My partner and I did our first deal a few years ago which went really well and we have about 1-1.5M in equity, but the problem is that the cash flow it generates is not that great - partly because cap rates are so low here in Los Angeles.
We have the property listed for sale and are thinking of 1031ing into something that will hopefully provide a lot better cash flow - which probably means we will need to look out of state.
We were considering multi-family but are open to ideas.
My question is - with 1-1.5M cash, is it possible these days to get levered returns in the 10-15% range? Net 200k+? Seems like it should be doable if we can find an apt deal for around 3-4M at an 8-10 cap and get fixed rate financing and lever up, but I am wondering what all of you guys are seeing right now.
If it's possible, any suggestions for markets to look at? We have been eyeing TX but haven't found anything great there yet.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Hi Mark,
I can tell you with multifamily it is heating up on the larger buildings. More of my clients want to get in while cap rates are good versus the debt that can be obtained on the mortgage.
This SPREAD is what helps the returns.
I am seeing interest rates rising for multifamily and cap rates decreasing over the next few years. As residential houses and other things dry up people are moving capital to larger multi family. Investors also like the size aspect of scale and being more hands off.
The interest rate you can get on a commercial loan is based on the terms you want. If you are willing to get a 5 year loan to 7 year loan term you can get fixed rates in the 4's. If however you are seeking 10,15,20 year fixed loans expect the basis points to jump 75 to 100 into the mid too high 5's on average. The longer you want the loan fixed the more the lenders will up you on the rate.
This becomes extremely important because the rate is tied to the loan term. Some buyers opt for shorter term loans for more cash flow today and others opt for longer term with less cash flow. The more the interest rate is the higher you have to push the cap for the spread and the harder it gets to make a deal work.
Now as markets heat up caps will compress and interest rates rise return will be less. The other thing that is huge is when sellers feel it has shifted to a sellers market they will feel less likely to carry seller held seconds to increase your cash on cash returns.
I personally right now from what I am seeing is it's time to buy for large multifamily. I am talking markets with yield not crazy 4 or 5 cap type stuff that even with a minor contraction you will lose value.
I think an 8 to 9 cap is reasonable depending on area and location for a fully performing property. When you get into true 10 caps you are entering areas where you will have to really work for that yield versus type of tenants you encounter.
There is a line every investor I work with draws in the sand versus returns and location they feel comfortable with.
Where you buy this multifamily is critical.
Pro-landlord or pro-tenant state??
Landlord paid utilities and lien laws??
Eviction processes and timelines for the county you buy in?? Some counties even with 3 to 4 week timelines take months to process the writs because of being short staffed.
Do you want to partner on a deal?? I have some clients that are fine and others that are not.
As for what kind of properties, I don't really look at big multi units, I purchase mainly SFHs. The other day my PM sent me a 82 unit 100% occupied property between Chicago and Indianapolis. There were actually two properties. One 82 units and the other was 65-70 units.
Both are 100% occupied, but I thought 82 units was particularly good because it had all 2 bed/1.5 or 2 bath units.
I think there are some deals out there, you just have to locate an area that you feel comfortable with.
Salem, OR · Member since 2013 · 701 posts · 159 votes
12y
Based on your cash available and the total amount you want to spend you are looking to finance 50% to 75% of the purchase. It will be easier to make your percentages if you finance more of the purchase.
For instance, if you can obtain money at 5% for 30 years your mortgage constant is 6%. If you find an 8% cap property and you finance 50% you will cash flow 10%. If you find a 7% cap property and you finance 75% you will cash flow 14%.
Yea I understand the finance piece, I guess my question was more along the lines of asking if it's possible to find true 8-10 cap properties these days. I see plenty of properties out of state that are advertised at those cap rates but without having experience in multifamily properties, I don't know how realistic the numbers are. For example, maybe in a perfect year a property will work out to an 8 cap but then if a boiler or chiller or whatever dies (again not familiar with the inner workings yet) we could be out $50k. Especially when talking about something in the $3-4M range possibly with 100+ units, I imagine expenses add up quickly.
Has anyone done a deal recently that is a true 8-10 cap with the property in good condition and relatively low headache? I'm curious to see some examples and get some ideas for what areas to start looking in.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Hi Mark,
I can tell you with multifamily it is heating up on the larger buildings. More of my clients want to get in while cap rates are good versus the debt that can be obtained on the mortgage.
This SPREAD is what helps the returns.
I am seeing interest rates rising for multifamily and cap rates decreasing over the next few years. As residential houses and other things dry up people are moving capital to larger multi family. Investors also like the size aspect of scale and being more hands off.
The interest rate you can get on a commercial loan is based on the terms you want. If you are willing to get a 5 year loan to 7 year loan term you can get fixed rates in the 4's. If however you are seeking 10,15,20 year fixed loans expect the basis points to jump 75 to 100 into the mid too high 5's on average. The longer you want the loan fixed the more the lenders will up you on the rate.
