Why are cap rates so high in Wilkes-Barre, PA?

Question

Why are cap rates so high in Wilkes-Barre?

I know the population has been decreasing for a while, but what's going in Wilkes-Barre that's leading to such high cap rates (i.e. sellers willing to sell their properties for really low amounts?)

Russell Brazil · Answer

It has been all down hill since Dunder Mifflin left town.

Scott Taylor · Answer

Kevin D. What kind of cap rates do you see for multis in those better areas?As an out of state person, the cap rates that I'm seeing - at least by the universities is insane (15+). But I've heard that the two universities there started requiring their students to live in the dorms and it was otherwise hard to find good, quality tentants who weren't on section 8. Thoughts?

Chris K. · Answer

@Scott Taylor I think the "market" cap rate in the area is around 10 to 12 percent. This means that if a property generates $12,000 in NOI in turn-key condition, you can expect to buy and sell if for between $120k to $100k. When I underwrite to IRR, I assume that I can sell it for 11 percent at the exit. If you are just going by the pro forma data, you can see properties that have 15-plus cap rates. Some of that could be because the seller simply failed to disclose certain operating costs. I remember one property on MLS that appeared to have operating costs in the low 30 percent. Later found out that the operating cost was around the mid 50s --- the seller's agent simply got lazy and didn't update the data. Other times, it could be because the seller has reason to dump the property.We also have lot of properties that some people would call PIGS. Here's an article about that if you are unfamiliar with the term. https://www.biggerpockets.com/renewsblog/2015/03/0...

Kevin D. · Answer

Coming from someone who grew up in and lives in the area, there are pockets of Wilkes-Barre and the surrounding area that are suspect. You can probably buy very inexpensively and make money, but it definitely won't be easy money. Conversely, there are a lot of other pockets that are slightly more expensive that you can get a quality renter in and make slightly less money. I'm sure it's like this everywhere though...The other thing to be aware of, is that you're required to have a property manager if you do not live within a certain radius of the city. I live within this radius, but still choose to use a professional PM because I work full time and choose to outsource that. Feel free to message me if you have any other specific area questions.

Stephen Franco · Answer

I have been investing and living in Luzerne/Lackawanna counties of Northeastern PA for over 10 yearsMy usual cap rate is 13-15% after a 10/10/10 pad and at the lowest I get is 10. As a wholesaler and realtor, I can do the same for youAlso, I handle alot of private lending deals offering returns of 10-14% per deal, sometimes less than a year

Rao Mu · Answer

Kevin D. I am looking at this particular property in Wilkes barre, PA with a high cap rate of around 18-19, though I don't think it's true. http://www.zillow.com/homedetails/390-S-Grant-St-W...How do you feel the neighborhood is? It seems like a school that got converted to apartment building (14 units) and also, it doesn't seem like a densely populated area also. Let me know your thoughts...

Scott Taylor · Answer

My agent actually owns a property near there, and said she's had a devil of a time finding renters. Apparently it's been siting vacant for a long time. They also have professional property managers who have tried to find renters with no luck.Apparently the local university changed it's policy with allowing certain years to live off campus. I believe all of the students could live off campus previously, but now it's only seniors or juniors. Don't quote me on that - but my agent said something similar and said she's have a devil of a time. They are obviously trying to unload the property.So your biggest thing might be finding renters. I'd check the property market to figure out if you can actually get anything. Also, if you are serious about it, you could always ask to see the current leases (which are sometimes only released after putting an offer in). Those current leases will show how vacant / full those units really are.

Kevin D. · Answer

@Chris K. I'd be curious to see your pro forma on that property also, can you email it to me? (Just curious, there is another school building for sale that could be a conversion.)@Rao Mu That's not my favorite neighborhood, and I personally do not invest there. Chances are, you will never have any appreciation in that area, and will possibly have negative valuations in the future, so you'll need cash flows (matching those CAP rates) to make the investment make sense.

Chris K. · Answer

@Rao Mu I've looked at that building before. I'll share my thoughts in greater detail if you send a PM. I don't think it's the greatest neighborhood, but not the worst. I recall the proforma on that property being somewhat odd --- maybe the stated gross income was too high compared to what the stated rent was?