What Most People Get Wrong About Cap Rates in Affordable Housing
If I hear one more investor say "affordable housing cap rates are too high, meaning returns are too low"...
I'm going to lose it.
This might be the most misunderstood metric in real estate. And it's keeping smart investors OUT of the best opportunity of the decade.
Let me explain...
A cap rate measures the return on a property RELATIVE TO ITS PURCHASE PRICE based on operating income. (Net Operating Income, NOI, is the North Star Metric in all real estate deals).
In Class A multifamily, cap rates are compressed to 4-7%. Investors accept thin yields because they're betting on rent growth and appreciation.
With our Condo - Conversion business model (buying from non-profit housing providers) we have purchased a building with negative NOI- making the Cap Rate completely irrelevant. @StarterHome.Fund currently has two properties in escrow... They would both be classified as a "-8%" Cap Rate.
Real World Examples of properties we have purchased or that are in escrow currently: (These numbers are not 100% accurate — These are based on my memory, at the time of purchase — but they are close enough for the sake of this example)
8-Unit in Outer Southeast PDX (100% Occupied) (In Escrow)
$75,000 per door purchase price
$600,000 purchase / -$75000 NOI = -8% Cap Rate
Estimated Sale Price: $2,400,000 ($300K / Door)
23-Unit in Inner Southeast PDX (40% Occupied)
$65,000 per door purchase price
$1,500,000 purchase / -$120,000 NOI = -12.5% Cap Rate
Estimated Sale Price: $5,700,000 ($250K / Door)
8-Unit in Outer SE PDX (75% Occupied) (In Escrow)
$75,000 per door purchase price
$600,000 purchase / -$75000 NOI = -8% Cap Rate
Estimated Sale Price: $2,400,000 ($300K / Door)
8-Unit in S Tacoma (0% Occupied)
$117,000 per door purchase price
$938,000 purchase / -40,000 NOI = -23.45% Cap Rate)
Estimated Sale Price: $2,800,000 ($350K / Door)
15-Unit in Inner N PDX (73% Occupied)
$120,000 per door purchase price
($1,800,000 purchase / -120,000 NOI = -15% Cap Rate)
Estimated Sale Price: $4,500,000 ($300K / Door)
11-Unit in Inner SE PDX (73% Occupied) (Pending DD)
$45,000 per door purchase price
($500,000 purchase / -90,000 NOI = -5.5% Cap Rate)
Estimated Sale Price: $2,475,000 ($225K / Door)
6-Unit in Outer NE PDX (100% Occupied)
$150,000 per door purchase price
($900,000 purchase / 54,000 NOI = 6% Cap Rate)
Estimated Sale Price: $1,950,000 ($325K / Door)
*** Special Note: The average Unit Price in Portland is $177,000 per door, and Cap Rates hover around 6.6% for Class C Multifamily.
Traditional Multi-family Investors see these numbers and think — Train Wreck !!! (Stay Away)
Nope !! 🙂
We look at these and instantly know the value. We salivate over these negative-NOI Cap Rate deals. We know that's where the profit is.
Crazy (unimaginably) Cap Rates in affordable housing don't signal higher risk. They signal a higher YIELD at acquisition. ("You make the money on the Buy")
You're buying more assets per dollar invested. Income per door becomes irrelevant.
But here's where the real misunderstanding happens...
Traditional investors evaluate affordable housing as a BUY-AND-HOLD rental play. And yes, if your strategy is to hold and collect capped rents forever, the returns are modest.
But that's not our strategy.
We're not buying for rental yield. We're buying for the SPREAD between distressed acquisition cost and condo conversion exit value.
Our return driver is the delta between $75K/door all-in and $275K/door exit.
That's a 265% spread. In 18 months.
Show me a 4-cap Class A deal that delivers that.
The investors who pass on affordable housing because of cap rates are applying the wrong framework. Like judging a fish by its ability to climb a tree.
Different strategy. Different metrics. Different outcome.
What metric do you think is most misunderstood in YOUR industry?
If you're an investor who has been passing on affordable housing because of cap rates... let's talk. We're buying properties right now at $75K per door and selling at $275K+.
The math works. The strategy is proven. The spread is real.
Drop us a message if you want to see how our Condo Conversion model turns "train wreck" numbers into 265% spreads.
