Investment strategy, criteria, & location

[Tim James]

Hello fellow BP'ers,

My wife and I are in the education phase of real estate investing, with plans to purchase our first property 12 months from now. We are traveling physical therapists, always on the move, so we're looking for advice on which location/market would be the best fit for us when it comes to investing in large multifamily properties, based on our criteria (below). Any thoughts are welcome to advise.

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- Strategy: acquire 1 large multi-family per year, buy and hold for cash flow. Save $120,000/year from work and put 20% down. 

- Criteria: Purchase at 10% of asking price and add 10% value in first year. Cash flow $150/unit/month. Property class __?___, Location ___?___.

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Year 1: put $150,000 down on a $750,000 20-unit, increase value to $908,000 and save $36,000 in cash flow + $120,000 from work savings

Year 2: put $160,000 down on a $800,000 24-unit, increase value to $968,000 and save $43,000 + $36,000 in cash flow + $120,000 work savings

Year 3: put $200,000 down on a $1,000,000 28-unit, increase value to $1,200,000 and save $50,000 + $43,000 + $36,000 + $120,000 work savings

Year 4: put $250,000 down on a $1,250,000 34-unit, increase value to $1,500,000 and save $61,000 + $50,000 + $43,000 + $36,000 + $120,000 work savings

Year 5: put $310,000 down on a $1,500,000 36-unit, increase value to $1,800,000 and save $65,000 + $111,000 + $43,000 + $36,000 + $120,000 work savings. 

Total cashflow at end of year 5 = $255,000/year.

I'd appreciate any advice on a location where this type of strategy/criteria could work well, and also info that would help me make my assumptions/estimations more accurate. I'm basing my current (potentially over-optimistic) price estimates off of some cursory Loopnet research.

Tim

[Account Closed]

Congrates on your plan. Couple of thing you might want to think about and talk with your lender.

1. Since all your proposed purchase are under $2m, you are going to probably max out on your recourse. Large properties can be finance without recourse so you might need to sell your properties sooner and roll up to larger properties by year three.

2. Unless your properties are near by, you will have a harder time managing as you grow.

3. It usually takes about two rent cycles before you can get your new value accepted in the market place. In other words, appraiser and banks like to see some time go by between the time you buy and the new value is established. For banks that usually over a year and closer to two. Appraiser almost always are skeptical in year one unless you have a good story.

4. Rising interest rates will negatively impact your cap rate and surpress your value. Make sure that your financing takes advantage of current low rates for as long as possible. Beware of prepayment cost if you plan on rolling up to larger properties.

5. Do your homework and keep in mind that not all needed repairs add income. Many smaller properties have extensive deferred maintenance and repairs like new roofs and equipment seldom add to the rent.

Good luck