Expected cap rate for APT. complex? - Posted by Bill Taylor

Posted by Morris on July 04, 2005 at 15:01:47:

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Expected cap rate for APT. complex? - Posted by Bill Taylor

Posted by Bill Taylor on July 04, 2005 at 13:54:32:

I am looking at 3 apt complexxes with what is told to me a $456,000 NOI. The asking price is $4,700,000. It has been reduced from $4,975.000. The appraised value was supposedly 5.2 million in 2001. I know our property tax rates have increased significantly in the last couple of years and I believe the expenses have incresed for this property as well. I have not done any more due diligence than talked to the owners. Based on this NOI and the asking price we have a 9.71% cap rate. What would the people on this board expect to have as a return for having the task of owning an apt complex. This happens to be 3 complexes. One complex is 84 units, another is 35 units and the last 28 units.

Re: Expected cap rate for APT. complex? - Posted by ray@lcorn

Posted by ray@lcorn on July 05, 2005 at 17:16:54:


Minimum acceptable returns are in the eye of the beholder. I know guys who will take on apartments at a 10%-12% first year projected return with an eye to creating upside in a three to five year hold period. They do very well with that model because they are in control of the deal from the start. Bigger operators use what I call captive fee management… meaning they have enough units in one market area to make the mgmt company put them on the top of the list for rentals, maintenance, etc.

Personally, we’ve just gotten completely out of multi-family properties just because we’re tired of the constant management requirements. I wouldn’t buy another complex right now for less than a 25% going-in return with the potential for a profitable flip within two to three years. And even then I would have a hard time talking my brothers/partners into it… just tried that with a flood-plain property that a local bankruptcy attorney tipped me to, and they looked at me like I was nuts!

But that’s just me. That doesn’t mean you shouldn’t pursue the deal. Every investor has to form their own criteria, then stick to it. Once you know your overall objective it makes it much easier to fit the pieces together.

In this case you might want to dig further into the numbers and see if the cap holds. The price reduction suggests that there is a problem with something somewhere in the deal. You might negotiate a Letter of Intent with the essential due diligence items required prior to contract. That would get you a free look.

Depending on how far the buildings are apart it may be a nice candidate for the start of a portfolio. That seems to be the high-dollar exit strategy these days, and it may be what the seller is looking for. In essence, the big players (REITs) can’t do small deals like this, but they will buy a portfolio once critical mass (typically about 200 units) is attained in one market area.


Re: Expected cap rate for APT. complex? - Posted by Don Dion

Posted by Don Dion on July 04, 2005 at 21:29:21:

The current national avg used by underwritters is 8.5% on multifamily. A cap rate of 9.71% raises the issue is there additional risk involved with this transaction? I will be happy to run the numbers for you on these projects as I did with the others you were looking into. Send the info via email.