Cap rates in North Carolina
Heya guys!
What cap rates are you getting NC - and where about in NC are you investing? What are the neighborhoods rated?
(I'm currently investing in smaller cities/towns Indiana, in C-/D properties - and getting cap rates between 13% and 15%. I just picked up a SFR in Independence, MO and expect to get a cap rate around 7% for a C neighborhood.)
Thanks for sharing! :)
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Jon, If you google CBRE cap rates you can find an interactive map on CBRE website. Using that map you can select your property type, subtype and class. After you've made those selections you can hover over various cities to see CAP rates (I believe the latest data is H2 2019, and the site isn't the most mobile friendly so it's better on a desktop). Lately syndicators have been "winning" deals in Charlotte NC by paying seventy five basis points under market CAP.
Jon, If you google CBRE cap rates you can find an interactive map on CBRE website. Using that map you can select your property type, subtype and class. After you've made those selections you can hover over various cities to see CAP rates (I believe the latest data is H2 2019, and the site isn't the most mobile friendly so it's better on a desktop). Lately syndicators have been "winning" deals in Charlotte NC by paying seventy five basis points under market CAP.
Hello, Jason. Thanks for the tip. I will put it on my list to check out. :)
What about you, Jason? What cap rates are you getting personally for your investments? What cities are they in? What types of units are they? And what is the neighborhood ranking (A, B, C,etc.)?
Thanks!
I've only seen cap rates used with respect to MFH.
We run two real estate investment strategies in parallel. We still invest in residential multifamily built 2000 or newer in markets with larger quantities of these available to consolidate management companies. These will be in A or B areas. We also syndicate 150+ unit apartment properties which are class B or C. Typically in this space existing class A or AA sells to Lifeco/insurance companies looking to park ten’s or hundred’s of millions in safe low return (~4%). Since we syndicate, we offer an 8% pref return and a 70/30 split to our investors, which typically isn’t found in A or AA (Core/Core+), but rather B or C value add. The only exception to that is a friend of mine built several class A properties because it was cheaper to build A than to buy B or C. The later in the cycle we get the riskier that strategy becomes though in my opinion. The FED can only manipulate the market so long, eventually reality will catch up one way or another.
A few years ago I had lunch with the Sr. VP of CBRE Business Lending. Part of my focus was to discuss the small ($1M to $6M) multifamily program from FNMA. CBRE is an approved lender for the multi-family program, so they are a good source for information, including cap rates (cap rate map) in various cities like @Jason E. Smith mentioned. Of value, too, are their research and reports which drill into small markets like Raleigh.
Thanks, Chris. That is interesting.
I was curious though, what cap rates individual investors are personally getting themselves. That is, what sort of cap rates I could expect, were I to invest in this area - given that I'll be investing directly in SFR or similar.
Do you invest personally in SFR or similar in the area?
I've rarely heard, other than on Bigger Pockets, the term CAP Rate (Capitalization Rate) applied to Single Family Residential (assuming by SFR that's what you mean) property. The cap rate is essentially a valuation measure. Some could argue that cap rate is a performance measure, but I'll focus just on the applicability of cap rate as a valuation of a real estate asset class.
To make sure I'm not missing something, I looked at how two different large real estate companies performed valuation. These companies are probably indicative of the industry as a whole. While both are REITs, American Homes 4 Rent (AMH) and Highwoods Properties (HIW) operate in two different segments. AMH is focused on acquiring, developing, renovating, leasing and operating single-family homes as rental properties. HIW owns, develops, acquires, leases and manages office properties in 8 eastern US cities.
AMH does not use the term 'cap rate' or capitalization rate' at all in their latest AMH SEC 10-K filing. For the most part, metrics relating income to anticipated acquisition price/cost are irrelevant to AMH. As performance metrics, they use Funds from Operations (FFO), Core FFO, and Adjusted FFO as described on page 49 of their 10-K. What's really wild is their acquisition philosophy overall, as described on page 8: "We intend to continue to expand our scale of operations and develop properties and make acquisitions even if the rental and housing markets are not as favorable as they were when we commenced operations, which could adversely impact anticipated yields." In other words, they will continue to buy when most of us 'normal' investors wouldn't.
