Let's play devil's advocate

[Joseph Gozlan]

I've been recently looking for smaller apartment complexes in my area (DFW). 

I understand the market is hot (some would say stupid-hot) but I can't shake the feeling I'm missing something. 

So I'd like to play devils advocate against myself here and see if you could help me see the light or where my logic is flawed. 

Option #1: smaller Multifamily with 30 units.

Let's assume that purchase price is about 1.5M and I can get $250 cashflow per door per month. That's a total of $7,500 per month or $90,000 annual which places our cap rate at 6% (market cap rates are 5-7 for B/C class these days)

Option #2: Four single family properties:

Simple math says that in order to get $7,500 / month I need singles that cashflows $1,875 /  month. Let's use the 50% rule and get to $3,750

Use the 1% rule and we get to a purchase price of $375,000 each.

Now the simple multiplication of $375,000 X 4 = 1.5M

Soooo, head ache and paint of 30 lower end (B/C class) tenants or 4 higher end tenants ($375K in DFW are very nice houses in good neighborhoods)?

I know I skipped some of the math such as vacancies, turnover maint, appreciation etc but I wasn't sold on these being the major decision factor (please DO correct me if I'm wrong here)

What am I missing? 

Does apartment complexes only make sense at larger units numbers?

What tips the scale either way?

[Matt Slakey]

Those smaller things tip the scales, the devil is in the details. Rentability would be the biggest in my opinion. It would be a lot easier to rent out a  B/C apartment than an A house. Most people do 2-3x rent as qualification for renting a unit. So for your house, the tenant would have to make $7500 - $11,000 a month (90k-135k per year). Your apartment tenant would have to make $1000-$1500 a month (up to 18k per year). So it would depend on your market: are there more people who make 120k a year who don't want to (or can't) buy a house or people who make $9/hr who can't buy a house.

Another aspect is the ability to add value to an apartment complex from raising rent, adding coin-op laundry (debatable on the profitability), rental storage, soda/vending machines not to mention the natural appreciation. Those houses can only appreciate with the market.

Someone else should comment on the ability to get a loan on a 30-unit vs 4 houses.