Your Min Cap Rate requirement on a 20-30 unit residential?

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Your Min Cap Rate requirement on a 20-30 unit residential?

David K.
Member since 2019 · 51 posts · 16 votes

What is your min Cap Rate requirement on a 20-30 unit residential?

Also consider these units are NOT new and are in good maintained condition. Vacancy rate is 5%. Rents are just about maxed out. 

I use Cap Rates as a quick way to judge a property to see if I should go the route of running the stack of numbers. 

For me my Cap Rate number in this market is 9% as a minimum.

What is your's and why? 

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y
Originally posted by @David K.:

Cap rate, IF PRICED CORRECTLY, can be a reflection of the risk of the market.  Conversely, a LOW cap rate does not mean less risk, it more often means the agent and owner have over priced the property. 

Russell, what is your minimum Cap Rate buy in?

 My minimum is 3, my maximum is 6. And yes, cap rate is reflective of the risk of the market or asset.  Yield in any asset class (real estate, stocks, bonds, reits, mlps, any asset class) measures risk. Its a fundamental truth to investing.

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  • Seth Ferguson
    Rental Property Investor · Member since 2019 · 407 posts · 267 votes
    7y

    @David K. I would suggest that cap rate is not the number to focus on. Every market is different...I know people making a killing buying at a 2.5% cap and also people doing well at 6% caps. It's about your business plan.

    If rents are maxed out and the property is in good condition, are you banking solely on appreciation? Or can you find another deal with a strong value-add component?

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    Hi Seth, 


    I do not see how you can make a killing at 2.5% cap rate. Can you kindly explaing how can that be but a temporary situation?

    Once your note rate goes up (and it will) or a recession hits with tenants leaving - you are toast in such a situation. At such a low cap rate, there is nothing left for the bad times - in my experience. 

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @David K. assuming you are buying at close to market rate, cap rate is an indicator of the risk of the property. In most markets a 9 cap would be a fairly risky property. 

    I can't tell you mine because I am not buying Multi family right now. The risk reward does not seem worth it to me right now. 

    @Seth Ferguson I would be interested in hearing a story about how to make a killing with a 2.5 cap property.

    1Reply
  • Seth Ferguson
    Rental Property Investor · Member since 2019 · 407 posts · 267 votes
    7y

    @Ned Carey I have a few interviews coming up on my show over the next few months that talk about this.

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  • John Franklin
    Specialist · Salado, TX · Member since 2014 · 69 posts · 50 votes
    7y

    Cap rates are the most misunderstood aspect in RE investing.  It’s also where shrewd sellers kill novice buyers.

    There are differences between going in cap rates, stabilized cap rates and reversionary cap rates. Know which one you are analyzing. Banks are going to focus on the NOI and DCR more than the cap rates.

    Brokers tend to use the going in rate but not stabilized. Cap rates for comparison should be the same type.  Unstabilized multi tenant properties should utilize discounted cash flows to analyze the true cost of stabilization.

    Every aspect of risk influences cap rates.  Two properties with identical cash flow can have different cap rates if one has a much higher underlying land value. 

    I totally agree with Seth.  Quit focusing so much on cap rates and focus on stabilized occupancy, market rent and cash flow potential.  

    Then I’d focus on interest rates and what happens to your cap rate if you refi at 1-2%  higher interest rates in the next few years.

    Just my $0.02!

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    CF sounds high to me.  Cash flow is more important.

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    I believe you need to buy a property at a 9% cap rate. If you buy lower then you must have done your dilligance and know income can be raised to get to that level soon - as  in less than a year. Unless you renting to the government or deep pocket renters even A list property goes vacant in a bad turn. 

    For example, I am buying in at a 8.3% on a good property but an innitial low interest rate gives me time to get the income up slightly. 

    You need the reserves to get you through a bad time. Otherwise, you are a gambler and I have seen plenty of real estate gamblers out there who do great in good time and lose it all when the breaks are put on the economic boom. 

    Especially now, we have had a long real estate boom - buying a low cap rate now is in my opinion just asking for trouble. Lenders are still lending with decent qualifications unlike the big boom 15 years ago, helping to keep real estate prices in realtive check. But prices are very high and the chances of future upside are less and less.

