I have been investing in SFH rentals in the Seattle area and want to move to multi-family apartments ($2-3M value). I am using MLS and Craiglists but not have luck finding anything close to a 10% CAP rate. Does a 10% CAP still exists or am I using the wrong tools to find properties. Thanks for the advice.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y
Sure, ten caps are everywhere. Just visit a war zone in a dead market near you.
Ten caps are ten caps for a reason...but I sure can’t think of a reason to buy one. Don’t lose sight of the fact that high cap rates do not mean high return. They just mean that the property and/or area is undesirable, thus the greater market places less value on the income stream than in better markets.
If your buying criteria is a high cap rate, you are using cap rate improperly.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
@Thang Nguyen I have been looking as well. I found two properties (over 10 caps) over the past two years or so, and they were too rough for me. The amount of money and work required to rehab them was just too much. I also use more search engines because there are many different MLS databases. Cap rates are often mis calculated because so many expenses are pro forma-and just plain wrong. MF has gone completely crazy the past 24 months or so, and what comes on the market-no matter how bad-gets gobbled up quickly! Sellers in Tacoma and Olympia want San Francisco prices! LOL
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y
Sure, ten caps are everywhere. Just visit a war zone in a dead market near you.
Ten caps are ten caps for a reason...but I sure can’t think of a reason to buy one. Don’t lose sight of the fact that high cap rates do not mean high return. They just mean that the property and/or area is undesirable, thus the greater market places less value on the income stream than in better markets.
If your buying criteria is a high cap rate, you are using cap rate improperly.
Investor · Utica, NY · Member since 2016 · 24 posts · 26 votes
7y
If you want to follow what’s cool then “low cap rate means your getting less headaches and you wont get shot” and “ high caprate means you are in the war zone”, But in truth if you want those great deals, things are more complicated then that. Example in NYC, you have some of the lowest cap rate in not so great areas. In New Hartford NY (in central NY), you can have great quality tenants at a much higher caprate. THe reason is supply and demand not the tenant quality. You have more people coming from all over wanting to buy in “NYC”. You can resale the building for more in a year. However that does not guarantee you won’t get shot before doing so, at that property. Another thing you want to be careful with is a recent trend prices for multi families have been going up in not so great areas but rent has not gone up and the headaches are still there. So if you are going by the theory lower caprate means better area only. You may get yourself in a property you are not ready to manage. I think you should approach each area very careful. Sometimes a good or bad neighborhood (low or high caprate can literally be different by blocks or sides of the same the street) The more you get into the details of the area you’re investing in the more you will be a success.
Real Estate Agent · Luray, VA · Member since 2016 · 459 posts · 293 votes
7y
10% caps do still exist, but like the other individuals above pointed out, generally it's because it is in a poor location or requires a major lift. If you have the experience and expertise to do those major turnarounds, then they could be a good fit for you.
Only other mechanism that can help with getting a better price - and therefore higher cap rate - would be marketing direct to owners and building a relationship with them. This can be a little tricky/costly in multifamily though.
Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes
7y
Likely won't find that in King or Pierce county. You can likely find a major value add that could get you up to those numbers in less active counties. Feel free to reach out to discuss, MLS and Craigslist don't include anything on the commercial MLS, CBA. Happy to help you find something.
Rental Property Investor · Johnson City TN · Member since 2016 · 386 posts · 271 votes
7y
@Thang Nguyen - Finding them on the MLS is going to be tough. It sounds like you may be starting to reach out directly to owners (your Craigslist reference). That may be your way to find these higher CAP rate deals. I would suggest driving for dollars. Pick an area you'd like to invest in and look for what appear to be Mom and Pop sellers. Typically they'll have the hand made "for rent" signs, if you call them, the owner might be answering the phone.
In addition to Craigslist, look for potential Mom and Pop owner on Facebook Marketplace.
Real Estate Agent · Fort Worth, TX · Member since 2018 · 24 posts · 13 votes
7y
You’ll have to look for deals a different way than the mls or craigslist to find motivated sellers at a high cap rate. Market-discount =a deal. In any market. Just decide that discount you need.
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Thang Nguyen
Cap Rates of 10 are definitely possible on a proforma, in a secondary or tertiary market or
on C or less class assets but you are not going to find a stabilized asset over an 8 CAP under normal circumstances with your experience. My good buddy @Russell Brazil has always said CAP rate is also a function of the risk you are willing to take which I would generally agree. Higher CAP rate properties can be more difficult to manage or more influenced by down markets so better cap rate doesn't always translate to better performance but more risk. Typically your best chance at a high cap rate is buying from a mom and pop on a deal too small for a fund or capital group.
Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
7y
@Thang Nguyen cap rate is just one piece of information needed to fully analyzed a deal as there are many factors to consider like others mention and your strategy for stablizing the property to increase your NOI. Happy Investing!
Thanks all. I guess I don't have the right framework to analyze the deals. If I take any low CAP deal in better areas, I see a large negative cash flow out of it. It is ok to get 5% and neutral cash flow but I can't sustain large negative cash flow. Example is below.
Sale price: 3.1M
Expected Mortgage payment: 13.9K/month with 25% down, 6% rate, 15yr ballon with 30yr amortization
Cash to close is 884K (25% down + 1.5 point closing cost); No upfront renovation cost.
Gross yearly rent in 180K
-5% vacancy
Yearly expense is -46.6K
NOI: 124.8K
P&I payment: -167K
Cash flow: -42K/year
This is in Redmond by Miscrosft so one of the best area in Seattle. No room to increase rent as this is recently renovated and at market rate. Anyone likes this deal with negative cash flow as advertised?
If the seller drop the price by 800K by some tough negotiation, would anyone do the deal with CAP of 5.4%, NOI = 124K, cash flow of $700/year? I assume this is mainly an appreciation play.
Would love to understand the different ways to evaluate better class properties to make the numbers work.