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Updated about 8 hours ago, 12/04/2024
Buying my first property (NEED ADVICE)
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)
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
Hello Lorenzo,
I’am with you 100%… i live in florida and been looking for multifamily all year long and the same issue here. When you do the math you actually loose if you finance. The only option is to purchase cash and at that point it makes no sense due to the fact that a HYSA account or CD can pay you the same interest rate without having to deal with property management. I am curious to see what others say, but I am completely with you on this. I even considered the option of just purchasing 1-2 single family homes per year and growing that way as there is less risks of tying up all capital in 1 property
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
So its probably a hard time to start out?
Quote from @Rafael Ramos:
Hello Lorenzo,
I’am with you 100%… i live in florida and been looking for multifamily all year long and the same issue here. When you do the math you actually loose if you finance. The only option is to purchase cash and at that point it makes no sense due to the fact that a HYSA account or CD can pay you the same interest rate without having to deal with property management. I am curious to see what others say, but I am completely with you on this. I even considered the option of just purchasing 1-2 single family homes per year and growing that way as there is less risks of tying up all capital in 1 property
Yea, its rough right now. Glad im not the only one.
What would be the plan for the SFH? Buy it and rent it out?
Yes, that’s exactly what I’m thinking—maybe even exploring Section 8 properties. I’m considering even taking the risk of investing out of state in markets with lower property taxes and insurance costs than Florida to increase cash flow. My long-term goal is to eventually own around 60 properties or more. Even if I’m only netting $500 per property, it’s still a solid way to generate passive income.
I want to be as hands-off as possible. Plus, if one area doesn’t work out, it’s probably much easier to sell a single-family home than an entire multifamily property
But again im not an expert, im actually hoping for some guidance here as well
#3 Multi-Family and Apartment Investing Contributor
- Inspector
- Austin, TX
- 29
- Votes |
- 64
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#3 Multi-Family and Apartment Investing Contributor
- Inspector
- Austin, TX
Quote from @Lorenzo Lopez:
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)
Have you thought about doing a house hack?
Quote from @Robby Sanchez:
Quote from @Lorenzo Lopez:
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)
Have you thought about doing a house hack?
Quote from @Lorenzo Lopez:
Quote from @Robby Sanchez:
Quote from @Lorenzo Lopez:
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)
Have you thought about doing a house hack?
#5 Market Trends & Data Contributor
- Investor
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner.
When I keep money in my HYSA, I make cash. When I buy property, I am long assets.
I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.
Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter.
@Rafael Ramos I have a buddy cash flowing about $1500 per month on properties in the Tampa Bay Area that were built around 2018 and have very little maintenance. Happy to connect you to help spark some ideas for you.
- Raymond J. Rodrigues
- [email protected]
- 619-456-8311
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
#2 Managing Your Property Contributor
- Property Manager
- Royal Oak, MI
- 4,856
- Votes |
- 8,265
- Posts
#2 Managing Your Property Contributor
- Property Manager
- Royal Oak, MI
@Lorenzo Lopez keep at it!
Everyone has been spoiled by the last 10+ years of low property values with high rents and low interest rates.
- Just ask any investor doing deals prior to 2008 Real Estate Crash!
It can easily take 6+ months to find a motivated seller.
- Just be prepared, because a motivated seller typically has a property with issues you need to be sure you can solve.
@Rafael Ramos you're talking about chasing higher-risk properties for the corresponding higher returns.
- Just be sure you fully understand those higher risks, so you're not blind-sided about why you're not getting your on-paper returns.
- Also, Section 8 is NOT what most investors think it is - or else demand would have caused the returns to drop.
DM us if you'd like to discuss applying the above to Detroit market:)
- Drew Sygit
- [email protected]
- 248-209-6824
Quote from @V.G Jason:
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner.
When I keep money in my HYSA, I make cash. When I buy property, I am long assets.
I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.
Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter.
.
@Lorenzo Lopez
Pretend a map of Boston is a pool of water. Imagine dropping a stone on the Public Garden and watch as the ripples extend outward. Where you dropped the stone is where you get max appreciation. They further out the ripples go from the stone, the less appreciation your receive while the cash flow increases.
Don't think of CAP Rates as just NOI/value. They really shouldn't matter to you. CAPs are an individual investor's measure of acceptable risk for a given reward. Some investors have an appetite for 3% (low risk) buys, like a Walgreen's parcel. Others want a higher reward so take on more risk, like low credit tenants.
