Not unlike the fabled bird this city is named for, the Phoenix multifamily mar-ket is rising again. The local economy looks good, vacancies are shrinking, and out-of-state investors are interested because Phoenix can give them something their home markets can't: cash flow.
Go With the Cash Flow Traditionally, about two-thirds of Phoenix investors were local companies. But in recent years, that has changed. While 34 percent of buyers of Arizona multifamily are still Arizona residents, 47 percent are from California, and 10 percent are from Illinois or Oregon. For these investors, Phoenix offers better cash flow for two reasons: lower acquisition costs and more attractive cap rates than in their home states.
In Phoenix, California investors can secure as much as four times the amount of property for the same amount of money. Multifamily investors from Oregon and Illinois have about twice the purchasing power. In addition, an 8 percent cap rate in Phoenix is good enough to ensure cash flow. That's unusual, considering that vacancies and concessions during the past two years of recession eroded revenues.
By comparison, most of California is operating under a 6 percent cap rate for properties with full occupancy where cash flow probably won't increase in the near future due to low turnover in units and rent control. Many California owners have mortgages higher than their income streams can support and are therefore producing zero or even negative cash flow. Such investors are looking for better investment opportunities in Phoenix, and the current low interest rates add incentive to make the move now.
As the improving economy helps fill Phoenix apartment vacancies and net operating income increases, value will appreciate. Because Phoenix residents are more transient than those in many other cities, Phoenix owners can raise rents to keep up with market fluctuations and maximize cash flow.