Cap Rates & COC for buy-and-hold in Raleigh-Durham-Chapel Hill?

[Mark Stevenson]

Would be curious if anyone might be able to share what kind of Cap Rates and COC returns you typically see in buy-and-hold SFH and 2-4 unit MFs, in the Raleigh-Durham-Chapel Hill area.

I've been looking primarily in Chapel Hill and some in Durham. If trying to get into A-or B-level neighborhoods, it seems a very high cost for lower returns. Maybe it's just lack of inventory, but best case seems to be a 6% cap rate. And with housing costs so high, some are negative cash flow, but COC return no better than 4-5%. (Obviously that's highly variable based on financing, but I'm looking at 20-25% down.) The 1% rule for rental rates just doesn't seem possible, maybe 0.9% at high end, more likely 0.75%.

There are definitely some better numbers in lower income areas of Durham, but there's obviously higher tenant risk in those areas and I'm generally hoping to find units in high performing school districts for long term reliable tenants.

Are these numbers in line with what you have seen historically? Are the numbers any better in Raleigh, Cary or elsewhere? I'm not often east of the airport so don't know those areas at all.

I'd prefer to stay local (though would still be using property mgmt company), but have also looked at some turnkey properties. Obviously you pay a premium, but even with that, and after adjusting for some of the rosy numbers these companies suggest, there still seem to be many with cap rates of 9-10% and COC return of 15-20%. I don't have any info about neighborhoods, so these may be in undesirable neighborhoods and may be poor comparisons.

Would love to hear from anyone who may have thoughts on any of the above. Thanks! :)

[Account Closed]

Mark,

Please allow me to throw in my 2 cents.  You have to view it from a seller's perspective.  If you own a building in an A or B neighborhood and it's producing 8% - 12% CoCR almost trouble free, what would make you want to sell it?  Almost nothing.  There's no motivation to sell.

The market dictates the cap rates.  As you already have seen, higher cap rates come in crappier neighborhoods,, and that is true across the whole country.  There is no unicorn.  Kind of put things in perspective that everything in life has a price.  If you want higher yield, you'd have to take higher risk and earn that yield.  It doesn't come free.  

Let's look at an example. You're a value investor. You buy an under performing building for $1MM. You put $500k into rehab, and it's worth $2MM. You now have the option of doing a cash-out refinance at 75% LTV and takes out all of your initial investment. If the building is producing 10% CoCR after the cash-out refinance, would you sell it or would you keep it?

Since you got all of your money back, the CoCR is actually infinity.  Say if you get 10% ROE, that's $50k/year.  If you can rinse and repeat for 5 times, you're home free.  However, if someone comes along and offer you $2.5MM, would you sell it?  At $2.5MM price, your ROE is only 5%.  Well, not so fast.

Let throw in a curve ball and say your market appreciates at an average 5% annually like my market and history has shown that in the last 45 years.  That's $125k/year in appreciation for a $2.5MM asset that you only get 5% ROE, would you still sell it?  Just want to put things in perspective on why some of us west coasters are jumping all over a 6% cap rate. 

Sometimes, we're too short-sighted and only look at the yield now.  Just remember that a good player goes where the puck is while a great player goes where the puck will be.  

Good luck.