Norfolk, VA Multifamily Market Understanding

[Stefani Gillenwater]

My husband and I are trying to learn more about our local market with respect to small and medium multifamily properties.  Would anyone be able to shed some light on the following questions:

1. What is local market CAP rate for C class small Multifamily assets (5-10 units approximately) ?

2.  Does our market have a standard vacancy rate or does it vary drastically sub-market to sub-market?

3.  Does our market have the ability to sustain a transition from owner paid utilities to tenant paid utilities (again this might be sub-market to sub-market as well)?

4.  How do 1bed/1bath apartments fair vs. 2/1? (Citydata.com shows that 1 beds are just slightly behind 2 beds)

5.  Is there a good metric to estimate commercial insurance costs? 

We appreciate any insight or feedback you can offer.

[Patti Robertson]

Hi Stefanie.  I will do my best to answer below. 

Originally posted by @Stefani Gillenwater:

My husband and I are trying to learn more about our local market with respect to small and medium multifamily properties.  Would anyone be able to shed some light on the following questions:

1. What is local market CAP rate for C class small Multifamily assets (5-10 units approximately) ?

Most small unit landlords I talk to aren't using CAP rate as criteria.  Those who do would love to get a Cap rate of 10%, but that's hard to do. Most small unit landlords in our market are using goals such as  minimum monthly cash flow and equity position. There are many types of landlording.  The safer your investments (Virginia Beach, middle income neighborhood), the lower the immediate return, but the better the long term appreciation will be.  Neighborhoods with the best total cost vs rental income ratios will yield a lower long term appreciation.  We have these discussions often ad our monthly landlord lunch & learn.  Personally I investing in lower income neighborhoods where I get a great total cost vs rent ratio. We have others who will only buy in Virginia Beach and know they pay way more for the same rent as we get in Norfolk. A lot of people on Bigger Pockets set a 1%-2% rent rule.  For the 1% rule, they want to be all in at no more than 100 times the monthly rent.  2% is even better.  I have purchased my portfolio mostly using a ratio of between 1.5 - 2%.

2.  Does our market have a standard vacancy rate or does it vary drastically sub-market to sub-market?

I would say we are pretty standard.  I group my tenants into 3 categories.  Military have the shortest terms in my experience.  SEC 8s have the longest lease terms.  Everyone else falls in the middle.  If you are financing, banks typically will discount your annual income by 25% to account for vacancy and repairs.  

3.  Does our market have the ability to sustain a transition from owner paid utilities to tenant paid utilities (again this might be sub-market to sub-market as well)?

Personally I just prefer to buy things that already have separate meters.  Transitioning is not a problem, as long as the cost is not unreasonable.  You will never cash flow as much on a property where the owner pays utilities.  We just don't get enough premium in the rent to cover the real cost.  There are companies who will submeter and pass the cost of the service to the customer.

4.  How do 1bed/1bath apartments fair vs. 2/1? (Citydata.com shows that 1 beds are just slightly behind 2 beds)

Unless you are really close to a base, 1 bedrooms are really hard to rent because there isn't much of a differential between one bedroom prices and two bedroom.  A one bedroom SEC 8 voucher holder can qualify for a two bedroom rent.  I find one bedroom tenants are people coming out of homelessness - living with a relative or a weekly rental hotel.   You will find your highest evictions rates and longest vacancy rates in one bedrooms.  

5.  Is there a good metric to estimate commercial insurance costs? 

The big variable here is flood insurance. Avoid flood zones if you can. The last flood policy I quoted was $1700 for a 4 plex where the business liability was also $1700. As you start out you will have to insure each property independently. Once you get a small portfolio, you can move them to a blanket policy which will give you a great savings. My cost was reduced about $250/property when we moved to a blanket policy.)

We appreciate any insight or feedback you can offer.

Looking forward to meeting you in our market!