What kind of cap rate for blackstone and the like?

Question

Just curious what kind of cap rate would one of these big investment companies make on their single family rentals?  I am only getting about 8% after all expenses, capex and property manager.  I feel I'm buying close to the best deals in town getting about the cheapest labor for repairs and getting market rent.  It seems to me that with all their overhead they can't be getting that great of a cap.  Thoughts?

Peter Lee · Answer

Good pt,

After I saw this infographic that shows the bond returns in low single digits now it makes sense to me.  The guys who create the bonds will collect a nice fee and the returns while unsexy, as long as they are marginally positive, I guess the structure works.

http://www.bloomberg.com/infographics/2013-12-20/blackstones-big-bet-on-rental-homes.html

Walt Payne · Answer

They are also going big into the areas they are going after, so economy of scale will apply.

Plus, think about where their money is coming from, and why. The thinking is get massive properties at whatever cost necessary because the bond market will soon go down the tubes. With all cash deals they will likely continue to cash flow. Not great returns, but safe. That is my take on it. It doesn't make sense otherwise.

Fritz Seide · Answer

Blackstone aims for 5.5%

Kathryn C. · Answer

As someone with an in-depth knowledge of how they operate from working with them on the inside, I can tell you they buy at a minimum yield of 9% at least in our area.  This number is probably low because their rehab budget are over inflated. For example a brand new home completed today will have a rehab budget of about $7,000 but maybe this is offset somewhere else such as the division that buys from the courthouse steps which is where they over pay for properties as they use a blended yield strategy even though they have no idea of the interior condition.

Account Closed · Answer

The Gaylords are bigger buyers then the Blackstone and they told me if they get 3% cap they are happy.

Joe Gore

Watson Smith · Answer

I wouldn't expect their return to be that high.  I'd say under 5%.  But its a lot easier to make money when you have 1,000's of properties returning that then just 2.  Their also betting on homes prices increasing and rents going up. Later down the road they'll probably sell some of the houses and act as the bank on them.  Double their money while collect interest.  They'll get some on the houses back due to foreclosing on them and sell them again.  With the number of proerties they hold the skys the limit.  They won't stay in the rental business forever though.  They'll have to adjust with the market.

David Krulac · Answer

A national operating dining chain site and a super gas store was recently sold here all cash for a 5% cap rate.   A operating national bank site was recently offered at 4% cap rate.

Its all about risk & reward, if the buyer feels that the nnn tenant is a solid A tenant then the cap rates tend to be lower.

If I had a 4% cap building, I'd sell it.

Peter Lee · Answer

Also wondering what people think their leverage, cost of debt, expense ratio, and appreciation assumptions are.  Lot of scenarios I ran don't come up with high returns.  Only thing I could easily see bumping up the IRR significantly is assuming 5%+ annual appreciation over say a 5 yr hold.

Peter Lee · Answer

Pat,

Mind if I ask what your expense ratio is, i.e. how much of your rent goes to expenses?  I have been also quite curious how those guys make it pencil.  I am assuming their biggest advantage is their cost of capital by borrowing insanely cheap but seems like they are overpaying wherever they go.

Chris Martin · Answer

If you take a non-literal definition of Cap Rate (A rate of return on a real estate investment property based on the expected income that the property will generate) then the anwer is in their stock valuation(s) and stock price. For a "property centric" cap rate, American Homes for Rent (NYSE: AMH) has (rough numbers, annualized) $3.5B inproperty, roughly $200M in annualized rent, $115M in expenses (see note below) for a $85M "return." $85M/$3.5B is about 2.4%. If you have their stock at $15.50 from last July (IPO) then you have a 6.5% return based on their $16.52 closing price.

In all fairness, their numbers will most likely get better as they get the property they recently acquired back to a productive (rented) state. But they won't get that much better regarding true return, IMO.

Note: Non-cash expenses excluded. They lost $7.6M (0.05/share) last quarter per their 10-Q at 
	http://www.sec.gov/Archives/edgar/data/1562401/000119312513441803/d616889d10q.htm

What kind of cap rate for blackstone and the like?

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