Houston Cap Rates and Cap Rate Projections?

18 Replies

I am looking at some apartment complexes as potential investments, what cap rates are we seeing in the Houston market? (Class A, B, and C)

Oh boy....ask 5 people and you will get 10 answers on this one.

We have seen everything from 4.5 to 7.5 depending on the area and class of properties.

Which submarket are you focused on?

I'm seeing something like 3-4 in areas like Montrose and Midtown. Then as you go down the food chain, I'm seeing 6-8 in the less trendy areas.

I would venture to guess in 6 months or so you will see supply coming from the hurricane and if you want to do heavy lift renovation you could end up getting really good cap based on pro-forma

For Class A, I've been seeing everything from 4% in downtown to mid-5s outside the Beltway.

@Percy N. How about C Class in west houston and spring branch north of I10?

@Fred Heller I assume you would generally consider west houston to be a “less-trendy” area trading at 6-8 cap rates? Is that the range you’re seeing for A Class to C Class?

@Jordan Decuir   No I wouldn't consider West Houston and Katy area less trendy. When I say less trendy, I'm referring to areas like Texas City and Baytown.

If you're a data geek, then here's your answer:

* Please remember the old adage: "There are lies, DAMN lies... and statistics."

The above was lifted from the 2017 H1 CBRE cap-rate survey.

The above was lifted from the 2017 H1 CBRE cap-rate survey.

@Todd Dexheimer Do you plan on syndicating some “heavy-lift” hurricane-impacted apartment deals here in houston?

@Jordan Decuir : be careful what you wish for. I tried to follow Todd into Cincinnati, and he bought the entire town before I even got there. :)

Back to cap rates: the rates I posted are averages, but are not what most would consider "good." (who wants to be average?) If you're looking for yield, you should be trying to beat those averages by a pretty good margin. If you are looking for overall IRR, then cap rate is not as important as the value-add opportunity.

Hope that helps!

James

@James Kojo , your point about IRR makes sense. My question is more from the perspective of preparing and communicating offers to sellers. How did you break into the multi-family space?

Originally posted by @Jordan Decuir :

James Kojo , your point about IRR makes sense. My question is more from the perspective of preparing and communicating offers to sellers. How did you break into the multi-family space?

Depending on how sophisticated an operator the seller is, they may or may not care about the prevailing cap as much as they care about a bottom line number, especially if you're buying distressed or mis-managed, as high expenses and/or low income will skew the cap. I think it matters more to you as the buyer for your own underwriting.

How did I break into the multi-family space? I'll let you know when I get there! :)
But seriously, I'm relatively new to MFR, but I've been doing SFR for a long while, and I'm a life-long student who likes to share whatever little knowledge I have gathered. Hence my activity here in BP. I'm actually learning while I'm doing it.

There are multiple strategies for cracking a new market from soliciting brokers to direct marketing. I chose to go the broker route. Instead of listening to my amateurish attempts, there are 2 active members here in BP that also have podcasts. Check out @Todd Dexheimer 's "Pillars of Wealth Creation". On episode #2, he talks about how he cracked the Cincinnati market. Also check out John Casmon's "Target Market Insights".

Hope that helps!

James

@James Kojo Are you planning to trade in your SFRs to go into Multi-Family? Maybe as a passive investor on a deal or two? What does your SFR portfolio look like?

Thanks for the podcast info. I have heard from a few folks that @Todd Dexheimer has been killing it in Multifamily. That Target Market Insights podcast is also one that I have been interested in checking out. I hear about it on the Best RE Investing Podcast Ever with Joe Fairless, which is another good one, especially if you only have 20-30 minutes to spare at a time.

Thanks for the shout out @James Kojo

@Jordan Decuir Houston is a market that I have been watching and will likely be spending some more time talking with brokers, lenders, appraisers, PM's, etc. We will see where that takes me. 

@Jordan Decuir : I'd be happy to swap war stories! Probably best done off-line. connect and PM me if you're up for it!

James

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