HIW, on the other hand, does use the term 'capitalization rate' in their latest HIW SEC 10-K filing. For context, on page 31 of the 10-K they say: "We have invested or intend to invest an additional $36.9 million of planned leasing capital expenditures. As of the closing date, based on the total anticipated investment of $436.0 million, the capitalization rate for the acquisition of this building, which was 89.5% leased as of the closing date, is 6.3% using projected annual GAAP net operating income for 2020." This is the context I generally hear the term used.
To answer the question, though, even for our apartments we don't use the 'cap rate' metric. Neither do our lenders. We use other cash flow projection methods and pro-forma statements that fit our lenders disclosure, leverage, and debt ratio requirements. A single 'cap rate' number for a city or region doesn't help us much because of the diversity of the property we analyze.
Jon, As Russell Grey would say “If you don’t like the answers you are getting, ask a better question.” I think I understand your question but I’ll try and shed some light on why your question may need a bit of calibrating and why you might not be getting the responses you were hoping for.
In all reality CAP rates really don't apply to valuing single family (including 2-4 unit residential multifamily). Chris gave some great reason, I'll give my two cents too.
First, if you find a single family listed as an investment and the realtor gives a CAP rate, send me their financial calculations of how they arrived at that CAP rate. Then I'll share with you an apartment community statement and how CAP rate applies to their valuation and you'll see it's not even the same world.
When valuing single family they are valued based on price per square foot and comp's. One reason is because the majority of people transacting single family (and the purpose it's built) are buying to live in the property. So Suzy homemaker can pay way more for a property with beautiful colors and the perfect swing-set for her kids, than you can pay from a cash flow perspective. I sold a house in Ardmore (well known neighborhood in Winston Salem) a couple years ago. The home had been tenant occupied for nine years and looked rough. A five minute conversation with my realtor showed another property similar condition and square footage had been sitting on the market for several months and wasn't selling. A cute little home just down the street with almost half the square footage sold in two days because it was move in ready. I would have sold the home for $100k, someone could have invested $20k or less and it would have been worth $150k. But the majority of people in single family can't see the potential. So I did just that, I put $20k in it and it sold for $150k in a week. And none of the valuation was based on how much it would rent for. This is another complete contradiction to commercial property. Where we as buyers walk in, see dated carpet, see old cabinets and see mis-management, we begin salivating because we know we can push NOI which then directly improves valuation. A great example is another investor I know purchased a property, re-negotiated the cable contract, signed a piece of paper and the property was worth $600k more with the stroke of a pen. I'm not saying that can't be done in single family, but I've never seen a cable contract change the value of a single family.
Third example of why single family is so different from commercial is because you could buy a single family next week, get a thirty year loan and the only time you interact with the lender is at or before the closing table. Once you own the property it’s your responsibly to pay the mortgage and the lender doesn’t really care how you do that. Seriously, you could sell crack and as long as you pay your mortgage they don’t care. In commercial it’s almost like a marriage with your lender. They will have a say, if not control, who you chose for property management. They will inspect the property every year and tell you what you need to repair and they will tell you when you can sell it and if you chose to sell it earlier or later than their preference their will be penalty costs (this is mainly because your loan becomes a derivative investment on the lenders balance sheet).
In summary, capital flows into commercial real estate as an investment seeking a return. To best demonstrate what the current market is willing to pay for streams of income the use of CAP rates are applied to show what recent buyers are willing to pay for streams of income. Nobody buys a 400 unit apartment property because they need a place to live. But they buy a house because they need a place to live. So because NOI isn't applicable to most single family transactions, price per square foot and comp's are mostly used when valuing single family.
@Jason E. Smith thank you for always taking the time and energy to help us and others on BP!