It's not possible to get a decent ROI with a cap rate <10%
Ok, I suppose it is possible - I'm just hoping to get some experienced investors' take! I do have capital that I'd like to put to use in an apartment building in the roughly 400K-700K range, however I can't seem to make the numbers give me a decent ROI. This very well may be mission impossible. I've run some numbers on several market rate deals, and below is roughly what I've seen:
Purchase price - 700K
Cap rate = 8%
NOI = 56K
I'd need a loan and property management.
Property management ~7800/year
Loan (5%, 20 year amort, 20% down) = 44.3K/year
Cash flow = 56,000-7800-44,300 = $3,900/year
This assumes NO capital expenses and assumes the current owner's maintenance numbers are spot on.
How is everyone making this work for them? Perhaps others are finding 11%+ cap rates in good areas?
@Austin Fruechting I have no issue with figuring value over time. As @Roy N. suggested, use the irr. A true cap as you have described is not a term used in the industry.
To state the obvious, in most areas we are in a protracted seller's market. Apartments and SFR.
In the big picture, when someone not in our business asks about apartments, I just point them to a homeownership graph. There's been a lot more demand for apartments in the last 10 years.
If over the next few years the graph gets back to 66% +/-, you'll see better 'deals' as competition intensifies for fewer apartment dwellers. But the consequence will be operational challenges and potentially higher vacancies. Throw a recession in the mix in the next 3-4 years (or sooner) and operational challenges will intensify.
Regarding "How is everyone making this work for them?" As pointed out by others, collectively we are bringing is some kind of value add. It could be, for instance, rehab and repositioning or some kind of conversion (e.g. condo conversion or reverse conversion), or a combination. But generally, I think market value purchases at this time have 'baked in' risk because of the protracted seller's market environment.
My 2 cents
