Good Markets for Reinvesting 1031 Proceeds-Cap rates of 6% or more

[Doug D.]

What are good U.S. markets to get 6% or better cash on cash returns in multi-family? 

In the next 3 months I will be doing a 1031 exchange. Significant cash coming out of the sale.  Looking for stable income moving forward. I'm an experienced real estate investor (but not in multi-family). 

[Brian Burke]

@Doug D.  , there is a difference between 6% cap rates (as mentioned in the title of this thread) and 6% cash-on-cash (as mentioned in your post). Finding 6% cash-on-cash is pretty easy in most markets if you use leverage. Finding 6% cap rates, on the other hand, is a different story.

If you don't mind owning B & C class properties, you can find stuff in the 6% cap rate range in Texas and several other growth markets. If you want to look only at A class properties, 6% is more hit and miss. It can be found in secondary and tertiary markets but less likely in core markets and highly unlikely anywhere in California.  I suggest you consider larger MSAs (you'll have to go slightly out of town from the city centers) in Texas, Oklahoma, North Carolina, Arkansas, Florida, Tennessee, Ohio, Georgia, and Alabama.

Others have discussed the pros and cons of TIC investing and I agree with all of the above. In the case of a TIC, each investor owns a fractional interest in the property and all investors must agree to sell, finance, etc. The control of the asset is very fractured...there is no centralized control.

There is one additional option, however, and that is investing in a larger property purchased in a Delaware Statutory Trust (DST) sponsored by an experienced real estate operator. In the case of a DST, the investment sponsor is (typically) the trustee of the trust and has the authority to sign on the loan and convey title. It mitigates some of the risks of TIC investments. Structurally, it looks more like a GP/LP arrangement commonly seen in multifamily syndications. The difference is that 1031 treatment is possible in a DST transaction, where it is not in a typical syndication.

The quality of the sponsor is the key component to the success or failure of TIC and/or DST opportunities. That said, the same goes if you invest in multifamily directly rather than in a TIC or DST. In that case, however, the sponsor is YOU and you have to evaluate whether you have the knowledge and experience to successfully execute in the multifamily space. If you don't have the knowledge, you can learn. If you don't have the experience, you WILL learn...perhaps the hard way. But let's hope not!