Multi-family Apartments with 10%+ CAP still exists?

Question

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.

Brian Burke · Answer

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.

Ronald Starusnak · Answer

I am closing on  15 CAP and a 21 cap in Upstate NY. I will be moving to Oregon this year and I'll probably keep my rentals in the Syracuse area.

Bjorn Ahlblad · Answer

@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

Jared Boundy · Answer

It’s not very common to find better than a 5 cap in the Seattle area.  If so, it’s a hot deal.

Charles Kao · Answer

@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.

Bryan Mitchell · Answer

Brian is correct, there are plenty of 10 CAPS. They will have 50% vacancies and or require rehabilitation.

Thang Nguyen · Answer

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.

Quito Keutla · Answer

@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!

Michael Hy · Answer

ohh Oregon, got hit lately with that rent control.

Clayton Collins · Answer

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.

Multi-family Apartments with 10%+ CAP still exists?

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