Cap Rates for Multifamily

[Alex Deters]

So I've been looking on Crexi at Multifamily buildings and most have a 4%, 5%, 6% cap rate on average. Isn't that low? How does one justify putting 300k down to only make 2k-4k a month? Is that a normal return?

[Joe Hammel]

@Alex Deters

Commercial and large multifamily is more advanced and perspective/visionary buying.

2 key points in nutshell:

1. They see the value add opportunities that other don't. Personally, I barelyyyy ever even look at a current NOI or current return if a performing property. I don't care what it's doing now because I'm looking at it POTENTIAL. What are market rents? Can I update units and increase rents more? Does it need better curb appeal? Does it simply need managed better? Etc

Investor buyers at this level have vision, resources and skill to increase the ROI so it often "appears" like they're buying a very low cap rate property because the current owner hasn't maximize.

2. Large MF comes with scale. It's a more passive move because you're dumping a large sum of money into 30,50,100 doors rather than buying 50 SFH. Cash flow is only ONE of the 4 ways investors make money. If you have a commercial property and paid $2m for it and without lifting a finger it appreciated at 3% (the rate has been muuuch higher) then you would have made $60k after one year. Ride this out for 5 years and you've made hundreds of thousands of dollars just buy signing the deed on this one property.

This doesn’t even count that VALUE ADD that you may have done which could be another $100k+ in value add. And the loan pay down which will be a few thousand dollars more.

ALSO, tax benefits. They’re cost segregating, showing insane amounts of “losses” and they’re writing off near 6 digits of passive income and being a “real estate professional” they can write off other forms of passive income etc.

Real estate is such and insanely good investment, even if you there cash flow out the window.

How do you get to all this equity you made if you don’t want to sell?

Easy, you just cash out refinance. So you can pull out that equity and go do it again. (Sounds familiar right? Brrrr is actually just a process any investor could/should use, and it doesn’t have to be executed in 6 months. It can be 6 years and at the end of 6 years is when you turn your roi infinite)