Looking for small multifamily (2-4) for $125-$175K range - Hope for Class B?

Question

Hey everyone, after shifting around my finances and returning to look for my first rental property, I am looking for a small multi-family property in a lower budget range from $125-175K (smaller % of net worth). Given the range, I am looking in cities that are more affordable but still appealing characteristics/demographics like Columbus, Cleveland, Indy, KC, Memphis, etc. I guess my question is what are the chances that any of these properties will be in or approaching Class B?

I know that multi-families, even a duplex, triplex, and quadplex, are usually at premiums to SFR given the income and cash flow potential. Therefore, I am assuming that properties in this budget range would be lower quality and in less desirable neighborhoods even in the more affordable cities. Am I thinking about this the right way and what would be the best way of determining the class of properties to balance quality and the lower budget?

Remington Lyman · Answer

I would say you are going to be looking at C class properties in that price range

Austin McClain · Answer

It's possible in Dayton but would be tight. Smaller towns (like Washington Court House) could be a good place to look too

Jad Boudiab · Answer

Having dealt with hundreds and currently manage several hundred units for out of state investors I would highly urge you to reconsider your strategy. SFRs outperform MF (duplex-quad) in C areas unless you renovate your units to B quality in C areas and attract better tenants.

Multi-family only outperforms in B areas or better, unless you are local or heavily involved thus finding ways to control more factors.

SFRs average out to have longer tenancies, which decrease your largest expense - vacancy (and turnover repairs). C tenants in MF are paying under $900 in rent, which doesn't necessarily put them in the top earner's bracket nor easiest tenants to deal with.

Can't speak for the other areas mentioned, but the price points you're looking at in Cleveland will not land you quality multifamily (maybe a duplex with some elbow grease) in quality B areas. You will likely be in C, to which if you do, I recommend buying, renovated the units to be nicer than the average C unit condition in that area, then screening for the best tenants you can source.

Anthony L Amos Jr · Answer

You can find B class multifamily in Toledo within that price range

Patrick Drury · Answer

@Andrew NorthcuttProbably going to be in more C locations

Andrew Northcutt · Answer

Great, thanks for the quick reply! I'm okay with that, since I'm mostly investing for cash flow at this point. Therefore, as long as it's not too low quality area where it comes with a bunch of issues, then that should be okay. I guess that just takes more neighborhood-focused research.

Given your focus in Columbus, do you have any pointers or suggestions for where I could start there?

Jad Boudiab · Answer

You can get an SFR in B areas for this price point, yes. You can also get an SFR in C areas for less, around $100k right now, that would rent around $1,250/mo. This is as of Aug 2023 Cleveland market.

Both should prove more profitable in the long-term compared to C area MF, and to your comment about hiring a PM, this is based on real data from my PM portfolio. That's not to say that a MF investor can't be profitable, we have many of that, but there's a clear distinction between performance of MF in B vs C areas. C area MF does ok when you fully renovate and harden up the unit.

A rental investor's biggest cost is actually vacancy and turnovers, if you can minimize that by being in SFR assets that attract less transient and more long-term tenants, you should realize consistent returns with less bumps along the way.

Andrew Northcutt · Answer

I appreciate the feedback here! Given this would be a first investment, I do not have experience dealing with tenants and may have overlooked this element. With that said, I plan on utilizing the advice and services of a PM.

I'm not too keen on the differences in pricing between MF and SFR yet. Currently, I think of buying a duplex as buying 1.5 SFRs from a price and cost perspective. If I switched to look at SFRs in this price range in these areas, would these be considered B Class?

Here's my initial thought process for MFs in the lower budget range:

MF will maximize my cash flow for my budget range. I don't want to have to buy a ton of doors to earn the same cash flow potential as fewer multi-family properties. However, my lower budget range ensures that I can have sufficient cash reserves for maintenance, repairs, and emergencies as well as a much easier path to fund an additional down payment to scale and avoid putting all my eggs in one rental property. Perhaps the answer is to save more for a higher priced and quality property, but again, that I think that means more time in between purchases.

Looking for small multifamily (2-4) for $125-$175K range - Hope for Class B?

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