Help me understand my marketplace... are these deals?

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Help me understand my marketplace... are these deals?

Ian Bower
Member since 2023 · 11 posts · 0 votes

Hey all, 

I've been looking for my first investment property in my local marketplace (2 hour radius around me) 

Here is what I have been finding for the most part... 

SFR - Low cap rate (3% or so)

Multi-Units - 10% Cap Rate, but poor condition*

Multi-Units - Low CAP rate, tenant occupied*

I understand my options for fixing things up at a property, but here are the issues I am running into.. 

*Tenant occupied properties usually have below market rent, often VERY below market. If the rent matched market prices it would be a good deal, what should I do here? 

*Tenant occupied properties that need a lot of work - especially when combined with my point above. I can't renovate with a tenant in the property, especially if they are paying below market rent.

I DO find some properties that are in good shape, even tenant occupied that have a low cap rate - or SFR that have a low CAP rate - Should I be considering these properties?


So I guess overall, my question is can you help me align my expectations with what I am finding, is this a case of "yeah, the market is weird right now, this is typical, you have to make a decision" or... "Look harder/Look differently"

Thanks!


FYI I think that low CAP rate is sub 5%, please correct me if I am nuts.

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Rick Pozos
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
1y

It's kinda the way things work. Low cap rates because you dont have to do anything, just collect the 4% or 5% like a CD at the bank.

10% Properties are going to be more involved. Get rid of crappy tenants that have been there for 20 years and still paying $500 per month instead of $1500, but it's a $hit hole. These will take some cash to get up and running.

Maybe look for properties that are a little higher cap rate AND might have some room for rent increases or ADUs or some other way to boost income. THAT is how you are going to get a great deal. YOU have to find ways to increase the value of the property.

You have to look at plenty of properties and find the one that will work for you. If 4% does not work for you, go on to the next one. You just have not found the right property.

AND YES, some people just ask crazy stupid prices hoping that someone will pay for it. Keep walking.

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  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    1y

    You are only really assessing based on CAP rate which tells me you are only looking online and assuming their CAPs are correct. CAP rate is one commercial metric of many that need to be considered. For a first-time investor, CAP rate is usually irrelevant unless you are buying 5 units or more.

    Are you looking for 5 and up? If not, CAP rate is a metric, but not applicable as 4 and under are residential and valued by comparable sales. You still want to know the balance sheet, rent roll, and expenses, but most people who talk about CAP a lot are over-using the metric and not seeing enough properties in real life.

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  • Ian Bower
    OP
    Member since 2023 · 11 posts · 0 votes
    1y

    Thanks Jonathan, 

    I've been in about 10 properties in the last week, so I'm definitely on the ground. I am using CAP rate as a comparison between properties, also using ROI.

    Here's an example of what I am finding, note that the higher ones (the one in bright green for example) represent wishful thinking. ex. "If I can convert that garage into an ADU" or "If I can figure out how to get rents higher..."

    What would you recommend for me to use to determine the quality of a deal? I think that is what I am asking more than anything.. I am using CAP rate to compare different properties, and ROI to determine the best use of my capital.

    So for example, Row 3 on this sheet seems great (It's one of the "hopeful thinking" ones though). 

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  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    1y

    It's kinda the way things work. Low cap rates because you dont have to do anything, just collect the 4% or 5% like a CD at the bank.

    10% Properties are going to be more involved. Get rid of crappy tenants that have been there for 20 years and still paying $500 per month instead of $1500, but it's a $hit hole. These will take some cash to get up and running.

    Maybe look for properties that are a little higher cap rate AND might have some room for rent increases or ADUs or some other way to boost income. THAT is how you are going to get a great deal. YOU have to find ways to increase the value of the property.

    You have to look at plenty of properties and find the one that will work for you. If 4% does not work for you, go on to the next one. You just have not found the right property.

    AND YES, some people just ask crazy stupid prices hoping that someone will pay for it. Keep walking.

    1Reply
  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    1y
    You shouldn't be using the cap rate for these properties. The cap rate is used to get an apples to apples comparison across commercial properties. You are looking at retail properties, which have been overvalued for a long time. Which is why it is difficult to find even 1% rule SFRs in a lot of areas right now.

    To your second part of the question: Most multifamily will be tenant occupied, which means they are producing income. You should pay based on what they are bringing in and look to increasing the rent. They will have 12 month leases, so over the course of the year you will be explaining to them your plan to rehab their units and bring them to market rent. This is called forced appreciation and is a great way to add value in multifamily. Cap rates are one metric to use in these but do your underwriting based on multiple metrics, not just the one.
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  • Ian Bower
    OP
    Member since 2023 · 11 posts · 0 votes
    1y

    Thanks Rick! That was the encouragement I needed. I switched to a different marketplace about 2 hours from me and I am already seeing more promising opportunities. 

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  • Ian Bower
    OP
    Member since 2023 · 11 posts · 0 votes
    1y
    Quote from @Benjamin Aaker:
    You shouldn't be using the cap rate for these properties. The cap rate is used to get an apples to apples comparison across commercial properties. You are looking at retail properties, which have been overvalued for a long time. Which is why it is difficult to find even 1% rule SFRs in a lot of areas right now.

    To your second part of the question: Most multifamily will be tenant occupied, which means they are producing income. You should pay based on what they are bringing in and look to increasing the rent. They will have 12 month leases, so over the course of the year you will be explaining to them your plan to rehab their units and bring them to market rent. This is called forced appreciation and is a great way to add value in multifamily. Cap rates are one metric to use in these but do your underwriting based on multiple metrics, not just the one.

     Thank you! I appreciate your answer. 

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