What is a realistic cap rate/CoC for off market deals?

Question

I am looking to buy distressed multifamily deals all cash. My method of finding these deals are mailers and MLS. However, i do not know what a common cap rate or cash-on-cash return is for off market deals. I am looking into the Texas market and don't want to spend two plus years searching for a single deal because i have an unrealistic expectation for returns. 7%+ cap rate is what i'm using as a benchmark. I would love an investor's perspective on what they look for and how they structure their deals in terms financing and cash on cash returns.

Russell Brazil · Answer

Looks like your trying to find something that doesn't exist in your market. A quick Google search shows that Class C in Dallas gives a 5.75% cap rate. Value add, which means a non-performing asset wouldn't even achieve a yield on cost of 7% after rehab and brining it up to performing status in Dallas.

Bruce Lynn · Answer

Account Closed  DFW area is very tough.  Honestly I don't see hardly any distressed multifamily.  Even when I do come across it occasionally, the numbers probably don't hit your benchmark.  It's nice to have a benchmark and nice to try to run numbers like that, but what I find is when you do that right now in today's market you probably won't end up buying anything.  There are always people who can rehab cheaper than you and have lower initial ROI requirements.

Long term I think things will shake out.  We've had good absorption in the market, but we have something like 55,000 MF units coming on line this year in DFW.  While there have been stats come out the past couple of months that say rents are up, I don't really believe that when you see the newer properties offering 2-3 months free rent.   Last time I checked a couple of weeks ago we also had 750+ single family homes for rent in just 3 cities of McKinney, Frisco, and Plano.  That's too many.  What I see is there are many people from abroad who just want to park money here vs their home country due to inflation or some other reason who are willing to take minimal returns in exchange for principal safety.  Maybe local investors as well who want real estate safety vs stock market or commodity risk.   This seems to be even more exaggerated in small MF in my experience where by traditional metrics, they're just not there unless you find that needle in a haystack.

Bob Stevens · Answer

The deals are not on MLS, there off market. All my personals are never less then 15% most avg 20% NET

Good luck

Bruce Lynn · Answer

For the most part we don't really see much distress in MF in DFW area.  Even when they need total rehab, they will often sell at amazing prices right now.  Lots and lots of cash looking for deals.  Reports say 1/3 of all sales are for cash and I believe it.  Lots of dynamics for this.  One is we don't have a lot of MF to start with in my opinion.  What we have doesn't turn over a lot.

Just to give you an idea of what I see.  6 unit asking $600,000 in a very tough area.  100% vacant.  Needs probably $30,000/unit rehab.  Rents probably $1000/month/unit.  My buyer offered $300,000 on it, which is very very fair price.  Seller doesn't even respond, no counter, no discussion.   Stuff like that is pretty common.  I see plenty of places sell for let's say $450,000 with $1200/unit rent on duplexes.

Alecia Loveless · Answer

@Shivani Kumar With family that has a portfolio in the suburbs my observation is that the market is too saturated. My family member struggles to find decent tenants year after year and the constant increases in property taxes are killing her cash flow.

Even with having close to $200K In equity per property throughout the portfolio she’s barely breaking even after mortgage, taxes and insurance.

Make sure you run lots of analysis to make sure this market is going to provide you with the results you want.

Corby Goade · Answer

If you are working on 4 units and smaller, there are no cap rates- those only apply to commercial property. Lots of newbies want to negotiate deals based on caps and it gives you a false sense of value for a property.

Are you looking at true commercial properties- 5 units and larger?

Diego A. · Answer

Hi Shivani,

First of all, the number chosen will need to align to your risk tolerance.

Now coming to your question, when looking at distress homes the Cap Ex won't work because of the condition.

When looking at this you should focus first on the ARV though you may not think on selling that will give you an understanding if you will have a return After the rehab.

Then you look at the cap rate, this is important for the long time investing and It will depend on what you are looking for (Long Term return, cash flow).

An last is cash on cash that will help you to get an idea on how your money is working.

Dallas is a hot market for investors and these are the numbers that I am seeing:

ARV: ~80% (Ideal this Number should be 70% to 75%)

Cap Rate: ~5% to 6% (Ideal this Number should be over 7%)

ConC: ~4% (Ideal this should be 6%)

Trying to get the ideal number could take you a while.

MF with 2 to 4 are completely different than 6, 8 and above. If you haven't done any Operations and rehab of MF start small would be my recommendation.

Lucia Rushton · Answer

@Shivani Kumar when you say multi family, how many doors is that? What is your budget? And how are you financing it?

Account Closed · Answer

Even for distressed properties, you can’t find a decent CoC? I would assume investors would negotiate for a better deal with distressed owners.

What is a realistic cap rate/CoC for off market deals?

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