All Forum Posts by: Corey M.

When investing in real estate in general, and multifamily in particular, selecting the right market is critical. I personally like multifamily because this asset class outperform all other asset classes. According to CBRE, “Over the past 25 years, multifamily investment has had the highest average returns of any commercial real estate asset class. The 9.8% average annual return is slightly ahead of industrial, and more than 100 basis points greater than office.” But, not all markets perform the same, and knowing which markets are performing well and still generating strong returns, even in a pandemic, is very important information to consider when committing to a potential investment. The reality is that we are now in a recession, and while 9.8% return might not be a realistic expectation in many markets these days, many markets are still capable of achieving solid returns.

Another factor to also pay close attention to is cap rates. Cap Rate indicates the investment risk and calculates what your return could be if you paid for it with 100% cash (no leverage or financing involved). Cap rates are used to value commercial properties in relation to other comparable properties (“comps”) in the area. As a rule of thumb, an attractive investment is to purchase a property with a higher cap rate than its comparable properties in the area, and sell it at a lower cap rate than the one you bought it for. The reason for this is because the lower the cap rate, the more the property will be worth.

Finally, above all else, is demand. Being aware of the percentage of renters within each market, as well as the number of competitors, including new development, is another key factor to take into consideration. After all, even if you get a great deal, without a stable tenant base, the property will not be profitable.

Here are the 2nd quarter of 2020 top 12 markets for US multifamily total returns:

12. Boston, MA

Annualized Total Return: 3.7%

2020 Average Cap Rates: 4.6% - 6.0%

Renter Percentage: 38.16%

11. Palm Beach, FL

Annualized Total Return: 4.0%

2020 Average Cap Rates: 4.6% - 6.0%

Renter Percentage: 30.52%

10. Seattle, WA

Annualized Total Return: 4.1%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 40.01%

9. Atlanta, GA

Annualized Total Return: 4.2%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 37.04%

8. Fort Lauderdale, FL

Annualized Total Return: 4.7%

2020 Average Cap Rates: 4.6% - 6.0%

Renter Percentage: 50%

7. Minneapolis, MN

Annualized Total Return: 5.0%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 28.43%

6. Tampa, FL

Annualized Total Return: 5.2%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 35.62%

5. Denver, CO

Annualized Total Return: 5.5%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 35.86%

4. Austin, TX

Annualized Total Return: 5.8%

2020 Average Cap Rates: 4.6% - 6.0%

Renter Percentage: 42.29%

3. Orlando, FL

Annualized Total Return: 6.8%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 40.68%

2. Charlotte, NC

Annualized Total Return: 6.9%

2020 Average Cap Rates: 4.5% - 6.1%

Renter Percentage: 47.10%

1. Phoenix, AZ

Annualized Total Return: 10.5%

2020 Average Cap Rates: 4.6% - 6.0%

Renter Percentage: 36.33%

Sources:

Newmark Knight Frank 2Q20 US Multifamily Markets Report

www.Apartmentloanstore.com

Department of Numbers

I live in CA where rents typically don't cover the price of a house/mortgage. I've lived in my place for 8 years and after a recent cash out refi, I pay about $2250/mo for my mortgage + taxes. If I rented it out, I could get about $3k per month. However, my expenses are another $750 or so (management, Capex, maintenence, insurance, eq insurance, hoa). Essentially I'd breakeven if I rented it. I'd also have to buy a new place at a cost of about $800k (160k down) @ 3% interest, and that new place would have all the typical tax breaks associated with a primary residence. Los Angeles property has been appreciating at about 8%/yr, and because of that, I'm trying to choose between renting out my residence and moving into a new one, or doing a passive investment in a turnkey. I have a f/t job and can't be active.

The turnkeys I've been looking at average about 18% IRR, and that includes appreciation, equity via house paydown, and net cash flow. Most of the places I'm looking at have about 2-3% annual appreciation. This IRR doesn't include depreciation.

So, with that $160k that I could use as a down payment on a new residence while renting out my current one, would it be better to do that or buy 800k worth of turnkeys with that $160k (~5 sfhs)?

My concern with renting my current house and buying a new one is that the cash flow could easily be negative on any given month AND I'd be taking on a new mortgage that is 50% higher than my current one. On the other hand, I'd be making LA level appreciation on both of them, which could be lucrative. 

Thoughts?