Resource finding area with best multi family cash on cash return?

16 Replies

I'm looking for an online resource that has data on average cash on cash returns for multi family investments in a given area.  I live in California and I know that this state has MUCH lower returns than say the Midwest but what are some online resources that will actually show that data?

Using leverage. If I bought the property outright I would be asking about Cap Rate.  I'm pretty sure Cash on Cash implies using debt. Cash return on cash invested.

Originally posted by @Nicholas Lohr :

  I live in California and I know that this state has MUCH lower returns than say the Midwest 

What documentation do you have for this "known"?  True there are some metrics that calculate some "returns" as lower than some properties in the Midwest but generally California CANNOT be beat for profit.  What would you rather have, some figgered % or money in the bank? 

@Nicholas Lohr I'm not sure that this type of data exists, although I could be wrong.  REIS is a good data provider that illustrates local economic data along with sale, cap rate, vacancy, and rent growth trends in local markets.     

I think you may want to start with the size of the asset you're looking to buy (10 unit buliding, 50 unit, 150+ unit) and the capital you have for purchase.  This will immediately weed out many markets based solely on what you can take down.  I think when purchasing multifamily there are many important factors: population growth, job growth, landlord or tenant friendly city or state, vacancy trends, rent growth trends, etc.  Are you looking for a value add deal where a substantial return could be made by re-positioning the property or do you want to purchase more of turn-key property with management in place?  I believe your strategy will limit the markets you may want to enter.     

@Account Closed ","user_avatar":{"medium":{"url":"https://biggerpockets.s3.amazonaws.com/assets/avatar/no_avatar.svg"}}}" href="/users/honobob">@Account Closed Thanks for the response Bob. Your assertion that California cannot be beat for profit may be true in the appreciation arena, but for Cap Rates and Cash on Cash return the overall trend in CA is much lower than other states and cities, especially in the midwest.

Originally posted by @Nicholas Lohr :

@Bob Bowling Thanks for the response Bob. Your assertion that California cannot be beat for profit may be true in the appreciation arena, but for Cap Rates and Cash on Cash return the overall trend in CA is much lower than other states and cities, especially in the midwest.

@Nicholas Lohr.  

Cap rates, $5,000 NOI at a 5% is valued at $100,000. $5,000 NOI at 9% is valued at only $55,556! Unless you are arguing that CA people don't invest to make money in real estate then you have to admit that CA has BETTER cap rates.

Cash on cash for a property in Indiana that has seen flat rents for years on end will have an initial advantage on cash on cash rates over CA.  But if you look at cash on cash over a holding period where the rents increase 6% annually while most other costs are capped then you will see a better return in CA.

About the only thing the Midwest has over CA is the low entry cost.  Oh and the delusion that your out of sight, out of mind "investment" benefits from your absence,  But penny wise, pound foolish. 

@Bob Bowling

You lost me with that last point. How is it that you're arguing that CA has better return than midwest properties? Are there properties in Cali that you can be all in for 45k and rent for 750-800? At those numbers, a 200k CA property would have to rent for around 3.3-3.5k a month.

Originally posted by @Alain Perez-Majul :

@Bob Bowling

You lost me with that last point. How is it that you're arguing that CA has better return than midwest properties? Are there properties in Cali that you can be all in for 45k and rent for 750-800? At those numbers, a 200k CA property would have to rent for around 3.3-3.5k a month.

Why would a property not command more value for a RTP (rent to price) than $45,000?  Several reasons,

1.  That $750-800 is only possibly rent collected,  In actuality you will be paying thousands in legal fees/turnover/damage to collect some of that rent.

2.  There is no appreciation.  Each year inflation is depreciating your asset.

3.  There is no rent growth.  Each year inflation is diminishing your cash faux.

4.  Your small rent per square foot will be eaten up by expenses per square foot.

A.  In CA your rent will be collected because of the demand for housing.  Few people, other than out right scammers, want to jeopardize their ability to rent.  CA is very friendly to educated landlords.

B.  You CA property will increase in value over the rate of inflation.  There are way to tap that equity to increase your profitability.  Think about it, what did that $45,000 property sell for 10 years ago, 20,30?

C.  I still have a property I started renting in 1982.  Rent has gone from $250 to over $2,000.  That's about 6.5% rent growth.  At the same rent growth the $800 rental would be renting for $100 a month in 1982!    That is not realistic.

D.  That same property collects over $3.00 a sf a month.  That Midwest property is probably twice as big and yet rents are probably one fifth per sf.  Say $800 for 1300 sf or 61 cents.  You'll be paying FIVE units of rent for the same expense that I have in CA. 

The only CA people that invest in the Midwest are poor people that can't afford the CA market or ignorant people that can't figure that profit trumps "cash faux" or are too inexperienced that they can't figger how to leverage into this more profitable area.

The best thing a newbie can do is understand what a MARKET is.

