Which market? and how to find best deal for cash flow, appreciation, good tenants

[Annette Barnett]

My situation:  Single family home under contract - closes Sept 7th (26 days), doing 1031 exchange, will have $275K-ish, wanting to move into multifamily.

Quandary - I want to buy in a strong market, have great cash flow, appreciation, get a larger building/more units for greater appreciation and mortgage pay down, etc., but the larger the building/more units - the less the cash flow, as it requires a larger mortgage, which means more of the money to pay for the property has an interest rate on top of it, eating into cash flow.  I am at a time in my life, after a career change, that I need more cash flow, but would prefer not to compromise the equity built from larger mortgage pay down and greater appreciation on a larger building/more units.  I've also primarily been looking in Raleigh, Charlotte (not finding much), Atlanta, Dallas, San Antonio (Texas - high property taxes obviously) and a little in Phoenix, but have heard it's overpriced/saturated.

I'm open to other markets!  Have tried to stick with larger cities to be safe, cuz I'm not well educated about smaller markets.  

Any advice on how to find the best combination of more units/larger building, cash flow, appreciation, mortgage pay down, etc? without endless searching? (which I'm willing to do if needed, but I'm a big believer in magnetizing/manifesting things over efforting).

Thank you

[Arn Cenedella]

@Annette Barnett

As Mick Jagger sang : You can’t always get what you what. 😀

In my opinion, to buy in a growth market and get good cash flow AND appreciation is going to be difficult. Maybe with 200 units but those will require $5M to $10M cash to buy if not more.

Your plan to move your SFR equity into MF is a solid tried and true approach.

That being said, one needs to have realistic expectations about the market and values.

I have completed dozens of 1031s for my own account and for my clients.
I can tell you that 45 days window to identify the upleg comes quickly.

If an investor isn’t realistic about the market, they will be up against that 45 day timeline pretty quick. 

With $275,000 to invest you are probably looking to buy something for less than $1M.

In major metro growth markets say in a B neighborhood, that probably buys you a 4plex maybe a tad bigger. A 4plex just won’t provide much cash flow.

Most investors end up making a choice between cash flow and equity growth.

Given your stated preference for cash flow, my counsel would be to stop looking in those A plus boom boom Sun Belt markets where everyone is looking and investors who have $1M or more cash to invest are everywhere to be found.

My suggestion might be Midwest - Kansas City, Indianapolis, Omaha, Columbus etc etc.

A little math might also be illustrative.

With $275,000 cash a property with a 10% cash on cash return year one will only generate $27,500 a year in cash flow. At 8% there will be $22,000 a year in cash flow.

If you can find even 8% cash on cash buy it assuming you use market rents and accurate expenses.

The intent of my comments is not to discourage but rather level set your expectations. Without realistic expectations, your search will not be productive.

I live in Greenville SC and own about 400 units here. It’s a growth market but it’s a smaller market. Even in this market, more growth than cash flow, one can’t generate significant cash flow with $275,000 cash. The cash flow will come as rents increase but year one or two - the reality is break even to small positive cash flow with 25% or 30% down.

Hopefully there are some investors from the Midwest that can chime in.

I’m a Sunbelt investor but the Midwest is solid - nothing is inexpensive anywhere and if it is the area is a dead end podunk market - I think you will have greater success looking in the cities I suggest.

I would also encourage to get on a plane and go to a few of these other markets and see what you think. Be very careful about major locational differences within cities.

Good luck!

Arn