5 Investment Real Estate Scenarios: Cap. Rate vs. Location

What Kind of Cap Rates To Expect in Different Philly Locations & the Burning Question:  Can Investors Have Both?


Over the years Jordan Brody & Co. has carved out a niche specializing in working with developers & investors.  New construction developments are pretty easy for an experienced developer to value due to the known variables of acquisition cost, the cost to hold & using comparable sales in the neighborhood to value the finished product.    Multi family real estate has its own challenges in valuation depending on if the building is performing & its location.  Our major challenge over the years has been reconciling an investor’s desire for a high cap rate with a performing building in a prime location.  Let’s take a look at a few scenarios.

Prime Location/Performing Investment

Let’s use Center City as an example.  You find a completely turn key, fully occupied building that needs little to no work & is able to be used at it’s highest & best use.  You will pay dearly for this & can expect a 5%-6% cap rate.  Seems low, however, there is very little risk & performing buildings are much easier to finance.  Many investors like low risk & easy management.

Prime Location/Non Performing Investment

These are your “value-added” projects.  The building may need a full renovation or zoning work to bring it or change it to it’s highest & best use.  For example, you purchase a brownstone in Rittenhouse Square that is zoned for offices where the highest & best use is a conversion to residential units.   This will require someone to be highly liquid to acquire the building, go through the process of obtaining zoning approvals with the assistance of a skilled architect & attorney, be able to fund the construction through a construction loan or liquid funds & bring the building to a performing level by occupying it once completed.  There is much more risk with this option.  However, if done right you can expect to have a much higher cap rate in a prime location.  Your cap rate in this scenario could very likely be 8% & up.

Sub Prime Location/Performing Investment

These are your fringe neighborhoods.  Think off campus housing & further away from the center.  Due to the “risk” inherent in buying on “the fringe” you can see very high cap rates here.  We have sold duplexes off Temple University’s campus for a few years now where the building is delivered new construction, fully occupied for the current school year & tax abated.  Financing on fully occupied buildings is relatively easy for qualified buyers with 25% to put down & investors have been enticed by the high R.O.I.  We have seen cap rates at 12% & up.

Sub Prime Location/Non Performing Investment

Again, a “value-added”  project but much lower entry level pricing.  You are still going to have to be liquid for acquisition, still may have to go through zoning for highest & best use & be willing to do construction but the reward is there in the end.  Higher risk & higher reward means that if all goes as planned a cap rate could be well over 10%.

Good Old Fashioned Speculation

These are the people that, for example, bought lots off Temple or Drexel’s campus 10-20 years ago & sat on them.  They literally sunk their money & have the patience to wait for their desired appreciation.  If you have money to burn, a good eye for market trends, don’t want to deal with management & don’t care if your investment performs this could be for you.  There is no way to know for sure where pricing is going to go & you could look at this as a gamble.

If you’re looking for an investment property to diversify your investment portfolio you should contact Jordan Brody & Co.  We have helped numerous clients build their real estate portfolio & passive income streams along with their net worth.