Boston is a "mature" market with strong appreciation, as @Dan H. mentioned. If you want some cash flow, aim for secondary markets like Worcester or Fall River. Starting out, buy a shabby condo and live-in/flip it. Or explore a 40B lottery condo purchase and look into house-hacking. Follow RobertNichols on IG (who also has a hard money company OnyxCapital, btw).
Keep trying until you find an 'equation' that works for you.
And. if you have a property management question along the way, feel free to reach out to me.
- Warren Lizo
- [email protected]
@Warren Lizo @Drew Sygit @Dan H. @V.G Jason
Thanks for the feedback.
My question is , I understand that some people would buy at a 5 cap but if they are getting leverage, are they just going to lose money until rates go down?
I guess its a bad example, this was a turnkey, fully rented 4 unit, and I understand valuations are based on comps not caps but the owner laughed when i gave him a low offer and showed me a list of 3 properties he sold at around that 5.3 cap in the last few months.
Im guessing then, that right now I should try to find 5-10 units that I can BRRRR?
#5 Market Trends & Data Contributor
- Investor
Quote from @Lorenzo Lopez:
@Warren Lizo @Drew Sygit @Dan H. @V.G Jason
Thanks for the feedback.
My question is , I understand that some people would buy at a 5 cap but if they are getting leverage, are they just going to lose money until rates go down?
I guess its a bad example, this was a turnkey, fully rented 4 unit, and I understand valuations are based on comps not caps but the owner laughed when i gave him a low offer and showed me a list of 3 properties he sold at around that 5.3 cap in the last few months.
Im guessing then, that right now I should try to find 5-10 units that I can BRRRR?
If so, simply put more down or consider the month to month an additional contribution capital wise. You're losing money, technically, storing it in the HYSA too. That 3% is not matching real inflation, and you're getting long the dollar.
Could you put it in some other asset and get a higher yield? Sure but that would go for almost any level of opportunity cost. To some degree it's always speculation, and to other degrees the risk profile situates itself for it.
It's just what are your intentions & pursuits. You are in Boston, if you found a 5 cap in Beacon Hill how quick would that leave the market? I mean the reality is low cap rate are priced to be the worst investment on paper, but likely the best store of value. So how you bring the money into the picture is just a mechanism, the reality is you do want to own the asset. If so, at what entry level is suitable. From there you assess if month to month cash flow deficit is okay, that's really such a small detail of it.
#5 Market Trends & Data Contributor
- Investor
Quote from @Andrew W.:
Quote from @V.G Jason:
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner.
When I keep money in my HYSA, I make cash. When I buy property, I am long assets.
I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.
Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter.
.
Leverage is a beautiful thing, but also a dicey one. If I can grab a quality location, 5.3 cap all cash right now I do it. The re-leverage aspect is now at my opportunity. Right now, I concern myself with the quality asset. How I cash flow it, how I leverage it, I can worry about to what's the most opportunistic & when. I call it "strategic" leverage, to make it appear cooler.
The equity market is a fine comparison, but the reality is if you think every 5 years you're net return will be 90%(not sure if this is pre or post tax) then you can choose that route but you have to mark it to that return annually which is a reach. I'm well diversified in equities, I think the scarcity game of physical real estate then add in the premium which is location will give me a higher yield in the 10-20 year mark and that's my timeline.
Ideally, you sit back on all assets levered at 20-40% and real estate possibly up to 60%, ideally not north of 40%. Keep your equities levered at 20%(half high vol, 1/4 low vol, 1/4 basic indices) and keep your phys/hard assets levered at 40%. The additional cash you have due to leverage put into more hard assets and the cash flow generated put into fixed income/equities after reserves. It's all going to be a long & quality game. And the strategy to enter it is crucial.
Quote from @V.G Jason:
Quote from @Andrew W.:
Quote from @V.G Jason:
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner.
When I keep money in my HYSA, I make cash. When I buy property, I am long assets.
I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.
Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter.
.
Leverage is a beautiful thing, but also a dicey one. If I can grab a quality location, 5.3 cap all cash right now I do it. The re-leverage aspect is now at my opportunity. Right now, I concern myself with the quality asset. How I cash flow it, how I leverage it, I can worry about to what's the most opportunistic.
The equity market is a fine comparison, but the reality is if you think every 5 years you're net return will be 90%(not sure if this is pre or post tax) then you can choose that route but you have to mark it to that return annually which is a reach. I'm well diversified in equities, I think the scarcity game of physical real estate then add in the premium which is location will give me a higher yield in the 10-20 year mark and that's my timeline.
