Cap rate

[Omid Rabbani]

What's the ideal strong cap rate % for 4 unit multi family properties in Southern California? (San Diego county)

[Aaron Mazzrillo]

Originally posted by @Account Closed:

Originally posted by @Aaron Mazzrillo:

4 units are considered residential and therefore do not trade on cap rates. I closed a 3 unit in Dec 2013 which I put $40k down on and netted just over $8k in 2014. That's a 20% return, and now it is worth $100k more than I paid. So, great cash flowing deals can be found even though some on this board would like you to believe otherwise.

 Hey Aaron, given your particular business model, and perhaps just in general in the SoCal market, how typical would you say a deal like this is in this market? 

 I can get a deal like this at least once a year. I do a lot of marketing via mail and by mouth so I see quite a few opportunities which always get me excited, but many fizzle out when it gets down to the nuts and bolts. It isn't all the ones I don't buy that have allowed me break the chains of a J.O.B. though. It is the one per year that I manage to push across the finish line. I'll do a year worth of buying, selling & wholesaling to get to that one cherry deal that makes this game so exciting for me. 

This particular deal was owned by a very knowledgeable and successful local businessman. Don't for one minute think I was pulling a fast one on this guy. He knew the tax consequences of selling for all cash today and how that might affect his return, even if he had a place to put the money. The reality is, most people DON'T have a place to put the money. 5% from me isn't 4% more than a bank deposit, it is 500% more. He wanted enough down to pay his recapture and he knew exactly what that number was. He then wanted the balance carried interest only. Now, he's making money on the government's dime. The money he should be paying them in capital gains is working for him because he hasn't received it yet, therefore he doesn't have to pay it. He only pays income tax on the interest payments. I don't think most people get how powerful that really is. Imagine sitting at home collecting interest on another person's money. Some sellers who aren't aware of that opportunity can understand it and decide they want to do it to. You just have to be good about selling them on the idea and making them feel safe selling a house without getting the money today.

I went to the city and inquired about my little apartment building. Turns out it is zoned for 11 units. Doors here in my market sell for about $100K a pop in the apartment market at the moment. What might this little building be worth to some developer if I do the leg work and get it permitted, all the while collecting the rent and using that cash flow to pay those fees?

There's so much opportunity all around every day. You just have to get out there and start sniffing it out. My buddy out in L.A. bought a free standing, mom & pop style greasy spoon restaurant from a guy. Just a small building with a small parking lot. He negotiated great terms on it. He then rented it to a couple with a big pile of money and bigger dreams of starting their own restaurant. They fixed it all up and pay him a few thousand more than he pays the former owner every month. All because he saw a For Sale sign in the window and decided to call the number, meet the seller in the building, and discuss some other benefits available to him now that he was ready to sell.

Some recent deals over the last few years:

Seller financed single family house. 5% amortized over 36 years. Rent is $475 more than payment. 10% down.

Subject to purchase of 2 on a lot with a 20 year fully amortized loan that was 9 years old when we closed. Payments are high, but amortization is more than 1/2 the payment and I only paid $10K in cash.

Just moved a 60 month, $500 0% loan I got when I purchase a house to another rental that I had 10% interest only loan on. I went from no amortization and a toxic loan to a principal only payment and my cash flow went up a few hundred dollars.

Seller financed 2 on a lot, 10% down, 6% 10 years I/O.