Hey BP. What do you do when every apartment building you look at has such a high price that you couldn't even turn a profit if you tried? I'm trying to purchase in a certain area and everything that comes up seems to have a 5-6 cap rate on it. Some are even top dollar for value-add properties. Why would I pay top dollar for a property, just so I can raised rents and meter utilities in order to break even? After 20% down, my payment is still more than the income on every property that comes up. Do people just put these enormous prices on these buildings just to see if someone will bite? Do you just make an offer at what makes sense, or just pass?
Right now I'm looking at a 23 unit for $1.8 mil. Total cash flow after mortgage payments would be about -$10,000 per year. At a price of $1,371,000 (8% cap rate), I'd net about $21,000 per year on it. How do you guys make it work?
Have you really looked at how you can add value by upgrades and forced appreciation?
@Jennifer Rysdam I had this conversation with a Nashville, TN, apartment complex investor a few days ago.
- Focus on fixer/upper complexes. Setup MLS alerts with an agent so you're notified the instant one pops up, get it under contract sight unseen and then go to work.
- If you're uncomfortable with the numbers, keep your powder dry and wait for your opportunity. Chasing investments isn't the same as making investments.
- Look into different markets. I'm not saying buy out of state, but look into different cities or rural areas around your chosen areas.
- Find a different asset class. If apartments are overpriced, do you have any other alternatives?
@Jennifer Rysdam most people are going with interest only loans for 5-7 year terms. Right now you can get 3.75-4% interest only and at a 5 CAP you will cashflow $36k after debt service on $1.8 million with 25% down.
@Jennifer Rysdam I’m having the same issue as a wholesaler trying to lock up MF for my investors. I’ve found that even mom and pop owners are wanting too much. I’ve just started focusing on small MF (2-4u). Those are still tough, but more manageable than large MF.
@Jennifer Rysdam when I hear that every deal is not working it probably means your underwriting could be off. Have you looked at your model to see if something is wrong or maybe you are being ultra conservative?