Is it reasonable to expect a 7% cash-on-cash return in these markets? Looking at an investment of $1.2M so a smaller building.
@EllieMiller I’m looking to start investing in the area as well, so I’m curious what you get for an answer.
My $0.02 for what it’s worth, is talk to a commercial agent; they can give you an idea of what the cap rates in your area are, and you could use that as a benchmark.
It’d be more work, but you could also talk to a local property manager, ask them them the properties they manage, and what the NOI looks like, then look up the sale price online, discount for inflation and back into a cap rate estimate that way.
Either way, once you had cap rate, you could get to an estimate on cash on cash return.
Hopefully, someone will just come and tell us the answer, but if not, hopefully this helps!
@Ellie Miller The "@" feature didn't work on mobile. Just quickly adding it so you're alerted of the post.
I think there are great opportunities still in Tacoma and Olympia, so I recommend talking to those Clinton mentioned.
I’ve been looking down there for a while; haven’t pulled the trigger on anything...yet, but hopeful for the New Year.
@Ellie Miller : Just to make sure we're talking the same language, you're asking about Cash-on-Cash, which is your return after leverage. Cap-rate is your return without leverage (as if you paid cash.)
The bigger the spread between your mortgage interest rate and your cap-rate, the better your CoC will be.
Tacoma is part of the Seattle-Tacoma-Bellevue MSA (Metropolitan Statistical Area.) Average cap-rates for stabilized B and C properties range from 4.75-6%, so the spread between those numbers and typical investor interest rates is pretty slim. That said, averages can be misleading, and you're not buying "average" properties because you're a bad-*** investor, right!? :)
Still, you'll be swimming a little up-stream to get decent cash-flow numbers in a low-cap MSA like Seattle.
That may call for a strategy shift. For low-cap areas, investors mostly look for total ROI (Return on Investment) opportunities which may or may not have a cash-flow component, but usually has an appreciation component. For example, you can buy a fixer at a 6-cap, rehab it, lease-up, and stabilize (also known as a value-add or forced-appreciation), then sell it at a 6-cap or lower. This generally works for 5+ units, which are considered commercial class residential.
Another appreciation strategy (which is generally poo-poohed by the BP community) is just buy for appreciation: Buy a stabilized asset, and hope the market gets hotter than it already is, then cash-out when it goes up. This generally works for residential class (4 units and below), but also can work in commercial since cap-rates are also fluid.
Hope that helps!
Updated over 3 years ago
I should have also mentioned: 7% CoC is pretty dismal unless there's a strong appreciation play at the end.
Yes, it is still possible to get 7%. Tacoma has been one of the highest appreciating cities in WA, since prices have been quite low up until this year. Feel free to give me a call or shoot me an email. Let's connect.
7% is doable, but you've got to know where to look. I see Tacoma as a long-term play. It's got a TON of new infrastructure going in over the next few years that will stabilize the city even if the area as a whole continues to cool off. I think it's a good place to get a bit of cash flow and appreciation without making a huge gamble like a lot of the folks 30 miles north are doing!