Cap Rate Dilema in multis

[Daniel Suarez]

I'm looking at a bunch of multi-families in different cities, and a lot of them are 4 or 5% cap rate in B areas that sell really fast. 

My point is, I understand that you get lower cap rate areas at A or B areas, but with such low cap rates you're certainly having a negative cashflow at 5% rate with 25% down at 25 years. 

Would love to hear from people who bought similar cap rate properties, what your strategy was to buy such low cap rate properties and how it worked out. 

[Brian Burke]

Most likely no one will be able to answer this question because no one was buying at 4%-5% caps three years ago, and with most assets being held 3+ years the 4%-5% acquisitions haven’t sold yet.

Having said that, 3 years ago when people said it was crazy to buy at 5%-5.5% caps, I've since made out pretty well on those trades, some of them exceeding 30% gross IRR on full cycles. But here's the rub: cap rates compressed to 4% since buying those, and that certainly contributed to the home-run style outcomes. Will today's 4%'s trade out at 3% in three years? I doubt it. But I've said that before, too...

I'm still buying today, and I think we'll do very well. Not 30%+ IRR well, but still double digits. To your point, 75% leverage doesn't always work—65% is common. And not 25-year am...more like 5 years of I/O followed by 30-year am. That gives time for the cash flow to ramp, which is the thesis behind low cap rates—rent growth makes the income stream more valuable.