Ideally, you sit back on all assets levered at 20-40% and real estate possibly up to 60%, ideally not north of 40%. Keep your equities levered at 20%(half high vol, 1/4 low vol, 1/4 basic indices) and keep your phys/hard assets levered at 40%. The additional cash you have due to leverage put into more hard assets and the cash flow generated put into fixed income/equities after reserves. It's all going to be a long & quality game. The point of entering it is almost futile, the idea is to acquire it.
So if I give you a turnkey, fully tenanted property in a great location at a 5.5-6 cap, buy it all cash, would you take it?
#5 Market Trends & Data Contributor
- Investor
Quote from @Lorenzo Lopez:
Quote from @V.G Jason:
Quote from @Andrew W.:
Quote from @V.G Jason:
Quote from @Charles Carillo:
The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).
This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner.
When I keep money in my HYSA, I make cash. When I buy property, I am long assets.
I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.
Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter.
.
Leverage is a beautiful thing, but also a dicey one. If I can grab a quality location, 5.3 cap all cash right now I do it. The re-leverage aspect is now at my opportunity. Right now, I concern myself with the quality asset. How I cash flow it, how I leverage it, I can worry about to what's the most opportunistic.
The equity market is a fine comparison, but the reality is if you think every 5 years you're net return will be 90%(not sure if this is pre or post tax) then you can choose that route but you have to mark it to that return annually which is a reach. I'm well diversified in equities, I think the scarcity game of physical real estate then add in the premium which is location will give me a higher yield in the 10-20 year mark and that's my timeline.
Ideally, you sit back on all assets levered at 20-40% and real estate possibly up to 60%, ideally not north of 40%. Keep your equities levered at 20%(half high vol, 1/4 low vol, 1/4 basic indices) and keep your phys/hard assets levered at 40%. The additional cash you have due to leverage put into more hard assets and the cash flow generated put into fixed income/equities after reserves. It's all going to be a long & quality game. The point of entering it is almost futile, the idea is to acquire it.
So if I give you a turnkey, fully tenanted property in a great location at a 5.5-6 cap, buy it all cash, would you take it?
I aim to buy great locations that are a bit distressed, fix up and manage the property management through my own venues. But there's lots of people who would buy that.
Boston is a tough market to find cash flow and good rent to price ratios. Have you considered other markets. I have a 10 property portfolio across Memphis and Detroit and they average 10% plus COC.
Great insights from everyone! To add, cap rates like 5.3% are often less about cash flow and more about long-term appreciation and value-add potential. Investors are betting on the property’s future value, especially in strong markets like Boston. Even though cash flow may be tight initially, leverage and appreciation can make up for it. Additionally, smaller properties (2-4 units) tend to have lower cap rates because they qualify for conventional financing, which impacts the math.
If you’re struggling with cash flow, finding off-market deals or considering seller financing could be a good way to improve the numbers.
Some markets are better for cash flow. Boston from what I've heard is very tough with compressed cap rates. Some investors are comfortable buying for appreciation or with the expectation that rents will grow at a faster pace. Either through value add or naturally.
I agree with you though I'm not willing to buy a short term liability in the hopes it will appreciate.
If you want more cash flow deals you may want to look outside of Boston and test out some new markets where you're hitting closer to the range of returns you're looking for.
@Lorenzo Lopez, what is your goal with your investments? I ask slightly jokingly, since I think we are all looking to make money with our investments. If your goal is to make money, and you aren't finding deals that you think will do that, there are other things you can do.
But more directly to your comment:
1. cap rate does not take into account appreciation.
2. Most owners over value their property, and particularly if you are looking at off-market deals, that seller is not even motivated enough to list their property, so the chances of you getting a "deal" are very low.
3. 2-4 families don't trade on cap rate.
4. You are likely competing with a lot of unsophisticated buyers who have money and hear owning a 4 plex is a smart investment.
5. You can't be competitive today buying on current yield alone. You need to factor in your POTENTIAL upside.
6. Interest rates are pretty universal across country, you are in a high demand, high cost area.
At the end of the day, a lot of people are not buying based on the long-term fundamentals that used to make real estate a great investment 15-20-40 yrs ago. They are speculating these days. And when you are competing with speculators based on sound investment theory, you will lose out.
Quote from @Lorenzo Lopez:
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)
- Josh Green
- [email protected]
- 801-441-8891