Bob Bowling : agree with your assessment. Live in Bay Area and invest in Bay Area. Started looking in other states but find that ca seems to fair a lot better over the long haul. Considering the limited time, it might be wise to just stay investing in ca. One deal in Bay Area is like 10-20 deals in Midwest. Particularly considering inflation and property appreciation, which are more important than cash flow over the long term.

2 camps in CA I see frequently.

Those who made a ton of equity cycle upside and their dead equity versus the rents they collect has a wide gap.

They see California with a host of issues and raising taxes and looking to put rent control on landlords. They want out to other parts of the country and 1031.

The other camp is Cali lifers. They will hold and continue to buy in Cali forever.

@Nicholas Lohr ,

It's truly a dilemma. If we could get the cash on cash return like the Midwest from day 1 and appreciation like the Bay Area, everyone would be happy. However, life is not that simple. 

As someone who invest in one of the most expensive real estate markets in America, which makes your Sacto market look cheap, please allow me to share my 2 cents. As a wiseman once said "unsuccessful people make decisions based on ther current situation while successful people make decisions based on where they want to be."

@Bob Bowling is right on. Your immediate cash on cash return might not be as impressive as the Midwest on day one. However, it would likely be the same after year 3 and blow the Midwest CCR out of the water by year 5 and beyond, and we haven't even talk about the ridiculous and speculative appreciation investing in our neck of the woods.

If you look at finance articles, Detroit and a whole bunch of Midwest cities always make it to the top of the list as high cash-flow markets while San Francisco and NYC typically at the bottom of the list. Rich people vote with their checkbook, and you know where they invest their money. Why do you think the most expensive cities typically get the bulk of the investment and not the high cash-flow markets? Could these markets actually be cash faux?

As they say in hockey "A good player goes where the puck is while a great player goes where the puck will be." To cap it with Bob's comment about out of sight out of mind investments, Master Oogway wisely reminded his pupil "One often meets his destiny on the road he takes to avoid it." I would heed Bob's advice and do some more research before plowing forward. Everything in life has a price. Something is cheap for a reason so is something expensive. 

Best of luck.

Originally posted by @Minh Le:

@Nicholas Lohr ,

It's truly a dilemma. If we could get the cash on cash return like the Midwest from day 1 and appreciation like the Bay Area, everyone would be happy. However, life is not that simple....

Actually it is!

Some markets have better appreciation than the Bay area.

And Cash Flow that every time I post examples people think we're making it up.

(I lived in Santa Clara for a while nice area but I'm glad I chose a different area for investing)

Hi @Richard Dunlop,  I am new to investing and potential doing my first deal wih some commercial real estate in Palm Springs. My next goal was going to be a 2-4 family in CA but if you know areas that have better appreciation and cash flow I would really love some examples. 

Unfortunately there's no way to aggregate cash on cash returns for a given area.

Cash on cash return is dependent on leverage, operations and the market.

For example, leverage. One guy can be using 75% LTV and another uses 50% LTV. Cash on cash returns will differ. One guy borrows with a 30 year amortization, another with a 25 year amortization. Again, COC differs.

Operations: Some long time owners spare no expense in repairs as they look to hold their properties for the long run. Some quick flip guys/private equity ones try and minimize repairs so they can meet return hurdles for investors. Again, each is going to have a different NOI due to differing management styles and hence different cash on cash returns.

Markets: When people report on rent growth in a market it's almost always inaccurate. You can't aggregate every single apartment in a market (or even a sub-market or a certain street) because you don't know how each apartment looks. One property may have a 3% rent growth while another has 10% rent growth because the renovations during unit turns are vastly superior. This would impact both the expenses side of operations as well as the revenue side, hence causing different cash on cash returns.

@Bob Bowling couldn't agree with you more. I'm buying a property in the NYC area at a 6.8% going in cap rate but in 5 years I'll be at a 17% cash on cash return. I see Indiana with 15% going in cap rates but how the heck can you grow the rents and what's your exit cap going to be. 

People don't understand when you're in an expensive market that despite taxes going up each year your expense ratio ultimately keeps falling due to aggressive rent growth. In Manhattan you have properties with 20-25% expense ratios despite landlords paying all utilities because rents are hitting $100/PSF.

@Joel Owens I think you're overlooking the fact rent control helps landlords who know how to game the system. Landlords publicly complain about rent control while secretly loving it because it discourages new construction, it makes market rents rise even faster than normal and it gives you downside protection because your property will never see a decrease in revenue even in recessions. Bad economics and a terrible idea I agree but it's a boon to landlords who know how to game the system in NYC and SF.

As someone currently living in the Midwest (Northwest Indiana) looking to start purchasing properties in my area very soon I'm curious if all the feedback above is strictly for someone looking to buy out of state simply to find something cheaper.

My plan is to invest in Northwest Indiana (multifamily/buy-and-hold), and the numbers seem to check out for me (using BP calculators), but some of the advice given about Indiana is making me a bit apprehensive.  Does it make more sense for me because I live here, or do the same points made about no appreciation and no growth mean I need to consider other areas?