This becomes extremely important because the rate is tied to the loan term. Some buyers opt for shorter term loans for more cash flow today and others opt for longer term with less cash flow. The more the interest rate is the higher you have to push the cap for the spread and the harder it gets to make a deal work.
Now as markets heat up caps will compress and interest rates rise return will be less. The other thing that is huge is when sellers feel it has shifted to a sellers market they will feel less likely to carry seller held seconds to increase your cash on cash returns.
I personally right now from what I am seeing is it's time to buy for large multifamily. I am talking markets with yield not crazy 4 or 5 cap type stuff that even with a minor contraction you will lose value.
I think an 8 to 9 cap is reasonable depending on area and location for a fully performing property. When you get into true 10 caps you are entering areas where you will have to really work for that yield versus type of tenants you encounter.
There is a line every investor I work with draws in the sand versus returns and location they feel comfortable with.
Where you buy this multifamily is critical.
Pro-landlord or pro-tenant state??
Landlord paid utilities and lien laws??
Eviction processes and timelines for the county you buy in?? Some counties even with 3 to 4 week timelines take months to process the writs because of being short staffed.
Do you want to partner on a deal?? I have some clients that are fine and others that are not.
My partner and I did our first deal a few years ago which went really well and we have about 1-1.5M in equity, but the problem is that the cash flow it generates is not that great - partly because cap rates are so low here in Los Angeles.
We have the property listed for sale and are thinking of 1031ing into something that will hopefully provide a lot better cash flow - which probably means we will need to look out of state.
We were considering multi-family but are open to ideas.
My question is - with 1-1.5M cash, is it possible these days to get levered returns in the 10-15% range? Net 200k+? Seems like it should be doable if we can find an apt deal for around 3-4M at an 8-10 cap and get fixed rate financing and lever up, but I am wondering what all of you guys are seeing right now.
If it's possible, any suggestions for markets to look at? We have been eyeing TX but haven't found anything great there yet.
Thanks in advance!
Why are cap rates so low in LA? Why do you care what the cap rates are?
Real Estate Investor · Louisville, KY · Member since 2014 · 34 posts · 4 votes
12y
Hi Mark,
It depends on what market you are in but 7-8% Cap is quite normal for multifamily. For mobile homes you are looking at 9.5-10%. Again it depends on where you are.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
12y
@Account Closed to understand why Cap rates are important is to understand what a cap rate is. A cap rate is your annual % return on your purchase price if you had no mortgage or capital expenses. As the purchase price increases relative to the income stream, the caps compressed or goes down. So in LA you are not getting the same bang for the buck, assuming other criteria were the same.
There are deals out there. We had a property that was an 11.5 cap that was an until we got the insurance quotes during the inspection period. It turned into a 9.5 cap.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Mark C sell your property pocket the cash and then lend it out to trusted closed circle of investors. put a pref return on it apr wise then a little equity participation.. use hour cash to go to the bank and get a LOC that is used to lend and you can make far more than you ever would be a landlord.. CASH is king look at other options
Real Estate Investor · Concord, CA · Member since 2013 · 55 posts · 19 votes
12y
@Jon Klaus, I have the opposite experience with mobile home parks and depreciation for a couple of reasons. Here in California, land improvements including underground utilities (water, sewer, electric, gas) and paved roads are very expensive. In addition, land improvements are depreciated over 15 years. A 50 space park could easily generate $50K a year in depreciation. We changed accountants several years ago to a firm that specializes in mobile home parks and it made quite a big difference for us, financially.
@Jon Klaus, I have the opposite experience with mobile home parks and depreciation for a couple of reasons. Here in California, land improvements including underground utilities (water, sewer, electric, gas) and paved roads are very expensive. In addition, land improvements are depreciated over 15 years. A 50 space park could easily generate $50K a year in depreciation. We changed accountants several years ago to a firm that specializes in mobile home parks and it made quite a big difference for us, financially.
Good to know. In your example of a 50 space park giving you $50K of depreciation a year, how much did the park cost?
Real Estate Investor · Concord, CA · Member since 2013 · 55 posts · 19 votes
12y
If the land improvements are $15K a space * 50 = $750K/15 = $50K. I suspect there are other tests the accountant uses (the approximate land value and the county tax records) to determine if the $15Kper space is a reasonable number and will pass an IRS review. Price of the park, could be $1 to $2M, depending location, occupancy, condition, NOI, etc...
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Jeff Greenberg:
@Bob Bowling As the purchase price increases relative to the income stream, the caps compressed or goes down. So in LA you are not getting the same bang for the buck, assuming other criteria were the same.
@Jeff Greenberg: My question to the OP was for him to understand WHY the cap rates were low for the type and location of the properties he was talking about. My question to you would be why you think a lower cap rate in LA gets less "bang for the buck" than...? Since cap rates are the result of market actions AND a lower cap rate means possibly that the market is paying MORE for an equivalent income stream than say Surprise, AZ it could be very well that there is market anticipation IN LA that rents are on the way up or that prices will increase even more or BOTH.
