cash-on-cash return (duplex vs apartment bldg)

[Todd Norris]

I have several small multi-family properties, and the cash on cash % return in my area (Northern Indiana) hovers around 20%. I'm thinking of taking the plunge into larger (50+ unit) apartment buildings/complexes. As a general rule, is the cash on cash % return higher or lower for a 50+ apartment complex than a duplex?

I know that every property is different, but I have found the 20% cash on cash % return figure to be a pretty good indicator of a good duplex. Apartment buildings seem to be all over the place...even in the same market. 

Thoughts? 

[Joel Owens]

Hi Todd,

What determines the cash on cash going in is LTV on the loan, cap rate, interest rate, amortization schedule, payment interest only or principal and interest.

The duplexes are more based on comparable sales approach where the 5+ units is the income approach.

With the smaller complexes you have to work for that extra yield. This is something I have to explain to investors when they make the jump to larger multifamily, commercial etc. You have a factor of cap rate compression and increasing income that adds layers to the cash on cash metric.

Apartments will vary based on location for larger buildings. The buyers will be different for various quality of locations and age of the buildings with the tenant mix. Again it goes back to that working for yield thing. Investors in the beginning will take on more headache for higher COC. As the cash flow gets larger they will go for more quality to offset headache.

The larger apartment buildings of 5+ units will not have the financing you are used to on duplexes. You will find short term loans of 3 to 7 years and amort. of 20 to 25 etc. with local banks and recourse.

Go loans in the 2 million range or higher you get away from local banks into much better loans. So it just makes sense if you are going to go big then go for more units. Better PM with lower fees and a full time repair person can be built in to operations of the building.