Buying MFR in $3-4M. What markets are you investing in and why ??

Question

Hello-

I am looking to buy multifamily in the $3-4M price range toward the end of the year.  I live in Texas and cap rates are compressed here quite a bit so I've begun looking out of state.  Our goal is cash flow and we are fine with a long-term hold.

What other markets are you investing in?

I know everyone wants to know this but I'd love to hear success stories from investors in this price range!

I am looking for 7-8% cap rates with a strong economy, and low risk of being overbuilt.  Would appreciate any advice on your success stories in this price range.

We are transitioning from 1-4 unit properties and looking for income for my father's retirement.  I have been a commercial real estate analyst for 10+ years so understand how to underwrite a building, I'm just not sure what market you can still find good cash flow.

Thanks for your input!!

Joel Owens · Answer

Lot's of sellers target 1031 buyers at low caps because they know the buyers are looking at a big tax penalty with depreciation recapture and long term capital gains if their exchange fails.

You have to really find someone that is off market with a pressing need to sell ( Wants to retire, partnership split, wants to recapitalize into other projects,etc.)

The ones on the market tend to do ( call for offers ) with multifamily, rounds of bidding, and try to suck out every basis point they can selling to a sucker at crazy prices. These buyers often roll the dice hoping vacancy stays low and rent growth keeps hopping at short term bubble numbers of 4% etc. They set themselves up for big losses when they cycle ramps back down and stabilizes to decades old norms.

Texas as you know has very high property taxes and for multifamily can eat you alive as tenants do not reimburse like with retail.

I can tell you in the 3 to 4 million range for multifamily nationally there are just tons and tons of buyers. I get calls nationally many times a month looking for the stuff and most of it has re-traded out  3 to 4 years ago. The stuff being sold is generally in marginal areas, at low cap rates, with false underwriting. The owners usually slam crappy tenants in and then claim the property is stable after 1 year etc. with minimal repairs and the expensive stuff to replace is ancient. I have some syndicator friends that used to do multiple deals a year and now to find a great property that actually pencils they might do 1 a year as everything is heavily overpriced.

I don't even focus on it anymore and like to work on larger deals where the goal is to take a class A property at a 5.5 to 6 cap and get it to an 8 cap over a 5 year horizon. I like those buyers better. The investors backing the family offices in those cases are ultra wealthy and do not need yield today.

Andrew Cushman · Answer

@Maggie Vineyard, as @Joel Owens mentioned the $3-$4 million space is very crowded with buyers in most markets.  But that doesn't mean you can't find a deal!

While TX is a good MF market and has good fundamentals, I recently sold off most of our portfolio there.  The biggest problem with TX is that everyone and their mother knows about it, including equity from outside the U.S.  Thus prices get bid too high from people who either don't know what they are doing, just need to get capital placed and worry about the consequences later after they get their fees, or don't need to get high yield (if you're from Europe 5% sounds great!).

For me, I like the Southeast in general - SC, NC, GA, TN, and FL.  There's other great markets scattered around the country in addition to these.  Since you are looking at a longer term hold and are yield focused, some of the secondary and tertiary markets within these areas are probably your best bet.  Determine some markets you want to be in, and then start forming good relationships with the brokers that cover them.  Eventually you'll start seeing the good off market deals.

Another good strategy is to focus on value add, which is what @Cody L. alluded to.  You're going in cap rate might be low, but if you can improve the property and run it better than the seller, your final cap rate can be much better.  For me, I don't even look at cap rates other than for the exit - I focus on cash yield and IRR.

The above works, even though the market is very competitive.  Last Friday I closed on a $3.2 million dollar property in a secondary market in GA.  The cash-on-cash return will be double digits within a year or two, and the appraisal came in at $3.8 million!  I'll take that any day :-)

Good luck!

Andrew

Cody L. · Answer

"Texas" is a huge area so when you say CAPs are depressed, you ahve to be specific.  In Austin?  Sure.  I still find great deals in Texas.

I'm still buying like crazy in Houston. Just bought a strip center that's 8+ CAP with upside.   And I just bought an apt complex that was a 3 CAP on paper but once I looked at their financials I realized just how bad they were mismanaged (it'll be 8-10 for me, easily).  Which is why I look at price per door in a given submarket, I'd rather buy a "low CAP" under the average PPD than a high CAP at a higher PPD in that same submarket because the low cap scares off buyers and there is normally something going on that causes the CAP to be artificially low.

Chibuzor Nnaji · Answer

@Maggie Vineyard you mentioned out of state but if Dallas is appealing to you as a market to buy in feel free to reach out and I can point you to some brokers who have some deal flow in that price range.

Benjie DeVera · Answer

I'm in the market for $2.5 M to $3.5 M range for MFR's in TX area. Any commercial Brokers in the Houston / Austin / Dallas here who can assist me with purchasing an MFR in the area? Please message me!

Debra Grumbach · Answer

@Joe Funari  - I believe Joe can help you out.

Todd Dexheimer · Answer

Midwest is great if you want cash flow. St. Louis, KC, Indy, Cleveland, etc. Lower appreciation, but great cash flow. If you have some risk tolerance, I would look into Detroit. Houston and Florida may have opportunity after the storms

Buying MFR in $3-4M. What markets are you investing in and why ??

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