Investor · Washington D.C. · Member since 2013 · 94 posts · 18 votes
12y
Hey Mark,
If you are talking IRR return, it is very achievable. However my impression is that you are targeting cash on cash return, and you'd be hard pressed to achieve levered 10-15% Coc in today's markets.
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
12y
@Mark C , it's not easy finding 10-15% CCR (leveraged) on multi family, specially if you want hands-off investment or you want an apartment building in a good location.
If you want that level of CCR, you may need to contend with older buildings with more maintenance issues or apartment buildings in bad areas.
Of course, you might get lucky and get a 15% CCR property in a great area. Based though on my experience buying a 130+ unit apartment complex (I put down $1M), it's more realistic to get 8-9% CCR p.a. but when you combine that with loan paydown over time (equity) PLUS appreciation, you will end up with 20% ROI/year (and that's tax free due to the power of depreciation).
@Jay Hinrichs raised a good point though. Private lending can be lucrative and getting 10-15% CCR is easy. As a private lender, I am making 12% p.a. right now and that's not even leveraged. You can institute leverage into private lending with minimal risks. However, downside of private lending is you don't get equity and appreciation. Oh, and you don't get the tax advantage of depreciation also.
If I can turn back time, I would invest my $1M - 50/50. 50% in an apartment building and the other 50% into private lending. Private lending will increase my CCR while the apartment building lowers my tax lliability and increases my wealth for the long term.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
12y
@Account Closed a 5 cap in LA, AZ, or TX give you the same income stream. A 5 cap in LA and an 8Cap in TX gets you more bang for the buck in TX. That was my point. There may be other reasons to invest locally, but cashflow is not usually one of them. Case in point I just purchase a property at 21k a door with 1 bed rents at $650. Compared to a LA purchase of 210k a door and $1800 1 bed rents.
The private lending idea is interesting, but I don't think we can 1031 into that. We have to exchange for real property. Probably best to stick with that to avoid paying a huge amount ($300-400k+) in taxes, otherwise I do like the idea.
I would say our primary goal is cash flow, yes - but without a huge amount of work (pipe dream?). Basically would like to keep it as passive as possible. Willing to do work upfront to get a property stabilized (over the first year or two if necessary) but after that would like to minimize workload.
So yes the reason we are open to looking outside of LA is because there just aren't many properties here that cash flow as well as elsewhere it seems.
Any examples of out-of-state apartment deals that were done recently with real numbers that would be doable for us? Very curious to see some real deals and start narrowing down markets to focus on.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Hi Mark,
By posting you have that cash you will get hit up by everyone under the sun.
You will also be told 100 different ways to invest the money by people that each look at things differently depending on how they invest and their areas of specialty.
For instance I might like and recommend certain things and others might totally disagree and like something else.
Typically in your situation I would recommend discussing over the phone with different individuals in varying aspects of real estate.
People call me all the time and I am happy to talk about retail or large multifamily, triple net leasing, etc.
So learn the ins and outs of varying type of investments and then look at possible ways you can invest. You might have an idea about a certain asset class and returns but until you talk to specialists in that asset class the picture will not be as clear regarding ( financing, deal structure, anticipated spread returns, etc.)
Maybe consider braking it up into 4-5 investments of $250,000.
It should be easier getting the desired numbers and would also give extra safety due to the diversification.
Thanks and have a great day.
Not feasible with a 1031 exchange - have to identify the properties within 60-90 days (I forget exactly) and then close within 6 months. Would be nearly impossible to coordinate the sale of our property with the purchase of 5 different properties and not have any fall through and close on everything within 6 months.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
To answer your specific original question, yes, you can achieve double digit cash on cash if you invest in large multi family complexes out of state, TX fir example.
@Account Closed a 5 cap in LA, AZ, or TX give you the same income stream. A 5 cap in LA and an 8Cap in TX gets you more bang for the buck in TX. That was my point. There may be other reasons to invest locally, but cashflow is not usually one of them. Case in point I just purchase a property at 21k a door with 1 bed rents at $650. Compared to a LA purchase of 210k a door and $1800 1 bed rents.
Except you're not going to get the same cap rate for the same income stream in LA, AZ, or TX. An income stream of say $10,000 monthly will get DIFFERENT cap rates in each one of those areas. For various reasons the markets determine that an 8% cap rate in LA is worth the same as a 12% cap rate in TX. If you are ONLY talking about IMMEDIATE cash flow then yes a higher cap rate should get a larger cash flow for NOW.
In your example why do you think the market values LA apartments at TEN times more than where you purchased? That was what I was questioning Mark C about. If he wants/needs bigger cash flow now then sure, chase higher cap rates. I was just pointing out that it may very well cost him profitability over just a few years.
