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...
In high crime areas you can find 9 and 10 caps all day (atleast on paper) but real life the tenants trash the place, don't pay and it rarely actually ends up a 9 or 10 cap. As a realtor when I get these type of clients I am just straight up that they aren't realistic no point in wasting either of your time.
Is that the norm? No. Is that what the sharks are looking for these days? Yes, depending on the market.
There is so much uncertainty in the market right now, anyone paying pre-covid prices for investment property is insane. Most markets I'm in, have vastly diminished buyer pools. HML have increased their rates and lowered leverage & banks are too busy with PPP loans and haven't been lending much. Cash buyers & hairy deals are going to get a discount. I am still buying but my prices have dropped. I have successfully negotiated 10-20% discounts on properties in the past 2 months.
@Ayat Suleiman if a newer investor calls me looking for a 9 cap or higher in a major market like Chicago, I know they know NOTHING about investing. Most buildings in C class areas are trading at below a 7 cap, and A or B areas are trading in the 4-6 cap range. Now you might get lucky and find a building where you can force the NOI higher through rehab, etc. That is what I do locally by finding deeply distressed deals and then increasing the NOI. I typically look for a stabilized cap rate of around 9 or 10, although I don't necessarily focus so much on the cap rate.
If you only look for 9 or 10 caps, you will get stuck in D class areas where the paper 9 cap will turn out to be a loser once you own it.
@Ayat Suleiman I've been getting investors 9%+ cap rates on duplex to four-plex units for some time now. I've actually had some at 13-17% recently. Servicing clients locally to globally these have become a niche for our firmore recently. Some on market deals and some off market deals. Michigan has pockets of markets performing well.
@Doug Beiswanger are you still seeing those numbers over the last few months? And do you think they'll stay steady in the upcoming months due to the pandemic?
@Ayat Suleiman Very much so. I've got clients from the USA and across the globe spending cash here because cost to acquire is so much more affordable and caps are good/great.
Cap rates in Cincinnati go over 9% all the time. Where I live, in southern California, we can get 6% at best. Of course, all of these are properties that are not value add. If you are buying fixers you could get better cap rates. In Indiana, Michigan and other locations you could get even higher. If your not interested in leaving Georgia you could probably get rates that were close to those numbers around Macon and other smaller towns.
We're usually seeing 15%+ cap rates in our deals in Cleveland and we only invest in C+ and above neighborhoods such as Cleveland Heights, Shaker Heights, University Heights and some parts of South Euclid. I see a lot of folks thinking it's difficult or rare to find these deals, but it isn't. All of our buy and holds are no less than 10% cap rate and on average 15%.
For example, a duplex we picked up in Cleveland near Euclid Creek Park reservation was for 83,000 with 30k rehab and ARV at 165k with 2,000 rents a month (1,000 a side)
and another tri-plex in Cleveland Heights with 89k purchase price, 80k rehab and 190k ARV with 2 of the units renting for 1150 and the 3rd unit renting for 700. This one we happened to pick up around 2-3 weeks ago during the current situation. We also picked up another 4 MF with 15%+ cap rate in the same areas within that same week.
@Ayat Suleiman what markets is your client looking for? B and C no way you'll find in Atlanta for a 9 CAP, clearly shows your client is out of touch with today's market. If he is open, like others said mid-west, and even tertiary markets here in Texas, that is easily achievable in the C Class space.
Also how many units is he looking for? 4plex? 100+? I may have some deals for him in Texas if its on the smaller end
@Adriel Hsu he specifically wants to stay around the Atlanta area but is open to surrounding cities since this is where he’s located. But I’ll see if he’s open to other markets
@Ayat Suleiman - I was on an initial call with a young broker about a year ago. First question he asked me was what cap rate I was looking for -- my answer: "I'd love to buy at a 20-cap." I was only half-kidding, but my point was that searching for properties based purely on cap rate is rather nonsensical in my opinion. There's so much more than cap rate that determines whether an apartment is a good deal, bad deal, or just eh.
So, we did purchase a 33 unit at about a 9-cap in 2019 on future proforma. It was at 60% occupancy and needed a lot of work. The owner barely broke even - he was 80-something, in poor health, and didn't have the time or money to dedicate to the property. What was the cap rate at purchase? Probably close to 0. We paid about half price of what the same complex would cost fully renovated.
Bottom line, I personally don't put much stock into cap rates on properties at purchase without a more thorough analysis. I do very much look at market cap rates and where I forecast that they'll be when it's time to sell... That's much more interesting to me.