S. FL Cap Rates

3 Replies

Hi BP!

I am trying to better gauge my options when looking at multi-family housing (4+ units) and am trying to see my options on how to analyze the deal best. For example, some properties on loopnet will disclose current NOI or list the gross, the expenses, and other variables...but how much salt should I throw on those numbers?

  • What is a good cap rate in south florida? 
  • Should I care about cap rate? 
  • How much should I pay for property mgmt for multifamily?
  • how much should I put aside for occupancy gaps or repair contingency?

Thanks and have a SAFE and HAPPY New Years!

Hey @Kevin K. welcome to BP! There is a ton of information about multi-families here on the site, and I've put up some lengthy posts about analyzing multi family projects so I won't rewrite everything in full now. In short answer to some of your questions, you should first qualify exactly what size you're looking for. 4+ is pretty vague, when some of us are looking at 100-300 unit properties (which technically fall into the 4+ category!). So 4-10? Remember that 4 vs 5 is a big swing, because it changes the financing class and insurance.

Budget 10% as a general rule for management, but 5% will cover you if you're talking about larger properties (50+).

Ignore all numbers provided on listings - they're entirely fabricated. ENTIRELY. Find market rents in the neighborhood, use that as a guide for gross income potential, and run your deal on that. Then reduce that gross rent amount by about 40%, and assume that is where the current leases are and that you will need to float the difference for 12 months. That should cover you while you make any necessary repairs / upgrades, remove any problematic tenants, and cycle out underpaying tenants.

You can find tax information online, and you should be able to estimate utilities based on your own home (cut a SFH utilities in half for a rough number). Remember to only budget for OWNER PAID utilities. I use 1/2 of a month's rent per apartment as a stabilized vacancy, though it will be higher in the first year.

Repair contingency or management reserve is a function of how much work you're doing at the outset. If you're going in on day one and replacing all major mechanicals, plumbing lines, electrical supply, roof, siding, windows, and doors, budget 1k per unit per year and you'll be fine. If you are not renovating everything, then you really need to have enough set aside (up front!) for 150% of the largest likely problem. If a new roof is your biggest concern and that's going to be about 10k, then set aside 15k up front. Plan to set aside 25-35% of that reserve amount each year (assuming that you'll actually USE the reserve every 3-4 years).

As for CAP rates, I haven't looked in south florida since last summer, but they were more or less running with most of the southeast. Finding something in the 9-12 range is great, selling at 7 +/- will give you a nice appreciation. Etc Etc.

Hope that helps!

@Kevin K. - I'll try to answer some of your questions:

What is a good cap rate in south florida? - I think this depends on the area and the investor...Every investor has their own goals/criteria. Some foreign investors are just trying to park their money in the US, and would be ok with low caps like 5%...Others want at least 10%...Etc. Also, I think it depends on the area. For example, I wouldn't want to own property in Liberty City at < 12% cap...On the flipside, I think it'd be quite challenging to get a rental property in South Beach at a 12% cap. 

Should I care about cap rate? - Again, I think this depends on the investor...Again a foreign investor who just wants to park their money in the US may not care what return they are getting. Another investor who would just have the money sitting in a savings account earning a fraction of a % would be happy with just a 3% return as well...Or, maybe an investor is going for an appreciation play - they might not care about cap rate either. Only you can really decide whether or not you should care about it.

how much should I put aside for occupancy gaps or repair contingency? - I'm not a landlord, but if I were I would include 10% for maintenance and 5% for vacancy...A lot of my landlord buyers do the same.

How much should I pay for property mgmt for multifamily? - Not sure as I'm not a landlord...I factor in 10% when analyzing properties for my landlord buyers...But @Account Closed can probably give a better, more accurate answer.

@Lucas Machado . Good info. I had the sane question.

@Kevin K. I interviewed a property manager and find they charge 10% of gross rent and a finder's fee equal to one month's rent if they have to find a tenant. They charge a renewal fee of a couple hundred dollars if a tenant renews. 

If it's a SFH you may use a Property Manager for the firsr year or til you find a good tenant who is willing to take care of lawn and small maintenance issues themselves in exchange for a $50 lower rent or you *not* raising the rent upon lease renewal.