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    Yes, I do agree it's obviously more than Cap Rate. And yes, Cap Rates are figured often missing big pieces at times. 

    Another qualifier for me is that the property MUST be returning close to15% or more on my down payment (of 20% or more down) within a year or less. Anything less than that and you better have some other angle to cover for future problems - in my opinion. 

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    There are banks out there willing to lend at a 1.2 DSCR. I told my banker, there is no way I would lend to a buyer at that ratio!

    At 1.2, you are really sucking on fumes to stay afloat. Unless you are deep pocketed, all the conservative investors like me are going to snap up that property for what it should have gone for or better in the REO sale after the downturn.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Cap rate is a reflection of the risk of the asset and or market. 9% is indicative of a high risk asset or market. Id never buy something with a cap rate that high.

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    Cap rate, IF PRICED CORRECTLY, can be a reflection of the risk of the market.  Conversely, a LOW cap rate does not mean less risk, it more often means the agent and owner have over priced the property. 

    Russell, what is your minimum Cap Rate buy in?

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @David K.:

    Cap rate, IF PRICED CORRECTLY, can be a reflection of the risk of the market.  Conversely, a LOW cap rate does not mean less risk, it more often means the agent and owner have over priced the property. 

    Russell, what is your minimum Cap Rate buy in?

     My minimum is 3, my maximum is 6. And yes, cap rate is reflective of the risk of the market or asset.  Yield in any asset class (real estate, stocks, bonds, reits, mlps, any asset class) measures risk. Its a fundamental truth to investing.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    2Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    Cap rates are useful but only one metric that I use.   I do a full blown analysis and deeply think about expenses, especially capital improvements that are needed for a building.  A good cap rate doesn't tell you that you have to replace the roof within 3 years.  "Price-per-door"  is one of my initial smell tests for a local deal.  The last building I bought had high vacancy and below market rents, so cap rates were meaningless.

    Many multi-family opportunities are listed with brokers.  Their financial analysis are notoriously inaccurate with regards to expenses.  

    In my market, high cap rates (10%+) are found in lower income neighborhoods.  The cap rate around 5% tend to be more trophy areas and assets.  

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    Well no one has shown me a sub 6% cap rate property that works. OK come on guys..... are you guys pulling my leg here. Maybe I am just older here are perhaps wiser. 


    What sane investor buys a property at 6% or lower cap rate UNLESS you KNOW INCOME is going up immediately. In most cases that pushes DSCR to ratios banks will not laon at - at least you will be forced to pour more cash in for a down payment.

    Lets say, you are buying a nice piece or property. So what, you are still behind and you are likely going to lose it in the next recession.  

    At 6% cap rate or below, in this already pushed up market, I say pass - you can make more in the stock market. Remember guys, even if you are using management for your property, you are STILL working for it when you buy property. 

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @David K.:

    Well no one has shown me a sub 6% cap rate property that works. OK come on guys..... are you guys pulling my leg here. Maybe I am just older here are perhaps wiser. 


    What sane investor buys a property at 6% or lower cap rate UNLESS you KNOW INCOME is going up immediately. In most cases that pushes DSCR to ratios banks will not laon at - at least you will be forced to pour more cash in for a down payment.

    Lets say, you are buying a nice piece or property. So what, you are still behind and you are likely going to lose it in the next recession.  

    At 6% cap rate or below, in this already pushed up market, I say pass - you can make more in the stock market. Remember guys, even if you are using management for your property, you are STILL working for it when you buy property. 

    Or maybe you have a higher risk tolerance, or lack an understanding of lower risk assets. Typically these lower risk assets and markets out perform the higher risk markets. And yes, almost immediately these lower risk markets have rent growth. Thats why we invest in them. My average rent growth over the last decade in lower risk assets is 5%. My average rent growth in higher risk assets is near zero. And thats just one of the several ways the lower risk assets out perform. Asset values rising is the other, lower vacancies, lower credit losses, lower repair percentage, etc.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    1Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @David K.:

    Well no one has shown me a sub 6% cap rate property that works. OK come on guys..... are you guys pulling my leg here. Maybe I am just older here are perhaps wiser.

