Cap Rate on 28 units (no room for debt service). Who buys these things?

Real Estate Deal Analysis & Advice
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Cap Rate on 28 units (no room for debt service). Who buys these things?

Ethan Bowen
Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes

So I saw a deal (if you'd call it that). There is a group of older investors ready to retire wanting to sell 7 buildings (4-plexes) on one bock for 2mil. The numbers given to me had a 5.8% NOI. Looking closer, they weren't factoring debt service at all into the expenses. So really the only person going to buy this is someone with pure liquid capitol that would have no debt service.

My question: Is their really a market for things like this? Are their people out their that invest 2mil of their own money into something like this with a 5.8% NOI? Or is this just a pipe dream for the sellers?

Thanks!

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Karl Pierre
Real Estate Investor · New York City, NY · Member since 2014 · 21 posts · 28 votes
12y

As noted above debt service is never included in NOI calculations and assessed from a return on cash perspective. With that said people would definitely buy this asset if a solid management team is in place and they are looking to capture a higher yield on their capital so that they aren't losing money to inflation or what they would yield on US treasury bonds and other low yielding securities.

@Ethan Bowen this may not meet your investment criteria but lets assume the buyer has 10M in cash that they wanted to park in what many perceive to be a stable and relatively liquid asset.  At 5% the investor would earn 500k annually for doing what exactly, parking money in a functioning money machine.

This is not criticism by the way, it's offering a different perspective/approach to REI.

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  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    Yes, it's very common in south Florida, where we invested the last few years in short sales/REOs. Now, many investors from South America and Russia are just looking for a safe place to park their cash, safe from their own unstable economy. They don't care about ROI or any operating expenses. When we were there last week, we saw several properties in the +$1M range, with unverifiable rental income of $5K a month at best!

    2Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Aly W. 

    So i guess it's safe to say this technically isn't an investment. It's more of just an asset that is for sale?

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    Just a note, debt service is Never included in NOI. And yes, if the property is in the Miami area, foreigners have driven up the market, and rescued the condo market, parking their money here without much concern for cash flow. They're looking for safety number one, appreciation second.

    0Reply
  • Ed L.
    Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
    12y

    I find the same thing here in Mississippi of all places.  Basically like buying  a 2million dollar CD that yields 5% and has a ton of liability and headaches...

    These "safe" investments will be run down ghetto dumps in 15 years as they lack the income to handle needed capital expenditures.  

    I just don't get it....

    2Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    @Ethan Bowen and @Wayne Brooks , exactly ;)

    Ed, yes, I believe that too. Eventually, they will run out of other foreign investors to sell to at these inflated prices, and pop - another bubble will burst. It's happening in NYC as well.

    1Reply
  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    @Ed Lee,

    Is Palmer's Crossing still a run down neighborhood?

    Joe Gore

    0Reply
  • Karl Pierre
    Real Estate Investor · New York City, NY · Member since 2014 · 21 posts · 28 votes
    12y

    As noted above debt service is never included in NOI calculations and assessed from a return on cash perspective. With that said people would definitely buy this asset if a solid management team is in place and they are looking to capture a higher yield on their capital so that they aren't losing money to inflation or what they would yield on US treasury bonds and other low yielding securities.

    @Ethan Bowen this may not meet your investment criteria but lets assume the buyer has 10M in cash that they wanted to park in what many perceive to be a stable and relatively liquid asset.  At 5% the investor would earn 500k annually for doing what exactly, parking money in a functioning money machine.

    This is not criticism by the way, it's offering a different perspective/approach to REI.

    5Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Karl Pierre 

    So I just had a conversation on the phone with my mentor and he said it's always worth looking at deals just for the experience alone. It's going to force you to research specific things that you didn't already know. 

    He then told me to go research a PPM.....

    1Reply
  • Karl Pierre
    Real Estate Investor · New York City, NY · Member since 2014 · 21 posts · 28 votes
    12y

    It is because when looking at the deal you may think to yourself how and or why would someone approach an investment in a certain way leading you to a new and great strategy that you want to replicate.

    Yes you should familiarize yourself with PPM's but what are you looking to do in real estate.  Someone people go through research overload and never do their first deal...

    A PPM is essential for larger syndication and is a formal description of a deal for fundraising purposes.  A PPM will run you anywhere from 5-15k to have prepared by any legitimate corporate attorney.

    2Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    There has been a LOT of cash sitting on the sidelines for years. It is looking for a place to go and real estate sounds good. 

    I believe the 3 primary reasons are 

    • A willingness to accept lower returns because of the different perspective that @Karl Pierre mentioned
    • Ignorance of the risks of real estate
    • Ignorance of the hidden costs of real estate
    0Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Ned Carey 

    I heard that their is 23 trillion dollars sitting in retirement accounts across america... Lot's of stuff to work with.

    @Karl Pierre I hear you Karl, and your right, I need to get my first deal done. I'm trying so hard. I'm trying to look at 2 houses a week to make offers on. So yes, I really want to get that first one out of the way for my self and for other people. So I can finally feel legitimate. 

    My immediate goal in real estate is to raise capitol for more investing. I want to work my way up the chain. Listening to Podcast 65 has really inspired me to look beyond what most of my local investors are doing with residential real estate. Hearing Wendall's story really made me believe that the sky truly is the limit.

