Multifamily Prices so High that Only Cash Makes Sense, But Why Not Put Cash in CDs?

[William Coet]

I don't have the cash, but other buyers do.  I still would like to understand why they are paying the prices they are when they could put the cash in a CD and earn interest worry (and work) free.

I'm referring to multifamily properties that have no room for rent increases through value add.  They are "priced to perfection" and the numbers don't even come close to penciling out if someone has to get a 30 year mortgage.  For example: 975k for an old (100 years) place with 100k income and 27k property taxes and owner paying $8,200 in annual utilities plus insurance and maintenance costs.  But they sell!!!

Why are people willing to pay these prices when they could put it in a CD?

Thanks!

[Kevin Sobilo]

@William Coet, I'll give a few possible reasons.

1. Needs a place to park cash! This happens more often than you might think.

An investor has a GREAT property and a lot of equity in it, time is ripe to sell, BUT they don't want to pay the tax-man! So, they do a 1031 exchange which allows them to sell and buy replacement investment properties but within a limited amount of time.

So, they sell and get a great price, BUT smokin deals are hard to find. So, they find something in nice shape that will hold its value a while until they are ready to make their next move. They park their money in the property because they don't want to take the BIG tax hit on property they just sold.

2. Time heals all deals (well many). A so-so deal that is cash-flow neutral will often become cash-flow positive over time. For example, right now interest rates are HIGHer than they are expected to be in the future. So, if they are cash-flow neutral now, they will be cash-flow positive in 3 years when they refinance at a 2% lower rate.

3. Tax advantages. If a property is making no cash-flow, when depreciation is factored in it is a paper loss on your taxes. I believe those losses can be carried forward into future years so that when you are making money, you pay even LESS taxes on it and keep more in your pocket.

4. Multiple ways money is made. A rental makes money 3 ways (cash-flow, mortgage paydown, and market appreciation. The fact that cash-flow on a marginal deal can still be ok was already addressed. Mortgage paydown is obvious but very slow at the beginning of a 30 year fully amortized mortgage.

However that leaves market appreciation. Some investors actually seek places to invest for market appreciation. If they believe conditions are right for properties in that market to increase they are HAPPY to buy and hold a property that doesn't cash-flow well on the belief that if properties do jump 10-20% per year for a coupe years in a row at some point that they will make out in a BIG way.

Keep in mind, if you invest $100k to buy a $500k property and the property goes up 10% in 1 year and you sell, you have made $50k on a $100k investment for a 50% ROI! Your returns on market appreciation are MULTIPLIED because you are buying the investment with leverage (a loan)! So, even a 10% jump in prices can be a 50% return on the investment. Compare that to 5% in a CD and you can see why people buy in hopes of market appreciation.