I am making offers on 20+ unit apartment buildings in central California. I am working as an independent contractor working alongside a real estate firm that is looking for B-C properties of the 20 unit or higher variety preferably with a value add component to the deal. I am using their spreadsheet underwriting template and our goal is to get to an eight percent cash on cash return for our private investors who are funding the deal. Certainly we hope as we successfully manage our properties that we will see an even better performance by these properties improving our cash on cash return for everyone.
The big challenge is as I do my underwriting I am finding that the asking prices of the buildings will return a very slim cash on cash return (some as low as 1.5-2%). When I submit my offer that is justified by our needs of certain levels of return on our investment I am looking at offers hundreds of thousands of dollars below asking price. I am also being told that multiple offers near asking price are being received by the seller.
My questions are:
1. Who can buy these properties for the three to five million dollar asking prices and not see any cash on cash return? Or in other words who am I competing against?
2. Am I competing against all cash buyers and am I out of the game because I can't come close to their offers?
Any input and ideas would be greatly appreciated!
You are stuck in a broker chain.
Here are the answers:
@Howie Baker There are many cash buyers that need to park their money. In many cases they don't even look at the coc returns, but does it cash flow. A cash flowing property in Cali. Yaahoo. On the larger deals, you also have the foreign money, insurance and hedge funds. They don't need the coc returns. They can hold for a while and bet on appreciation or just protect their capital.
You and I and any other syndicators have to work long and hard to find the good deals that are worth our time. I stay out of Cali even though I happen to live here.
Good luck to you
Hi @Howie Baker - one solution is to find deals before they're deals so you are the first and only person the seller is talking to. Do some marketing, call around to apartment owners and network. You'd be surprised at the number of multi-family landlords willing and ready to sell but just haven't pulled the trigger on actually calling a broker. You can't compete against morons because it's not a fair fight. It's like arguing with a sociopath. You'll never win. Change the rules of the game so they're not invited.
The 1-3% return is the tip off you're paying too much . Class B will have a bigger price.
"our goal is to get to an eight percent cash on cash return for our private investors who are funding the deal" and that may be part of the problem - - investors needing higher returns.
I got mine with a 1031 LTV 25% and that lead to an immediate 6+% return day one. You need to increase GSI, decrease the expenses or decrease the down payment to improve the return.
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