Why are the cap rates in mid-western cities so high?

Question

I've been looking for multifamily units in mid-western cities like St. Louis, Cincinnati, Dayton and Louisville. I've noticed that in some cities like Dayton, the cap rate for smaller MF properties is around 10 to 12%. What's the reason for that? Should I be suspicious or excited?

I'm looking for MF properties from 4-plexes up to about 20 or 25 units, so maybe it's just the smaller properties that have high cap rates. The prices seem very low, too, and I'm not sure why. Example: a 4-plex for $79,000 with a cap rate of 13%. The pictures of the units look fine and it's not a dump.

Anybody know anything about these markets and can you explain what's going on? Thank you!

Jake Walroth · Answer

I live/invest in Cincinnati/my brother invests/lives in Louisville. Both of these are great markets for investing. As for the cap rates... if you're just using Loopnet... not sure these can be trusted... at least from my observations. You can find those cap rates.... not sure I'd invest in those areas, but they're definitely out there. Having lived in the Bay Area, I can tell you these are very different markets. It's much more broken up, street by street, etc. While pictures may look good.... you really need someone on the ground or to come out and visit to see if the neighborhood/tenant base is somewhere you'd be comfortable investing in. Also, many of those sellers know people like you from SF, LA, NYC, etc are jumping for joy when you see that 13% cap rate..... so just be careful and make sure to perform extreme due diligence.

Jay Hinrichs · Answer

Risk / Reward Tenant demographics / Tenant base

low end rentals like the 4 plex you mentioned are very tough.. your rents are very low.. not enough gross rent to carry 4 kitchens bathrooms etc. and the tenants basically are renting the cheapest thing in town.. so guess who your tenants are.... they tend to be transient/ lots of turn over/ lots of no pay/ lots of drama.. thats why a seller would dump those at those prices.. they are suffering from burnt out landlord syndrome 90% of the time.

Alex Brookbank · Answer

@Aaron McMahon

Aaron, a couple of things come to mind. First, those cap rates could actually be higher or lower in reality ... probably lower... but definitely run your own numbers. Even at a high cap rate , some of these may have value add potential... depending where they are located, etc. I wouldn't let the high cap make you suspicious just because - but be diligent with your own due diligence.

Generally speaking, I'd say the higher cap ate compensates for lower appreciation potential + tenant demgraphic. So it's a give and take. In the midwest, it's more important to make sure the cash flow can sustain your return on investment, because appreciation will probably be lower than other markets. But a mix is always best!

Vivek Khoche · Answer

@Aron McMahon - It's no brainer , simple risk return paradigm higher the risk higher the return. Not sure how much you have traveled to cities and war zones. PM me if you want list of brave investors before you now available for your consumption. Read the link , the three properties are in respective A,B, C areas. Don't worry there are D and E and F as well.

https://www.biggerpockets.com/forums/311/topics/227602-difficulty-selling-rental-properties-at-loan-amount

Good Luck Investing

Vivek

https://www.biggerpockets.com/forums/311/topics/227602-difficulty-selling-rental-properties-at-loan-amount

Good Luck Investing

Vivek

Why are the cap rates in mid-western cities so high?

Why are the cap rates in mid-western cities so high?

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