    That's most likely the answer. You are better, smarter, faster, more handsome than everyone else here on BP...

    OR

    Maybe 9 Caps work as your minimum because you are looking at small buildings (20-30 units) in a market that doesn't have a lot of investor demand. Both those factor could reduce competition for these assets thus forcing the seller to give the buyer more return. 

    To get an accurate answer, we'd need to know:

     -where you are looking

    - what Cap rate you are talking about, pro forma, stabilized, reversionary

    Some reasons why people buy at a 6 Cap:

    -Path of progress play

    -High income/ net worth investor looking to diversify into a real asset for capital protection that provides some tax advantages. 

    -Portfolio play

    In other words they have totally different goals than you... 

    BTW, a lack of anyone refuting your claim is not proof that your claim is correct. You are the one making the assertion that 6 Caps don't "work", so the onus is on you to back up your statement with facts, NOT on others to prove you wrong. 

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y

    Sorry guys, my appologies, I am not saying I am smarter than you guys! But I have been around. I am just questioning this and seeing what side of the arguement holds more true. Kindly stick it out with me. 

    Russel, can you kindly show me how that low cap rate property worked with how much you put down, how much you leveraged, and your cash flow?

    How did you deal with high ticket repairs like when a boiler cracks and you are in for a $28,000 plus expense? Where did the cash come from if it is not flowing enough from the property for example. 

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  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y
    Originally posted by @Russell Brazil:
    Originally posted by @David K.:

    Well no one has shown me a sub 6% cap rate property that works. OK come on guys..... are you guys pulling my leg here. Maybe I am just older here are perhaps wiser. 


    What sane investor buys a property at 6% or lower cap rate UNLESS you KNOW INCOME is going up immediately. In most cases that pushes DSCR to ratios banks will not laon at - at least you will be forced to pour more cash in for a down payment.

    Lets say, you are buying a nice piece or property. So what, you are still behind and you are likely going to lose it in the next recession.  

    At 6% cap rate or below, in this already pushed up market, I say pass - you can make more in the stock market. Remember guys, even if you are using management for your property, you are STILL working for it when you buy property. 

    Or maybe you have a higher risk tolerance, or lack an understanding of lower risk assets. Typically these lower risk assets and markets out perform the higher risk markets. And yes, almost immediately these lower risk markets have rent growth. Thats why we invest in them. My average rent growth over the last decade in lower risk assets is 5%. My average rent growth in higher risk assets is near zero. And thats just one of the several ways the lower risk assets out perform. Asset values rising is the other, lower vacancies, lower credit losses, lower repair percentage, etc.

     Russell, can you kindly show me how that low cap rate property worked with how much you put down, how much you leveraged, and your cash flow?

    0Reply
  • David K.
    OP
    Member since 2019 · 51 posts · 16 votes
    7y
    Originally posted by @Bill F.:
    Originally posted by @David K.:

    Well no one has shown me a sub 6% cap rate property that works. OK come on guys..... are you guys pulling my leg here. Maybe I am just older here are perhaps wiser.

    That's most likely the answer. You are better, smarter, faster, more handsome than everyone else here on BP...

    OR

    Maybe 9 Caps work as your minimum because you are looking at small buildings (20-30 units) in a market that doesn't have a lot of investor demand. Both those factor could reduce competition for these assets thus forcing the seller to give the buyer more return. 

    To get an accurate answer, we'd need to know:

     -where you are looking

    - what Cap rate you are talking about, pro forma, stabilized, reversionary

    Some reasons why people buy at a 6 Cap:

    -Path of progress play

    -High income/ net worth investor looking to diversify into a real asset for capital protection that provides some tax advantages. 

    -Portfolio play

    In other words they have totally different goals than you... 

    BTW, a lack of anyone refuting your claim is not proof that your claim is correct. You are the one making the assertion that 6 Caps don't "work", so the onus is on you to back up your statement with facts, NOT on others to prove you wrong. 

     Bill can you give me any examples of people who did 6% sub deals? For example, how many units, where and how long have they had the property? 

    I am looking at a large Medical office buildings. These are suppose to be solid stuff (cap rate 7.4) but what happens when a few Doctors offices leave? It's going to be a while before the unit is filled. 

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