Is 10% CAP too much to ask?

Question

Hello BP community, need your advice. I currently reside just outside Chicago and want to relocate to the North East Florida region next year. I am looking to invest in a multifamily units or mobile home park or parks, to get to 50K/year of passive income (will try to shed my daily job). I am very handy and not afraid to get down and dirty to make things work. Problem is I am up North and looking for opportunities down South, that limits my engagement with other RE investors down South. I analyze deals almost on daily basis for a 10 CAP investment property. I have talked to 2 RE agents so for with 0 results. Is 10 CAP too much to ask these days in the North East part of Florida? I am not opposed to broadening my geographical area, but to get my moneys worth I feel I need to be close to my investment property. I have been a rookie landlord for the last 7 years and own 1 rental townhouse in Jacksonville, FL and want to expand. How would you approach this situation?

Russell Brazil · Answer

Cap rate is not a measure of return. Cap rate is a measure of the risk of the asset and/or market.  If you want a specific cap rate, then you need to seek out assets and markets that match that risk profile. For instance, if you are looking at a bunch of 7 caps, and want a 10, look at riskier assets and markets. If you are looking at a bunch of 12s and want a 10, look at less riskier assets/markets.

Matthew Miller · Answer

@thomaspetra Jax is a great place to invest, however because of that the market has been driven so high that a 10 percent cap is nearly impossible.   You can find it, but you would be buying in a warzone, then when things don't go right, evictions, bad tenants, large amounts of repairs and high turnover, your cap rate that you thought would be 10, goes down to a 6 in the blink of an eye.  Better off buying in a high c class with 6 percent cap and a lot less stress in my opinion.  You have to play the long game now in this market.  If cash flow is your game, it will be tougher than it used to be.

Charles Soper · Answer

Short of literal swamp land, just about all of Florida’s RE is super hot right now,  that said, a 10 cap is going to be tough to find unless you’re willing to go to tertiary markets (really small towns) or into C class or war zone areas.

That said if you know you’re coming for sure maybe it’s worth a trip down to do nothing but network with local investors and possibly agents and commercial brokers.

Evan Greenfield · Answer

@Matthew Miller - I 100% agree with your statement that the operating cap rate could shrink if the property is poorly managed. It's important to note that when purchasing class C and D property to conservatively estimate vacancy and repair costs.

@Thomas Petra - These property classes typically require more repairs and evictions. Also, a property manager may require a higher fee to manage a difficult property due to the time that is required to maintain it.

@Charles Soper - I believe that the only way to really learn a market and have confidence in your investment is to get your boots on the ground. Often said, rarely done. Great advice!

When Hadar and I first connected he informed me of his travel plans to Jacksonville; I introduced him to my local contacts and he drove the market for a few day. I'm sure it was an invaluable experience for him.

@Hadar Orkibi - As always you hit the nail on the head. North East Florida is heated right now and there are off market deals that are available if you know the right people. Thankfully I do know the right people since I live locally in Jacksonville. A deal came across my desk the other day that you might be interested in. I'll give you a call to let you know about it. It's always good catching up with you.

I look forward to connecting with each of you.

All the best,

Evan

Hadar Orkibi · Answer

@Thomas Petra i like Real Estate much more, why??

Because you can control it and add value to it.

you as an investor cant add value for Stock or Bond. and you cant buy it at significant discount!

@Evan Greenfield good to hear form you!! i left you msg.....

Hadar Orkibi · Answer

@Thomas Petra North East FL, Especially Jax is boiling hot. like MFR, Mobile Home Parks would have lower Cap rates these days.

The key in hot market is to buy off market from motivated owner. most of the properties online priced very high.

I have some friends that invest in MHP and they target 10% Cap. take in account that your entry cap may be lower until you reposition the asset.  It is my understanding that there are other areas in the country where you can achieve even better than 10% CR with MHP.

Kiera Underwood · Answer

@Thomas Petra as far as looking into other areas, 10% caps are tough to get here without sacrificing in area or condition, but it does happen! We're closer to consistent 8% caps. It happens less on multi though, sellers know the multi demand and it's pushing the prices up everywhere! SFH's are for sure the sweet spot. I wonder if this is the case in FL at all as well?

Matthew Miller · Answer

@Thomas Petra I think you are on the right track.  While the large cap rates sounds great, so does winning the lottery.  lol.

Thomas Petra · Answer

@Hadar Orkibi thank you for a quick response. It appears that Jax market is very hot and it is very hard to find deals for a newbie like myself. Anything less than 10% CAP begs a question is it really worth investing in RE compared to the stock market, not considering the appreciation of the RE investments and favorable tax laws at this time.

@Charles Soper for my first MFR I would rather be safe than sorry, which means lower CAP rate for a safer investment. I plan on coming down to Jax in the middle of July and looking forward to networking with local investors. This will be my first step in meeting other investors, very nervous and excited at the same time.

@Matthew Miller I agree with you 100% on buying C class with 6% CAP and have a lot less stress, compared to a D class 8 or 10 CAP and a headache. I have 2 young kids, i don't need more stress. Cash flow is important but not everything. That just means i will have to get couple extra properties under my belt before i can leave my current job.

@Evan Greenfield thank you for your contribution to my post. I was not aware that property managers set rates based on property class or location i thought it was a flat fee per door or so. I learned something new already. Thank you!

@Russell Brazil this is a great way to look at the CAP rate. Long time ago in my investments class at UNF i was taught that the greater the risk greater returns on investment. This is also true for real estate.

Thank you everybody for sharing your thoughts and experiences.

Looking forward to networking with you in the near future.

Thomas P.

Tj Hines · Answer

@Thomas Petra 10 caps are out there, but you have to be super persistent in your search. Maybe off market? But anything listed by a broker especially in Fl. will be tough. Market is super hot. Once you have a track record, brokers will start sending you off market opportunities. Simply put the multifamily world is a team sport. You have to network, network and network and then go network some more. It's an never ending journey. Use resources that are available to you right now to make connections. Everyone who you're looking to attract are online.

Is 10% CAP too much to ask?

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