10-15+% levered returns possible? With 1-1.5M cash

[Mark C]

My partner and I did our first deal a few years ago which went really well and we have about 1-1.5M in equity, but the problem is that the cash flow it generates is not that great - partly because cap rates are so low here in Los Angeles.

We have the property listed for sale and are thinking of 1031ing into something that will hopefully provide a lot better cash flow - which probably means we will need to look out of state.

We were considering multi-family but are open to ideas.

My question is - with 1-1.5M cash, is it possible these days to get levered returns in the 10-15% range? Net 200k+? Seems like it should be doable if we can find an apt deal for around 3-4M at an 8-10 cap and get fixed rate financing and lever up, but I am wondering what all of you guys are seeing right now.

If it's possible, any suggestions for markets to look at? We have been eyeing TX but haven't found anything great there yet.

Thanks in advance!

[Joel Owens]

Hi Mark,

I can tell you with multifamily it is heating up on the larger buildings. More of my clients want to get in while cap rates are good versus the debt that can be obtained on the mortgage.

This SPREAD is what helps the returns.

I am seeing interest rates rising for multifamily and cap rates decreasing over the next few years. As residential houses and other things dry up people are moving capital to larger multi family. Investors also like the size aspect of scale and being more hands off.

The interest rate you can get on a commercial loan is based on the terms you want. If you are willing to get a 5 year loan to 7 year loan term you can get fixed rates in the 4's. If however you are seeking 10,15,20 year fixed loans expect the basis points to jump 75 to 100 into the mid too high 5's on average. The longer you want the loan fixed the more the lenders will up you on the rate.

This becomes extremely important because the rate is tied to the loan term. Some buyers opt for shorter term loans for more cash flow today and others opt for longer term with less cash flow. The more the interest rate is the higher you have to push the cap for the spread and the harder it gets to make a deal work.

Now as markets heat up caps will compress and interest rates rise return will be less. The other thing that is huge is when sellers feel it has shifted to a sellers market they will feel less likely to carry seller held seconds to increase your cash on cash returns.

I personally right now from what I am seeing is it's time to buy for large multifamily. I am talking markets with yield not crazy 4 or 5 cap type stuff that even with a minor contraction you will lose value.

I think an 8 to 9 cap is reasonable depending on area and location for a fully performing property. When you get into true 10 caps you are entering areas where you will have to really work for that yield versus type of tenants you encounter.

There is a line every investor I work with draws in the sand versus returns and location they feel comfortable with.

Where you buy this multifamily is critical.

Pro-landlord or pro-tenant state??

Landlord paid utilities and lien laws??

Eviction processes and timelines for the county you buy in?? Some counties even with 3 to 4 week timelines take months to process the writs because of being short staffed.

Do you want to partner on a deal?? I have some clients that are fine and others that are not.