5% cap rates for apts in Dallas area. How to find better returns?

[Sarah T.]

Hi fellow Bigger Pockets investors!

It's nice to meet you all.  I'm a newbie to the forum but not a newbie to investing - I've owned / own a few properties (single family, duplex, etc.).  I've been trying to buy my first apartment complex in the <$2 million range within reasonable driving distance of the Dallas Ft. Worth area (<2 hours?), but I can't seem to find anything for sale that doesn't have a dismally low 5-6% cap rate!  These are older B and C class apartments we're talking about, too, and not Class A.  I'd love to hear your thoughts on and kick off a discussion on:

1.  Is it ever a good idea to buy an apartment complex at 5-6% cap rate using financing?

 (Especially since:  a)  the commercial lenders I've spoken to thus far all have balloon payments in 5 or 10 years...when interest rates go up, cap rates will surely follow... which means I may be forced to sell at a loss in a higher cap rate market or possibly be unable to refinance in a higher interest rate market if the cash flow then becomes underwater due to the higher rate?   b) This leaves almost no margin for positive cash flow if commercial mortgage interest rates are around 4.75%.)

2.  If not, do any of you have any experience or tips on how / where to find apartment complexes for sale that have cap rates higher than 5-6%?   

I've had no luck with MLS or Loopnet thus far.

Thanks in advance for chiming in, and I'm looking forward to becoming a part of and contributing to the Bigger Pockets community! 

[Joel Owens]

Property taxes in Texas will eat you alive on multifamily. A lot of properties are getting re-assessed with very high taxes.

Time to buy multifamily was 3 to 4 years ago. When everyone touts 3% vacancy, operating costs of 35%, and rent growth of 4 to 5% annually lasting forever you "run like h&ll".

Great times for a seller but crappy times for a buyer. Some will buy at a low cap rate and use a floating interest rate tied to LIBOR to eek out cash flow.

Real estate each asset class cycles at various times every 10 years or so. So if you have a loan coming due in 10 years there is a good chance you can sell and 1031 at the opportune time. When it's a 3 to 7 year loan it's more tricky for timing to dispose of the asset at the optimal time. 

There is long term debt out there but to push 20 years the interest rates will rise and almost wipe out any cash flow.

Those 5 caps or even 6 caps with Marcus and Millichap I could probably tear apart their OM's for stated estimated expenses.  When you run real numbers the cap rates are even lower at a 4.5 cap or something. A lot of these older buildings the sellers have smeared carpet and paint on them and left old mechanicals. Kind of like old cars where you can make shiny for 400 bucks with new paint but the stuff that costs thousands they don't touch. 

I haven't closed much multifamily for clients in years because the numbers do not work. I am doing more retail strip centers these days because they are a better value in the cycle and are not overheated like multifamily. We are getting 7.5 to 8.5 cap rates on quality properties.

Good luck but I wouldn't be buying an asset class that is overheated at the top of the market and using financing to massage the deal to get any cash flow out of it. That is sure fire way to lose a lot of money. I am not against multifamily I just can't put my clients into a property unless it makes sense.