Buying my first property (NEED ADVICE)

[Lorenzo L.]

Hello all,

I am trying to do my first deal/buy my first MF property but I haven't been able to move the needle.

I am focusing on Small MF (2-4 units), with a value-add strategy. I have been cold calling direct-to-seller and working with brokers to find deals.

I don't understand how properties, in East Boston, for example, are trading at around 5.3 cap when rates are around 6.5%. I was cold calling an off market property and the guy laughed at me because I asked if he would take somewhere around an 8 cap (obviously i didnt say this, I gave him a ballpark number) and he shared with me that these properties are trading at 5.3 cap. I just dont understand how people are buying at such low caps ? Aren't they losing money? Can someone please explain how transactions are being made? (other than the seller financing stuff because I've asked and nobody seems to be interested)

[Dan H.]

First recognize that 2 to 4 units are valued on comps and not cap rate.   In addition, due to them being eligible for conventional non-commercial financing they typically have lower cap rate than 5 units and more.  

Recognize initial cash flow is likely at an all time worse.  3 recent studies show that the rent to value ratios are at an all time worst.  Combine this with interest rates that are near the high for this century and cash flow is challenging.  

total return from an RE investment includes value added, appreciation, tax benefits, equity pay down, and the cash flow. 

Recognize due to the leverage that is possible with RE, the return from appreciation is magnified. Note at 80% LTV, the return from appreciation is 5 times the actual appreciation rate. A market like Boston has a long track record of appreciation in excess of inflation/cpi. If the cpi is 3% but Boston RE appreciation is 4% and you have 80% LTV then your return from appreciation 20%. Not a bad return from appreciation alone.

Equity pay down is ~$200/month for each $100k borrowed depending on rate you get. Or at 80% LTV. ~$165/month for each $100k of value or almost 2% return from the equity pay down.

value adds vary in the return they provide.  If you purchase a rent ready RE investment this could be 0%, but at the opposite extreme a good brrrr can produce the now elusive infinite return (I have achieved this on most of my RE investments but believe it is very challenging in the current market to bp not be cash negative after the refi to extract the added value.

I expect to make an offer this week.  Its return is achieved due to an alternate rent model.  Purchase is ~$500k and rental income will be ~$100k.

Also rates may go down resulting in increased cash flow via a refinance.

The answer to your question is there are a lot of different ways to make money via RE investing, but it used to be easier to find deals that work.  

Good luck