Real Estate Agent · Atlanta, GA · Member since 2020 · 28 posts · 16 votes
I'm currently working on a project where one of the investors is looking for a 9% cap rate on a few multi-family properties (b and c class). To me that seems a little high considering the cap rate isn't normally that high even when we aren't in a pandemic. Am I just not looking hard enough or does this seem a little out of reach?
Sometimes an investors desired cap rate or desired return shows the fact that they don’t know the market or anything about RE investing. If someone tells me they want anything over a 5 cap on actuals in LA I won’t give them a second though, they have no idea what they are talking about, and are a waste of my time. This may be the case with this investor...
@Ayat Suleiman It's very high in any decent market. Typically, such high cap rates have only been found in either very rough areas (ghettos) or areas where there's nothing going on economically in recent years. If property values wind up dropping significantly in the coming months because of COVID-19, then it's possible that you'll find be able to find such high cap rates in more markets. So my recommendation is to either wait it out and see what happens or have your investor adjust their criteria if they want something sooner than that.
Sometimes an investors desired cap rate or desired return shows the fact that they don’t know the market or anything about RE investing. If someone tells me they want anything over a 5 cap on actuals in LA I won’t give them a second though, they have no idea what they are talking about, and are a waste of my time. This may be the case with this investor...
@David Smith How are you calculating it that you're finding 9% easily? I've looked at hundreds of deals in the last three years and have only seen cap rates that high a handful of times.
This is probably because I look at this like I'm in the rental property business more than just "investing", but I don't find cap rate all that useful. I mean it seems useful if you were wanting to compare the return on different types of investments but when it comes to looking at a particular multifamily property, I'd want the rent roll, any existing leases, and if possible a balance sheet & P&L statement or at the very least a list of monthly expenses in order to determine if the property might make sense for me (and at what price). (And even if all I can get is the rent roll I can probably make a pretty good guess at expenses in my market. )
@Russell Gronsky Yes that would make more sense to me. It seems like he just wants something ready to go. As long as he's willing to be flexible I'll see if he's willing to consider a higher rate after value-adds.
@Jill F. I like your thought process. It actually makes much more sense to me that way and I also agree most of the time cap rate really isn't that useful, but some investors are stuck on it.
@Jill F. I think if you plan on holding the property for a long time, calculating the PV is a worthwhile activity as part of your analysis.
How would I do that to make it most useful for me? The PV of the net cash flow from the property for how long I hold until I expect to refi or for the whole time I expect to own it? Would I include rents for units vacant at purchase that I expect to renovate? Something else entirely?
@Ayat Suleiman yeah, if he is looking for a property that he can force to a 9 CAP after value-adds, then you can probably find him that. Although, don't take my word for it, I don't know anything about the Atlanta market. =)
Maybe he just needs the info presented in a different format? Like, "After $6k per door in value-adds and the corresponding $150 rent premiums, the building would be a 9 CAP."
Orrrr....maybe he comes from industrial or retail space where CAP rates are in the 9+ range and thinks it's the same in apartments?
@Jill F. I think if you plan on holding the property for a long time, calculating the PV is a worthwhile activity as part of your analysis.
How would I do that to make it most useful for me? The PV of the net cash flow from the property for how long I hold until I expect to refi or for the whole time I expect to own it? Would I include rents for units vacant at purchase that I expect to renovate? Something else entirely?
I'd say you start with the desired discount rate and calculate up to your expected refi. Only add the rents from vacant units once you expect them to be filled and producing income.
@Russell Gronsky Yea his experience has been only in doing flips for the last few years and he's just trying now to expand into multi-family so it's new for him. That's a lot of great advice. Presenting it in a different format is a great idea too. I think that's the route I'm going to take.
@Ayat Suleiman I'm a flipper too. Anything you can show him involving renovation cost to get higher rents and how that translates into his desired CAP rate will help him grasp the idea.
Also, it will probably help if you talk about what the cost per door is to purchase, how much per door renovation costs are. Then, it might make it easier for him to understand how that affects rent increases, which raise the property value and could get him to his 9 CAP.
@Ayat Suleiman, it really depends which portion of the noi you're using. Trailing 12, trailing quarter, current quarter, projected 12 etc. I would try to steer the conversation more towards IRR. That holds more weight. Even more the case that due to the pandemic we don't really know where cap rates will fall yet. It is entirely possible that it could raise cap rates in the multi family sector. But to be more direct, I think you can get your target cap, depending on how you approach the noi.
@Russell Gronsky, I don't prefer IRR over PV per say. I prefer it over cap rate for sure, but even more so in an environment where cap rates aren't clear. If we are purchasing to hold in this scenario, the cap rate would only represent the first year. Unless this was directed towards a flipper?
@Alex Sabio - I'm sure in some places in SoCal you can get over a 6 cap. Cap rates are very market specific. I'm talking about the City of LA. I don't know the market caps for all the areas in SoCal.
accidental 'Enter', @Ayat Suleiman, 9% will be hard to find in a B Class. Question...in terms of # of units, how experienced is your client? Is it possible he doesn't know what's he asking due to inexperience?
Yes @Jay Helms I honestly do think it's due to lack of experience in the multi-family arena. This will be his first multi-family purchase and I think his expectations are just a little too high. I just wanted to get some insight from others to make sure I was relaying to him the best information possible.