6% CAP rate as first investment, or stay away from it?
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[{"id": "gs7rdio", "text": "A lot of variables go into deciding if a deal is \u201cgood\u201d. Cap rate is good but it could be too low for the market the property is in. You also have to look at the covenants and leases. The future \u201crentabiity\u201d is also important.", "replies": [{"id": "gs7ztj5", "text": "How does one properly assess future rentability?", "replies": [{"id": "gs8518z", "text": "Population trends, income, vacancy, &amp; neighborhood trends are a good way to start", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gs7rzdr", "text": "Like a lot of things in the world, it depends. For a Class-A apartment complex with future rent increases 6% cap is not bad assuming you have taken into account some vacancy rate. It's not easy to find better cap rates in this category.  For me personally, I invest in strip centers where I try to target 7-8% cap minimum.", "replies": [{"id": "gs85x0i", "text": "Dude if you can find me a class a apartment complex anywhere in America that\u2019s available on a trailing 6 I\u2019ll cut you into the promote. 6 cap class a doesn\u2019t exist unless you\u2019re in like the back woods of South Dakota....", "replies": [], "depth": 2}], "depth": 1}, {"id": "gs7skj6", "text": "Gross leases or net leases?  \nWhen are they up?  \nIs occupancy currently 100%?  \nHow are you going to fund tenant improvements allowance?  \nIf it takes you 18-24 months to refill the first vacancy, are you screwed?  \nYou say you have no other reserves after you purchase this. Have you been qualified as a borrower for the loan?", "replies": [{"id": "gs7tl8u", "text": "Pretty sure the OP is referring to MF.", "replies": [{"id": "gs7vw2c", "text": "Rereading the post, I think you're right. I initially assumed office for some reason.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gs7smg8", "text": "Is it fully leased or is there additional upside?", "replies": [], "depth": 1}, {"id": "gs7t5xw", "text": "A lot of things to consider. It would be best if you could talk to someone knowledgeable in your market. \n\n6% cap could be good or bad. But I think also important is to look at your Cash on Cash return. Where does this put your financially tomorrow if you buy today? overextending yourself? Will after debt service leave you with little room for error? \n\nGet an inspection to make sure you don't have any major repairs. \n\nHows the Roof, Foundation, HVAC? What's the property tax history? will you be able to escalate rents faster than the taxes do? \n\n&amp;#x200B;\n\nBest of luck! hope it works out!", "replies": [], "depth": 1}, {"id": "gs7t6yz", "text": "Nobody on this page will be able to tell you if this is a good deal unless they are very familiar with your market.  There are too many variables that play into it.  Bigvee is correct about the future rentability and leases,  but you also need to know what comps have sold for and what is happening in your area.", "replies": [], "depth": 1}, {"id": "gs7w4gq", "text": "Couldn't answer that question without knowing what your assumptions are.\n\nI can make a solid case for assets at a 2 or 3% cap, and none for some in the 10 - 15 cap rate range.", "replies": [], "depth": 1}, {"id": "gs7wkis", "text": "You're 20 living with parents and you are looking at investing in commercial real estate.", "replies": [{"id": "gs8209t", "text": "\u201cIt\u2019s also pretty much all the money I have\u201d is a red flag along with many others in this post.", "replies": [{"id": "gs82yyl", "text": "Agreed. Commercial can be a good investment, but you need solid reserves because a lot can happen such as prolonged vacancy.", "replies": [], "depth": 3}, {"id": "gs86gtr", "text": "Fair but he also has no expenses it seems. I wish I was 20 and living at home with that money at that age", "replies": [{"id": "gs8chj2", "text": "No personal expenses but what about reserves for capex on this project? Lots can change once you own it. I\u2019m all for making big plays when you see the right deal but going all in with no room for error is dangerous.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gs7wpnm", "text": "Does your math to get to 6% use the current property taxes or the substantially higher amount you'll pay as the new owner?  I've seen many nominally decent deals shrivel to shit after taking into account the much higher base expenses.", "replies": [], "depth": 1}, {"id": "gs7zzo6", "text": "Is this residential or retail? What quotes have you been getting on rates? \n\nCould be a solid deal depending on location as well. How many bedrooms per unit (if residential) or how many sqft (if retail). A lot of questions going in to the deal, but honestly, if you have the cash at 20 years old I think you should go for it. Worst case, you mess up and you have to sell the property (probably wouldn't even lose money on that besides closing). You're going to learn a ton and probably worth it to do this than to go to college. (but also get a college education)", "replies": [], "depth": 1}, {"id": "gs80jjo", "text": "Don\u2019t base it off a cap rate, take into account what other comparable properties are selling for on a $/SF or $/Unit basis. Take an in-place cap rate based on this type of valuation, probably will end up being closer to an 8 cap or more.", "replies": [], "depth": 1}, {"id": "gs81n1a", "text": "Depends on the market you\u2019re in and how you\u2019re underwriting the asset. I would base your cap rate on how YOU project the property will perform including taking into consideration any substantial increase in expenses such as taxes. Chances are, there some upside with competent management so calculate your return based on that and not how it has historically operated b/c you can probably increase cash flow fairly easily. If that rate of return is acceptable to you, then go for it.", "replies": [], "depth": 1}, {"id": "gs858tl", "text": "If you have not been approved for a commercial mortgage, look for parents to pitch it. Min 2 year steady income for $340K loan+ closing cost. Gift is OK up to a point.", "replies": [], "depth": 1}]