Investor · Melrose Park, IL · Member since 2015 · 77 posts · 24 votes
I have been reading "How to make Big Money in Small Apartments" by Lance A. Edward and foreword by Ron Legrand. I am pumped to buy small 5+ unit buildings. It seems to me that unless you buy buildings with a minimum cap rate of 20%, it is hard to make it work. I am going with the assumption that the buyer is financing the property of course. My goal is to net $100/month/unit AFTER expenses, financing, vacancy, repairs, etc.
This leads me to understand that the financing is critical. What is the best way to find private investors who are willing to finance 90-100% of the property? And, it seems to me that for a private investor to do it, they would want to see a high cash/cash return. What interest rates and terms do they want on average? Obviously, as the property investor, I would want the lowest rate at the longest term possible to get the payments low. James
Well Sajju from Oakland, and Bob from Hawaii, yes in both of those parts of the country, a 20% cap rate would not be realistic. However, in the Midwest, it is quite common to see 10-15% cap rates often, 15-20% in lower middle class-lower class areas.
the buildings I own are at a 50% cap rate. Highly risky but at my age and experience is worth the risk to me.
If you plan on buying a multi don't look at cap rate, look at vacancy, if it's 100% chances are its too cheep and you could probably get away with raising the rent, if it's at 50% maybe the area is terrible or the units dont fit well with the people living in the area. its a bad investment to have one bedroom units if the area's average household is +4 people.
Also like it was stated above, the higher the cap rate the higher the risk it is as an investment, perhaps it is an older building with repairs left and right, maybe its a high crime area or perhaps it is low income high turn over, or worse it is an area where its impossible to find good tenants.
Investors come in all kinds of risk tolerances and investment desires. Some want a turn key super high end neighborhood and are willing to pay a premium for the security and will settle for less profits, others want to go all in and invest in distressed properties in not so great neighborhoods for huge returns and are willing to accept the risk.
Id say the best course of action is to do it yourself, or follow along with someone who does the kind of investing you want to do and have him or her as your mentor. Once you have a foot on the ground and are being successful, people who previously would have never entered real estate investing will line up wanting to join forces with you