Multi-Family Investing - Meeting Your Investor`s Expectations

[shusarik]

Greetings,

I`m hoping to receive some feedback and insight from others regarding their experiences when trying to meet an Investor`s expectations.

I`ve spent the past several months working with a JV Investor to find a suitable multi-family property (8+ units) in Alberta. Prior to this process, I made sure to properly qualify the investor, which included them completing both the REIN JV Questionnaire and Expression of Interest. This gave me a clear understanding of their expectations for a yearly ROI, over an agreed upon 5 year buy and hold strategy.

Now after spending many hours of my time searching for properties both privately and through Realtors, I came across one particular building that met my Investor`s ROI requirements (taking into account cash flow, mortgage pay down, and appreciation). What I thought would be a sure sell, turned out to be a disappointment. The Investor came back to me saying that even though the projection met the ROI requirement, a property would need to show a Cap Rate closer to 10 before they`d be willing to proceed (this particular one was around 6). Now given what I`ve seen in the Alberta market, or any market in Canada for that fact, buildings in reasonable condition/location just aren`t selling for cap rates at or near 10.

Here`s my dilemma. This investor has the ability to fund a large deal entirely on their own. Plus, they are well connected and can very likely open the door to other high net worth Investor`s down the road. Needless to say, I don`t want to give up on this person, but at the same time I`m not sure how realistic their expectations are in this marketplace. I know the saying holds true, "He who has the gold makes the rules", and that leads to a challenge because this Investor essentially has all the say on whether or not we proceed, since they`re putting up the money. I don`t want to spin my wheels wasting both my time, and my professional advisor`s time trying to find something that doesn`t seem to show up, but I don`t want to just give up.

Any thoughts, comments, or suggestions on how others have handled similar situations is Greatly Appreciated!

Thanks!

Steve

 

[Thomas Beyer]

10% CAP rate can be found ONLY in towns with high vacancies, towns that are dieing or through sheer luck ..

most CAP rates in decent towns would be:
5% or lower in Vancouver
6% or lower in Calgary, Edmonton good areas
7% or lower: Edmonton average areas, smaller communities close to big cities with strong demand across the West, SK big cities, MB, GTA
8% or lower: in many parts of the country
9% - sub 10% .. in smaller communities

Most investor groups with lots of money try to grind you .. and I found those groups hard to work with .. so state your terms that you find acceptable or walk ..

 

[Nir]

Thanks Thomas, great CAP summary by area category.

Steve, when I work with a real estate agent it is very important to me not to waste his/her time or mine. Therefore, I always look for ways to work efficiently with the real estate agent. The most efficient way for me is to provide specific number criteria for example 7% CAP minimum in certain area or annual rent to price ratio of certain percent. This helps everyone focus on the right properties. You know exactly what to look for and the investor is committed to take action when you find a property meeting his/her criteria.

It was not efficient to let you spend so much time without letting you know in advance they are looking for around 10% CAP. Such a criteria can also help you understand if the expectation is reasonable and decide if you are interested in working with them and how much time you are willing to spend. It works both ways because once you find a property meeting the criteria, the investor is expected to take action. you will learn very fast who is serious about buying and who is not.

Good luck managing your time more efficiently in the future,
Neil

 

[seanverret]

Thomas,

What are all the variables that come in to play when calculating CAP rate?

Thanks
Sean

QUOTE (thomasbeyer2000 @ Nov 6 2008, 10:39 AM) 10% CAP rate can be found ONLY in towns with high vacancies, towns that are dieing or through sheer luck ..

most CAP rates in decent towns would be:
5% or lower in Vancouver
6% or lower in Calgary, Edmonton good areas
7% or lower: Edmonton average areas, smaller communities close to big cities with strong demand across the West, SK big cities, MB, GTA
8% or lower: in many parts of the country
9% - sub 10% .. in smaller communities

Most investor groups with lots of money try to grind you .. and I found those groups hard to work with .. so state your terms that you find acceptable or walk ..

 

[Thomas Beyer]

QUOTE (seanverret @ Nov 10 2008, 11:57 AM)
Thomas,



What are all the variables that come in to play when calculating CAP rate?



Thanks

Sean


check this post: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-7448-Multi_Unit_Properties.html



basically: size, views, location, condition, interest rates, rent levels "as is", rental upside, rent control laws, in-migration, risk, perceived risk, economic outloook, vendor motivation to name the Top 10 CAP Rate Influencers ..