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    12y
    On a different note, I really like your profile story. You can tell your ambitious and that's contagious (in a good way). Best of luck with your REI.
    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    @Ethan Bowen Are you looking locally or across a larger area?  Just curious what your model is and if there are deal in your area.

    0Reply
  • Ed L.
    Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
    12y
    @Joe Gore

    It's pretty bad over there.  I try to stick closer to USM for the grad student tenant base.


    Originally posted by @Account Closed:

    @Ed Lee,

    Is Palmer's Crossing still a run down neighborhood?

    Joe Gore

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Ethan Bowen 

      to answer your question absolutely .. I sold a 4.5 million dollar apartment building in Portland in 06.. for cash  IT was a 1031 rolling out of vegas.. These particular investors have no debt on anything.. and its a 5.5 cap... Its the quality of the asset that is so different. When you have solid west coast or other known prime rental markets the big money is going for safety not the highest yield..

    As we start in RE we are looking for the highest yields generally and that's what leads many newbies into war zones and ghettos not realizing there is a huge difference in asset class's.   This particular property runs 95% full at all times.. PM is 4%  plus on site manager. My client comes once a year to look at it for 1 hour. then we go have dinner and fine wine.

    they are now buying the one right next door for 3.5 mil cash same cash flow..

    And it was great timing on their sale in Vegas if they kept vegas they would have lost 50% of their value buying in Oregon it did not go up but it did not go down and it cash flows uninterrupted with no management issues like clock work.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Bob E. 

    Ya, there are deals. I know there are, because there are plenty of investors at the local REIAs that are doing deals. I just don't have the capitol for marketing or the reputation to be constantly getting referrals. What would you suggest?


    0Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Jay Hinrichs 

    Yes, I think it goes back to what @Aly W. was saying. It's less of an investment and more of an asset, a safe place to park your money.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Ethan Bowen 

     No I think its a RE investment if they wanted to park money they would just buy double tax free muni's  or @Account Closed   as they live in Honolulu they buy Hawaii state energy credits...

    From your prospective Ethan your equating everything to % cash flow.. When RE investing is far more than that.. its cash flow  Its equity protection.. Its chance of appreciation.. Its sleep well at night because I did not buy a tough to manage property, Or like the first building I sold them they are perfect for condo converts down the track and they would make a 50 to 70% return on equity...

    Its clear here in the states that Cash flow numbers  = RISK  that is for sure...so you have to weight all the factors.

    Now these same investors bought in Vagas a couple of C class 4 plexes that do not produce very well and some SFR right at the bottom.. Even though the SFR only created about a 6% return they are going on the Market in the fall for very large appreciation gains.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    As @Jay Hinrichs said: 

    "As we start in RE we are looking for the highest yields generally and that's what leads many newbies into war zones and ghettos not realizing there is a huge difference in asset class's."

    My husband and I bought our first two properties, SFRs, in class C neighborhoods, in a tough city. The values had fallen like crazy in '08, and these properties had been selling for $25K more than what we paid, so we thought we were getting a deal. Cash flow was good, and rents are still high today. 

    However, the city deteriorated along with the economy, and almost every tenant (except 2 or 3) has been a headache to manage. We're thankful we stopped at 2 properties there, and began investing in devalued condos in good areas in Ft. Lauderdale. They've all doubled and sometimes tripled in value, rents are high, and the tenants aren't hearing gunshots every night. Because they're in condo communities, we don't have to worry if a unit is vacant and going to get the copper stolen (ask me why I worry). 

    So Jay's advice is good for anyone starting out. It's not all about the cash flow or the 2% rule. Sleeping well at night and not worrying about your properties or your tenants is worth more than 2%.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Aly W. 

      Aly its nice to get an honest post about low end rentals and all that it entails.  There is far to much blue sky talked about with these types of properties.. Its a 50/50 proposition at best. And in my mind those properties are only suitable for those that live and work in the community and these assets are a commodity not an investment.. because they are not an investment per se as they never go up in value they go down usually and they are money pits when your in the super cheap ghetto war zones.. good job recognizing this and understanding that properties with hopes of appreciation because of area are to be considered in the full equation of investing in Cash flow rentals were ever that maybe.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    I've edited and removed several off topic posts in this thread.  Please stay on topic and avoid nitpicking over grammar and spelling.

    0Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    Absolutely @Jay Hinrichs . While the cash flow has been good these 8 years, if we weren't underwater on those properties, we would sell them. Forget about appreciation. Many landlords in that area just milk those properties dry with cash flow and deferred maintenance. 

    We take care of our properties. Our tenants say they don't like living in the area - they don't have much choice at those price points - but they are very happy with the houses.

    0Reply
  • Ethan Bowen
    OP
    Real Estate Investor · Sandy, UT · Member since 2014 · 85 posts · 18 votes
    12y

    @Jon Holdman , much appreciated.

    @Jay Hinrichs & @Aly W. , I'm just going to sit back and watch haha. I really do appreciate your willingness to give your expertise here. This is all great stuff for me to learn.

    0Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    You're welcome @Ethan Bowen, glad to help ;)

    0Reply
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