Help with choosing MFH market

14 Replies

Hi all -

I'm preparing to search for my first quad-plex.  For starters I'm looking for 10% Cap and $150k-200k.  Any feedback on areas or ideas would help me narrow it down.

Thanks!

Zach

Why not look where NOI is more desirable at an 8% cap or less desirable at a 12% cap? What is your fixation with a 10% cap? Do you have any idea how hard it will be to find an area that has a 10% cap?

Originally posted by @Bob Bowling:

Why not look where NOI is more desirable at an 8% cap or less desirable at a 12% cap? What is your fixation with a 10% cap? Do you have any idea how hard it will be to find an area that has a 10% cap?

 I suppose I could search for 8%.  I just used 10% as a starting point.  I've heard a lot of people mention and use 10% in their examples.  Is it hard to find an area with MFH 10% cap rates? I'm asking.

Zach

Originally posted by @Zach Adams :
Originally posted by @Bob Bowling:

Why not look where NOI is more desirable at an 8% cap or less desirable at a 12% cap? What is your fixation with a 10% cap? Do you have any idea how hard it will be to find an area that has a 10% cap?

 I suppose I could search for 8%.  I just used 10% as a starting point.  I've heard a lot of people mention and use 10% in their examples.  Is it hard to find an area with MFH 10% cap rates? I'm asking.

Zach

Well it's just odd to be shopping for a cap rate. It's backwards. You should be looking at NOI's. Say you want a $20,000 NOI. In an 8% market you'd pay $250,000. In a 10% market you'd pay $200,000 and in a 12% market you'd pay $166,667. Different prices for the same NOI. Theoretically the market has said each deal is equal on the day of purchase. If you're in a 12% cap market you'll end up overpaying at 10 %, If you are in an 8% market you are just a lookie loo.

If you are in a 8% market but the nearest 10% cap rate market is 1000 miles away is it worth it to invest from a distance?  Higher cap rate markets have certain challenges.  Sure you're paying less to get in but do you have the skills needed to make the same profit that you could make on an 8% cap rate property? 

Be careful with cap rates.  Here they are mostly used to convince people to buy in areas that they probably shouldn't.

@Zach Adams

 Have you read Dave Lindahl's book Emerging Markets?  Have you looked in Riverside or San Bernardino County?  Are you looking to stay in California or go out of state?

I am doing this almost exactly right now.  My research so far Is Ohio, Indianapolis, Kansas City, and Texas.  I have found what I believe is a good honest realator in Kansas.  I learned today however there is another 3k units being built there.  Hope you get good feedback I will look forward to reading it.

@Eric Bilderback as much as I like Indianapolis, it's not a particularly good market for multi family. Most of the MF units are very old and in rough areas. I'd tread very carefully there.

Originally posted by @Christopher Hunter :

@Zach Adams

 Have you read Dave Lindahl's book Emerging Markets?  Have you looked in Riverside or San Bernardino County?  Are you looking to stay in California or go out of state?

 Thanks Chris.  That book is on my list.  I've heard good things and will pick it up.  At first I assumed I would go out of state, but maybe San Bernardino, Riverside, or the Imperial Valley could have afforadable MFHs? i.e. $200-400k?

Originally posted by @Mike D'Arrigo :

@Eric Bilderback as much as I like Indianapolis, it's not a particularly good market for multi family. Most of the MF units are very old and in rough areas. I'd tread very carefully there.

Thanks for the heads up Mike. I'm still going to put Indy on my SFH list.

@Zach Adams  If you really have no idea of market cap rates in So Cal, MF in great areas like west side Costa Mesa are down to about 1-3% and rougher areas like Murrieta and Lake Elsinore routinely trade in 5-6% caps.  Now that is market average.  People here will tell you there are much better deals to be had if you really look, distressed deals, etc.  And that is true if you are tied into the market or spending scores and scores of hours scouring and rejecting until the gem if found.  But the idea that you will find 10% deals in CA simply by changing your search from SD/OC/LA to Inland Empire is wishful thinking.  

Sorry I don't have any great tips but as much as I would love to participate in CA MF, I have stayed on sidelines because people are buying based on expected appreciation, not current cash flow.   Or they are getting to 10 cap using massive leverage and expectation of upside after rehab and re-positioning.  Too risky for me.

Originally posted by @Leonard L. :

@Zach Adams  If you really have no idea of market cap rates in So Cal, MF in great areas like west side Costa Mesa are down to about 1-3% and rougher areas like Murrieta and Lake Elsinore routinely trade in 5-6% caps.  Now that is market average.  People here will tell you there are much better deals to be had if you really look, distressed deals, etc.  And that is true if you are tied into the market or spending scores and scores of hours scouring and rejecting until the gem if found.  But the idea that you will find 10% deals in CA simply by changing your search from SD/OC/LA to Inland Empire is wishful thinking.  

Sorry I don't have any great tips but as much as I would love to participate in CA MF, I have stayed on sidelines because people are buying based on expected appreciation, not current cash flow.   Or they are getting to 10 cap using massive leverage and expectation of upside after rehab and re-positioning.  Too risky for me.

Thanks.  Wow 1-3% is sorry.  8% could make sense, but yes it sounds like a lot of work and time to find something like that.  I am not a real estate professional so putting the time in to find something out here that still would be 2-3 hours from me might as well be out of state. 

Originally posted by @Leonard L. :

   Or they are getting to 10 cap using massive leverage and expectation of upside after rehab and re-positioning.  Too risky for me.

How do you use leverage to get a 10 cap? 

Originally posted by @Zach Adams :
  Wow 1-3% is sorry.  

Didn't you understand what I wrote about cap rates above?  

@Bob Bowling

I will assume your question is in good faith and are asking me to explain the difference between levered and un-levered returns. Here's the deal. You buy an apt financed with debt at 80% LTV. Say the apt would return only a 7% return on all cash after expenses, so if $100k price it returns $7k cash flow. So un-levered the deal would be a 7 % return. But you pay only 5% interest rate on your 80% LTV debt. So you would get a 7% return on your investment, but you now also earn a 2% spread on the 80% debt. If you do all the math, your 7% return on all cash becomes a 15% return on the 20% cash you put down. That is the power of leverage. You can play with the LTV and/or the loan interest rate to go from 7% to 10% rather than juicing all the way to 15% as I set forth in my example, but the principle is the same. This is how so many people get 10 caps and above on MFH deals -- thru leveraging debt which is obtained at a lower cost than the all cash cap rate.

Originally posted by @Leonard L. :

@Bob Bowling

 I will assume your question is in good faith and are asking me to explain the difference between levered and un-levered returns.             This is how so many people get 10 caps and above on MFH deals -- thru leveraging debt which is obtained at a lower cost than the all cash cap rate.  

 Maybe I think you mean cap rate when you say caps?   What do you mean by caps?

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.