Parking money in Slower Markets - Mid West, South, high CoC cap?

[Susan O.]

Is anyone doing 1031 exchanges out of markets like San Diego, San Francisco, NYC, Boston and just parking money in slower markets? Or sub markets with higher cap rates?

What are all your thoughts on just parking money in allocation for long term hold like a Detroit, Las Vegas, Orlando, Jacksonville, Atlanta, Indianapolis, St Louis, Memphis, or Houston type of metro? That has a 7-10% return rate or cap rates?

Those areas would be pretty steady no? Compared to places like Miami/ Fort Lauderdale, Boston, San Francisco county, New York City metros

I have about $350-750k that I'm taking out of stocks and just thinking about parkin it in 7-10 cap markets? And holding for 5-10 years? Anyone doing that?

[Brian Burke]

@Susan O. I did something similar to this back in 2005.  Prior to that I was doing a lot of investing in California and saw handwriting on the wall that there was trouble coming.  So I went to Buffalo NY of all places, and bought some property there.  My thinking was that was a market that didn't move much in any direction so there was relative safety there.  Turned out I was right--soon after California dropped 30% to 70%, and my Buffalo property actually went up in value during the same period.

But I caution you to not focus on cap rate as a haven of safety.  First, cap rates and return on investment have little to do with one another (although it is a common misconception).  And second, higher cap rates are usually just that for a reason.

Cap rate is nothing more than a temperature of the market.  Investors recognize strong markets that have a good economic story and are willing to pay higher prices for the same size in-place income stream.  They do this because there is upside potential and a good chance that revenue growth and occupancy levels are sustainable.  

On the other hand, investors tend to pay less for a stream of income if they think that income stream is going to remain stagnant or there is risk that it could decline.  Paying less for that income stream means a higher cap rate just by definition.  But if you think of it that way, perhaps you see higher cap rates as less of a positive and more of a negative.  There is some truth to that, to a point.

So my advice is to focus far less on cap rate and instead look for markets that have a strong economic story.  Markets that have population growth, job growth and income growth.  Those are the places most likely to produce the best overall investment result.  

That said, some of the markets you mentioned on your list are among the top markets in the country right now (and by virtue of that, have low cap rates!).  Those include Orlando, Las Vegas, Jacksonville, Atlanta and to a lesser degree, Houston.  You won't find 7% cap rates in any of those markets for larger multifamily acquisitions of good quality.  I see virtually every marketed deal over 100 units in those markets plus a healthy share of off-market opportunities, and nearly without exception I see most of these trade in the fives.  But the ones we've acquired in these markets have a ton of potential and will very likely outperform assets in weaker markets.