Single Family Rentals at 24-32% Cap Rates

[Joe Colasuonno]

I got into real estate investing in 2008-2009 after selling a business I had started in college for about 50k. My father was a builder for 20 years, so I've always been around real estate, but up until then neither he nor I had really acted as a landlord full time. We pooled our money and our first property was a 30 unit foreclosure in a depressed area, about 50% occupied. We closed on it using hard money at around 12% interest. A year later we took in a partner with good banking relationships and was able to refinance the property at 4.8% and cash out our entire initial investment plus some extra cash. Over the past 3 years we have grown our portfolio to just under 300 units, with about 260 of them located in Allentown, and the rest scattered around NJ.

I'm a numbers guy, and recently we purchased a few single family homes in the area for between 10-15k each. The first one we bought for 11k, put 5k into it, and it is currently rented at 925/month by a Section 8 tenant who pays all utilities. My NOI is around 650/month, placing the investment at a 48% Cap Rate, which is essentially unheard of in most places. The model is replicable in this area specifically, and I have since purchased an additional 5 single family homes. I have noticed that I make more money per unit per month than I do with my multifamily investments in the same area, while spending approximately the same per unit to purchase and fix up.

The model I have formed to stick to is as follows: Total investment under 25k per home (including closing costs, purchase price, and renovations), NOI over 500/month. If the property fits that model, it is a 24% cap, if it either costs less or makes more per month, the cap rate increases accordingly.

My issue is that I am having trouble finding banks or lenders who are willing to lend money on these properties. The combination of the size of the loan with the fact that a lot of lenders steer away from lending on single family rental property put me in a difficult situation. Does anyone have any advice as to how I can refinance these properties once they are preforming so that i can purchase and replicate the model more frequently?

[David Beard]

Joe C I have purchased properties with numbers approaching what you describe. I just bought a 60 yr old 1050SF brick ranch HUD for $17K that needs just a few cosmetics, and will rent for $850. I have another in the same subdivision that I bought for $22K, and it also rents for $850.

ALL OF US who practice this strategy have the same financing issues. Local banks will not be financing these properties anytime soon. Most won't do NOO SFR at all in my area. Also, the areas where you buy 4 to 6% per month properties are generally deemed too risky, and the banks don't want this type of collateral on their books, not to mention the small loan sizes are not profitable. It's just a non-starter. The up-side of it is that this lack of financing is keeping prices in this tier more depressed than they otherwise would be.

Simply put, you need to focus on private lenders. Offer 10-12% interest and talk to friends, associates, financial planners, and accountants (i.e. advisors that don't get commissions from peddling financial products).

Put together a presentation describing your strategy, process, and your profitable portfolio, all pointing toward the safety of their investment. Doesn't hurt to illustrate the low returns available in CDs, bonds, and annuities, and the volatility and low 15 year average return in equities (< 5%). You will probably need to get an appraisal, and look to borrow 65-70% of the appraised amount for a 5-10 year period, fully secured.