Who is currently buying MFH? What CAP Rates are you expecting?

Question

I am with a property management company located in Indianapolis, IN.  We manage many different types of homes ranging from $2400/month corporate relocation's to $550/multi-family homes.  There was a time, not too long ago, that it felt like everyone was looking for the passive income that can be generated for having 1 roof and 4 individual units.

There was a period that lasted about 8 months or so in Indianapolis that many investors we looking for SFH rather than MFH.  The returns were typically ranging between 6-9% for the SFH and 11-15% on MFH.  Purchase price was very similar so I ask today.....who are the MFH buyers today?  Are they hedge-fund groups?  Reits?  Pools of individual buyers?  What are you seeing out there?

Steve Olafson · Answer

Interesting choice of words.  I have been selling my apartments because there is a lot of money chasing little product.  Of course I want to maximize my returns based on what people are willing to pay.  I would not call that greed.

To answer the original poster.  Most of the REITS still seem to be in a buying mode.  I think most local investors that already own a good amount of product are sitting on the sidelines or selling.  I have heard talk of some of the REITS scaling back but don't know if they are or not.

The successful multi-family investors that I know do not simply buy for cashflow.  The discussion that I hear about buying this way usually comes from people that are fairly new to the game.  Perhaps this is because I have only invested in the west where there are boom cycles on occasion. Once you get a taste of the big returns from value-add and market driven increases, it is hard to think along the lines of cashflow.

Rich Weese · Answer

Albert Bui- brilliant minds must think alike! Your list looked like the path I travelled to get where I am today.

Rich

Rich Weese · Answer

I've been in this game for decades and haven't paid much attention to cap rates. As an answer, I'm buying a couple larger apt. complexes in Dallas and am actually here at present getting mgmt ready for when they close. 7.8% was a 164 unit building that will close in June.

Now that the answer is out of the way, there  are so MANY other reasons I buy a property. Trends, location, rental comparisons, rehab possibility, vacancy, condition of big expense items (roofs, Chillers, boilers, parking lot, etc.), financing, upside etc.

The properties I'm buying are part take down properties in a 1031 exchange. I was coming out of a storage facility with great income but no write off. I wanted a property that would provide comparable cash flow or more, but with most of it covered by depreciation. to obtain the cash I wanted, I went for a couple nice C properties. At present, that is best for my situation.

That will change. I have another apt building in Dallas that has gone up nearly 100% in value in less than 5 years. Tons of equity. If I decide to sell later this year, I will go for a B type property with less cash, but also less potential large repairs. Income will not be as important at that point as a great building that will probably cover all income with depreciation and much less oversight and expenses.

Times can dictate what you want or need at a particular time. When I started, cash flow was most important. Then it became quick appreciation and growth. After that, I wanted to leave a legacy for grand kids with self sustaining R.E. to have funds available in a Trust.

It is time to fine tune and secure the financial situation for long term purposes. I have never been hung up on one particular method or strategy. They can all work at different times, imo.

Good luck finding your own method.

Rich

Giovanni Isaksen · Answer

We're strictly looking at 'special situations' for acquisitions these days. Currently trying to coral several distressed owners who have properties with a lot of deferred maintenance and below market occupancy in markets that we like. At this point they're still paddling down that big river in Egypt but once the fit hits the shan they'll start taking my calls.

For long term holders, e.g. not syndicators or private equity, if you buy with low leverage and a margin of safety in the cash flow you can pay market prices today and in 20 years the guy who sold it to you will be wishing he never sold.

If you think prices are high in your market check out Vancouver BC where you'd be buying 60 year old, flat roof, single pane window, central boiler, never been remodeled buildings at 'suite' cap rates in the upper 2s.

Just some food for thought but I don't think the Fed is as likely to raise rates (and drive up cap rates) any time as soon as most think. For more on this see my 2 recent posts: http://www.biggerpockets.com/blogs/5055/blog_posts... and www.ashworthpartners.com/10yr-multifamily-investme...

Albert Bui · Answer

Awesome insight Rich,

This is the same track I've been researching, thanks for the post to reiterate that there are others other there  on this same path:

- the balance between cash flow, tax shield from depreciation, and projections to figure out how to net "0," on paper or as close to it as possible

- building up the passive activity loss bucket in anticipation of properties or other income producing activities that have income that exceed expenses and depreciation so I can keep the net "0," balance for tax shield purposes

- use of entities, revocable and non revocable trusts, and Life insurance to exit life with no estate tax, fund trusts with perpetual income and asset growth by auto/default design to perpetuate indefinitely into future generations

Rich Weese · Answer

Mike McKinzie-This will be first property for me in Mesquite although I've owned a lot of properties in other cities around Dallas and Fort Worth as well as San Antonio and McAllen. It is still hard to go wrong in Texas.

Thanks for the prop on my Book. Glad you enjoyed it. Was it a Kindle? I don't remember signing a copy for you and I always do that.

Azeez K-Thank you and your cash flows sound great. Good luck.

Rich

Azeez K. · Answer

Hi @Derek Gendig

So far this year we have bought one 30 unit Cap Rates were 13% cash on cash was 28%. We are currently in the process of closing on a 100 Unit Cap Rates are 10% Cash on Cash 12-15%

I have seen MF overvalued especially in Atlanta, GA. Most instances valuations don't make sense. Additionally, have seen pools/syndication. No hedge funds in the MF.

@Rich Weese

Congrats on getting your loan assumption approved. I hear it is quiet a process to get the loan assumption to be approved and a whole lot of documentation. I am already looking at HUD FHA 223(f) loan to refinance the 100 unit in the next year or so. I know it is going to be a long process for refinancing through HUD FHA 223 program. Anyways Good Luck on the 164 Units sounds exciting.

Thanks

Mike McKinzie · Answer

We own a SFR in Mesquite and will be accelerating purchases, most likely next year.  Thinking about the Multi Unit this next time around.  Also, just finished your book @Rich Weese, an enjoyable read!

Rich Weese · Answer

update – just today received approval for Fannie Mae loan assumption on 164 units in Mesquite, Texas. What a pain in the ass that has been, but I think it will be well worth it. Still looking for one more unless I decide to sell my 154 unit building in Garland. If that were to occur, I would be looking for an additional 300 to 500 units. It is hard not to be enticed by the increase in equity on my building in a short number of years. Obviously, if my building has gone up in value, so has everything else. I still love Texas!

Rich

Mark Mosch · Answer

Peter - to answer your question about where - not in California.  As some people here have mentioned, cash flow is only part of the story - driving appreciation is the other.  However, despite California being a great source of appreciation for your properties, the cap rates have been bid so low, that we can't get the kind of base yield we need for our investors there.  Our fund tries to take a balanced approach being providing a 'decent' (8%) current yield from the cashflow to the investors, but then also having some upside due to adding value and driving up rents over time to give us some forced equity.  In California, the cash flow side of things is way too low, so we are working in MSA's that give us a better current yield but still have some appreciation potential.

Who is currently buying MFH? What CAP Rates are you expecting?

Most Popular Reply