Having looked at several multifamily deals in secondary markets, and the taking prices and the projections, I am left to wonder who other than a REIT can make good sense of buying some of these properties. While the assets are decent, they are often older, in need of material renovation, and have some but limited rent upside due to the markets they are in and their age. In the current debt market, one can make good sense of a decent current return in the teens levered, but assuming a 5 year hold and the ten year rising to 4% or more likely 5% over the term of investment, it is hard to understand where the capital gain will be on an asset in a secondary city that is now maybe 30-45 years old. There is no real upside to the next buyer as the renovation will have been completed, the rents raised and wages and demand will not likely have increased a lot to justify material increases in rents for pretty ordinary suburban located apartments. In the meantime operating costs will have increased.

This appears to have resulted in REITs being able to swoop in and pay unrealistically high prices to get a nice asset that will yield a decent cash flow to the REIT. An individual investor has a very different outlook in most cases and is in for cash flow plus an upside and possibly the management fees. For the passive investor in these assets it is fine if all they seek is a higher yielding asset to provide a relatively safe cash flow for a period of time, but there Is no real capital gain.

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