30% Cap a red flag??

Question

I am a flipper and I am looking down the road thinking about buying an apartment building. I am a newbie to the apartment building world and just starting to look at deals, being a flipper I am drawn to value add deals but not totally hammered. I was looking on loop net and saw a 52 unit building advertising a 30 cap. Would this fall into the too good to be true category? When looking at an Apod are there signs that they have fudged the numbers?

thanks for the help

Russell Brazil · Answer

The higher the cap rate, the higher the risk. This would indicate to me that this is one of the riskiest properties in the nation....or.more likely that they don't know how to properly calculate cap rate.

Joel Owens · Answer

Don't buy trashy properties in suspect areas from afar thinking you can turn it around easy and make a big payday.

That is frequently how many lose their shirt and go back to investing where they live with their tails between their legs.

Joel Owens · Answer

Under 1 million a low amount of doors. Not enough doors to own remotely effectively especially a C type product.

Might want to buy 4 units close to you for more favorable financing. Keep it local where you can keep an eye on it unless you are buying A to B type location and property in another state.

John Thedford · Answer

I would question the representations made. I have seen brokers advertise properties with bogus Cap Rates because they fail to include all expenses, etc in the figures. VERIFY always.

Eric Inman · Answer

Mike,

Many people do not calculate CAP properly.  A few things to factor in (that many don't):

-Reasonable management fee (8-10%). A lot of people self manage but you still have to factor in that cost as your time has value and when you sell, most investors will use it when running the numbers.

-Property tax based on the "new" purchase price.  In FL that number is based on 85-100% of the new purchase price times the millage rate. It may jump up if the seller has had the property a while with a low assessment.

-Reserves.  Many people budget 5-7% or so for maintenance but do not budget for long last items.  If you have a 25 year roof with 10 years left and it will cost $15,000 to replace, you need to budget an additional $1,500 per year going forward to cover that specific item.  Same with seal coating the parking lot, etc.

-Deferred maintenance.  Old buildings may have old plumbing and electric.  Same scenario, do your due diligence and budget accordingly...

-Rent. Not sure about Nevada but MF rents have peaked here and I wouldn't proforma based on current rents but would use a avg between current rents and rents at the bottom of a down cycle. The swings (peak to trough) have been pretty large here.

-Tax returns.  I'd get a copy of the sellers corp or LLC return to verify he's depositing what he's claiming in rent.  Its easy to show scheduled rent but the actually may vary greatly.  A 30% CAP seeing extremely high.  Here a mediocre MF building in a tertiary area would still trade at an 9-10 CAP with A properties trading at 6 or below.

Just my 2-cents, hope it helps.

Roy N. · Answer

Or both.

Douglass Benson · Answer

Be skeptical of anything that is for sale.  Do your own homework, look at other properties in the area and see if you trust what you are seeing.  It is easy to figure out average rent (www.rentometer.com) as a starting point and if you are a house flipper, it shouldn't be hard to estimate how much costs you will have bringing the building up to speed.  Ask a local commercial broker what multi-family properties are going for in the area and see how it compares to what you are looking at.

Ask yourself "Will good people want to live here?"  Don't ever kid yourself on the answer to that question and please don't ever forget that the answer to that question has NOTHING to do with how well you have fixed up the place, it has everything to do with the neighborhood the building is located in.

There is a ton of money to be made as a slumlord, but I don't know how to do that so I can only advise you on how I would approach it making money my way.

Jay Hinrichs · Answer

simply put  either can't properly describe cap.. or its a ghetto war zone prop. that 90% of the folks that buy it will fail and lose all their money or most of it.. and it will be back on the market for a 40% cap rate

Mike Harding · Answer

thanks guys, kinda what I thought.  anyone know where you could find what the national average cap rate for class a, b and c? or how to find that info for specific markets?  I am looking at a purchase price of 1 million or less and trying to decide if it is better to get more doors in a less desirable market or get a better building with less doors but be in a more desirable market...

30% Cap a red flag??

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