Originally posted by @Chris Cambridge:
Rason these are strong CAP rates, Did you negotiate a steal? Are these in contract? There are a myriad of options for a great deal. The usual still remains. Down payment (no 100%), quality of asset, cash on hand from buyer, last but not least credit.
I cannot speak to the specifics of the above deal, but in general deals in Norwich might sound like "steals" but there is a reason you can find "12-caps" in Norwich, CT:
1) Norwich is a depressed market, and I believe it's declining in population.
2) It's easy to underwrite deals in Norwich as a 12-cap, because showing "nationwide averages" on the pro-forma for line items (e.g. vacancies/bad-debt, repairs, reserves, turnover costs, etc.) might allow you to achieve those numbers. However, I think the ACTUAL costs will be much higher than projected by brokers.
As an example, I was looking at a 70 unit portfolio in Holyoke, MA that was trading at an incredibly high cap. However, after driving around and seeing that building after building is vacant and boarded-up, I did not want to be in an area like that. It might not be too long for one of these buildings that I looked at buying to be boarded up too, and then what would the cap rate look like at that point?
Think about what happened to Detroit; there was a time when sellers couldn't give their buildings away and it took a very big commitment to get things back to where they are now. But not all towns can come back from the dead, and even if they do you need to carry them through the rough times.
I know how tough it is in NYC when caps are trading at near (and below!) 0 levels, but sometimes the shiny objects aren't all they're cracked up to be.
Happy investing.
