5% Cap Rates with low CoC return, strategy thoughts?
 What are people's thoughts on starting at very low cap rate, low CoC returns for very long-term investors? Taking a 15+ year outlook, looking at the highest quality, newer buildings, in great locations with medical tenants and long leases remaining (7-10 Years). Is that strategy smart to basically be ok with minimal returns for 7 years or so to than be doing well for the rest of your hold period? These type of properties we are looking at, generally demand a 5% Cap rate with a 4% Coc in Year 1, with annual increases can get it to 10% CoC in 8 years. We have the ability to be very patient.  Other thoughts on these long term plays, positives and negatives. Thanks for the help!
[{"id": "huq7pwz", "text": "This really depends on the asset class. If we\u2019re talking retail/ office then it\u2019s usually institutional money at play. Multifamily is different. If you buy a value add (larger property) you can dig yourself out of the low cap rates. These two asset classes also have wildly different lease structures too. Long story short, yes, buying at a 5 cap or less is fine. You really need to determine your position and look at what fits your investment goals best.", "replies": [{"id": "huq80bp", "text": "Very helpful. How about medical?", "replies": [{"id": "huq8saa", "text": "Generally speaking that would look similar to the office space. It really depends if we\u2019re talking about a major medical space or a small urgent care. It would be common place for a large medical center to trade at a low cap rate and have a 20 plus year lease. If it\u2019s a small urgent care you\u2019d have to take a look at the lease and operator. You would also want to determine if the space could be repurposed for another business if that operator were to choose to end the lease.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "huq9x56", "text": "So Um not sure what you\u2019re buying or where to get to a 5 cap on in place  right now but good for you. Average CoC for everything I\u2019m buying over 5 year hold is pretty low right now, but I do VA so I guess that\u2019s not surprising that the majority of my return attribution is to appreciation. \n\nThat said generally good things happen to good real estate - if you buy a high quality asset in a good location it\u2019s generally never a bad thing. However in an inflationary environment I wouldn\u2019t want to be stuck into a long WALT deal where your real value is eroding over time due to fixed rent step then as you get close to renewal you\u2019re going to get nailed on whatever TI costs in 10 years at serious basis creep. I also hate MOBs - unless you\u2019re on campus they can be really tough to renew the anchor tenant who knows they have the upper hand - if they move so does the whole ecosystem - so they can ask for a ton of TI and low rents and you have to give it or else they\u2019ll find a developer to build them a brand new MOB to anchor somewhere else, get cut into the deal, and bring all their doctor friends with them to tenant the rest of the deal. \n\nI guess overall if I want to get to a high CoC over time I\u2019d buy multi and rip agency supplementals to cash out appreciation or buy industrial which has shorter WALT and less TI on renewal - would stay away from office and retail because who knows and TI, WALT, and renew risk scares me on MOB. Hotels also crush it on CoC if you buy right and mail your pip (and I dont think you can go wrong buying a domestic destination hotel right now) but you shouldn\u2019t play that game unless you\u2019re in PE buying for a fund. \n\nAnyways some brief thoughts.", "replies": [{"id": "huqq6ik", "text": "Yup. Class A long WALT stuff is a place to store capital with low risk. Safe Harbor.", "replies": [], "depth": 2}], "depth": 1}, {"id": "huqabxj", "text": "The cap rate is mostly an expression of the market\u2019s consensus of risk. There are plenty of people who have done very well investing in new Starbucks or Walgreens buildings that trade at 5 caps. There is no value add because the leases are set for long periods, but the risk is very low, so the low cap rate is reasonable.\n\nThe problem with this for most newer investors is that they are trying to *become* wealthy, not *stay* wealthy.  It\u2019s difficult to build wealth with a normal income and 5 cap deals. If you are a high earner, then go for it. Or if your risk tolerance is lower, then yeah, buy one of these deals. When I started out, I needed to build wealth, so I did a lot of very speculative, high cap rate, value-add deals. The time was right, and I did well. Now when I see a D-class deal at a high cap rate, I turn it down. You only have to get rich once, so I play a lot more defense now. Low cap rates mean low risk for me, so if the fundamentals are good, then I\u2019m fine with it.", "replies": [{"id": "hut2xhl", "text": "I\u2019ve seen a Walmart NNN go dark, even low risk does mean some risk. The Walmart paid out for the rest of the lease but it was something I never expected to see.", "replies": [], "depth": 2}, {"id": "hvnmcx0", "text": "That\u2019s a good story.  Nice work!  What\u2019s your take on the overall state of the multifamily market right now and where should people position themselves going forward?", "replies": [], "depth": 2}], "depth": 1}, {"id": "huqdvts", "text": "What asset class are we talking?", "replies": [{"id": "huqjxi5", "text": "Medical", "replies": [], "depth": 2}], "depth": 1}, {"id": "huqopsn", "text": "You want a STNL corporate-guaranteed urgent care or dialysis building. They\u2019re usually newer, well-maintained, and feature a good L:B ratio/ample parking. Even if they somehow go dark they are viable for 2nd generation use. Basically zero risk. In person medical care is Covid proof. Recession proof.", "replies": [{"id": "huqp3e3", "text": "&gt; STNL\n\nIt is STNL, it's backed by a local university, and has 10 years on lease. 5% Cap with a first year 4% CoC", "replies": [{"id": "huqtwhp", "text": "If your strategy is core with a 7 year hold then I\u2019d buy it tomorrow at a 5 cap.", "replies": [], "depth": 3}, {"id": "hure0fp", "text": "What terms are you seeing for debt?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "huqpwg2", "text": "Are there 3% annual rent increases?  Is the current rent market or do they seem a little high or a little low?  Does the university have good credit?  If they move out is the property re-tenantable?  How's the roof? \n\nIf I was your broker, I would ask these questions lol", "replies": [{"id": "huqsptw", "text": "Very helpful, rent is inline with area. University has great credit. Building is 1 year old, 8,500SF. Rent increases a dollar a year, which in year one is 3.55% increase, which over 10 year decrease but averages 3.15%. Move out question is still one that needs to be answered.", "replies": [], "depth": 2}], "depth": 1}]