo with lower quality houses, the return is over 20%.

    I would never invest in anything at a 10% CAP.

    0Reply
  • Michael Sobotka
    Real Estate Agent · Buffalo, NY · Member since 2014 · 23 posts · 12 votes
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    Recent transaction I did for a client:

    $62,500 All Cash offer on a Buffalo property. 3 units collecting a gross rent of $1600. Taxes are $1300 annually.

    1Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
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    Originally posted by @Roy Oliphant:

    @Brian Burke 

    Not to be argumentative; I am really trying to learn

    You don't care about Cap Rates because it is a term that can mean different things.  How useless is the call for 'a good deal'?  That's not even measureable between investors because 'good' is subjective and has different values based on context and motivation.

    Please relate an objective measurement that you use to define a good deal.   

    Heck, a "good deal" is not only subjective between different investors, it might even be defined differently to the same investor depending on their goals at that moment.

    I don't use cap rate to define a good deal because it is inconsistently calculated and doesn't tell the whole story.

    I define a good deal using IRR. If I can deliver a 15% IRR net to my investors while carving out at least 30% of the deal for myself, I'd consider that to be a good deal in the context of a B or C class property. I have to be able to achieve that result with a conservative assumption for economic and physical vacancy, expenses, rent growth, and expense growth.

    However, if I'm not syndicating the deal and I'm doing it for my own portfolio, my definition of a "good deal" is likely to be quite different.  In this case, I might be looking to flip the property and just make a certain percentage of the exit value, or I might have a goal of generating cash flow and simply be looking at cash on cash return.

    There is no objective measurement to define a good acquisition because there are too many differing objectives amongst buyers.  Cap rate is about the best measurement out there, despite its many limitations and inaccuracies, for defining loan sizing and exit value but it has little value in defining a good acquisition.

    So, Roy, no argument here. I agree with you!

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  • Rurik Schutte
    Marshfield, WI · Member since 2015 · 2 posts · 0 votes
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    Originally posted by @Dan B.:

    It depends. But usually when you want to impress someone you use the most inflated one. For instance, I got a 115% ROI, 85% CoC, with a 9.28% CAP rate on my duplex last year (real numbers - I bought it owner occ). The CAP rate is pretty good, and in this case probably the best measure of this asset, but I would tout my ROI (or CoC), that's outta this world!

     1st. not to change the subject, but are you going to with the Packers Good Luck?  :)

    2nd. Earlier in the desiccation it was said that larger properties have lower numbers. Would that statement apply with your duplex?  What is your strategy with your duplex cashflow, flip, or something else?   Thanks for answering my Question.

    @Brian Burke Thank you for all of your input.

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  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
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    @Keyur S. 

    10% Cap Rate and higher are definitely in the Midwest and South as most people have already stated.

    0Reply
  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    Ok I will jump in the pool party!

    Cap rate is just one metric and factor of MANY. It is not the holy grail or complete answer for your investment decision to buy or not buy.

    The number one factor I see is the STATED CAP off of what existing income and expenses??

    Almost all the time the numbers are crap. 10 cap and then they are basing it off of 30 to 35% expenses with an old building. They might even have books to back up their position BUT then through experience without even looking at it you know the reason their numbers are like that is DEFERRED MAINTENANCE and not properly running the asset like they should. If they did their numbers would be 50 to 60% expenses depending on various factors.

    So this C property at a 10 cap has now turned into a 7 cap which is bad for that type of area.

    I get contacted all the time about this and the expectations from the buyer are just simply not realistic. They want a class A location and a class C cap rate! lol  Good luck with that one people.......... : )

    I know from being in the market what is available. It might take a new investor 3 to 4 months of grinding to come to the same conclusion I already know so I will not waste time with them. If they listen to me and realistic then I will look at spending time with them.

    If they are trying to throw dirt on the wall contacting 100 brokers to find the deal of a lifetime it is a waste of time. WHY because those deals that do come along the brokers buy them directly or they have buyers loyal to them where they present those types of properties first. See when a buyer is an unknown entity without a track record of performing they are an UNKNOWN RISK.

    Brokers get paid when properties close. They do not get paid for people going on wild goose chases, learning the market, etc.

    Most of my friends that own C class apartments to get the best returns out of them manage or live close to the assets. They are not buying from multiple states away or out of the country for those types of property.

    What about rent growth??

    Say you buy in a depressed area for a 10 cap. The area gets worse over time and rents decline and market value goes to a 12 cap. Did you win?? Doesn't sound like it to me.

    How about someone buying in a great area for a 8 cap and the population, incomes, etc. have all gone up and rents keep going up great year over year. You bought at an 8 cap and it wasn't a 10 but does the picture look better than the C location property now??

    I think it does.

    In those depressed areas cash flow might seem great but the chances for increased rents are low as these tenants are living hand to mouth. They can't afford large increases in rent like professional workers with discretionary income. The tenants also tend to be very unstable in their lives and jobs and turn over frequently.

    These days I just talk to people on the phone and if they are not realistic I wish them good luck. Time has to convert to dollars for me as this is a business and not the Red Cross.    

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
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    You can only vote for a post once.  I voted for @Joel Owens post already so I can't vote for it again...consider this post to be my "double vote".  Make that a "triple vote".  He's right on the money.

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  • Dan B.
    Rental Property Investor · St Paul, MN · Member since 2013 · 91 posts · 45 votes
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    Originally posted by @Rurik Schutte:
    1st. not to change the subject, but are you going to with the Packers Good Luck?  :)

    2nd. Earlier in the desiccation it was said that larger properties have lower numbers. Would that statement apply with your duplex?  What is your strategy with your duplex cashflow, flip, or something else?   Thanks for answering my Question.

    Exciting game! Too bad for the pack, but it was fun to watch. 

    I'm hardly qualified to comment but I could certainly see that. However I think the type/location of the property makes a huge difference. For instance, mine has 2 large units (2000sf+) and is in a great area with a huge park in the back yard. I'm planning to cashflow it till the cows come home. 

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  • John HornerPro Member
    Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
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    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. 

    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.

    I would agree from Columbus, Ohio, You are not likely going to find these on the MLS, but for marketers like us we see these regularly.

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  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
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  • Jared Maltbie
    Real Estate Broker · Orlando, FL · Member since 2013 · 57 posts · 15 votes
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    @Keyur S. Central Florida region. The I4 Corridor Tampa to Orlando.. Message me if you are interested. 

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  • Craig H.
    Investor · Statham, GA · Member since 2010 · 75 posts · 26 votes
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    @Keyur S.

    I have 28 SFR units in Macon GA performing near that level. Interested? ;-)

    Craig

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Roy Oliphant - CAP Rate is a market metric which illustrates the behavior of the marketplace. This metric has much less to do with subject property and much more with the market.

    Furthermore, CAP Rate is a still snap-shot in time - looks good on paper, but that's pretty much it. If the intent is to track actual and time-sensitive performance numerically, then IRR works much better.

    But, to a lot of us, time has more value than any formula can track.  Ease of management - same.  So, a "good deal" is very subjective if we are willing to step away from the numbers a bit...

    1Reply
  • Craig Teeter
    Tyler, TX · Member since 2014 · 63 posts · 8 votes
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    10 caps are everywhere. Not hard to find at all. B markets. C and D can be way higher. 

    Definitely have to watch the numbers though. I just let a deal get away from me because Loop Net had a property listed at a 7 cap when it was actually closer to 10.5 or 11. And yes, I look at Loop Net in my area because I know most everybody. 

    Have you ever considered building a relationship with a builder? 

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