How much can I expect to pay for a multi family apt?

Question

A newbie here, wondering how much I would expect to-or in the case of finding a investor, would expect to realistically spend on a multi-family apartment complex? These things do not come cheap, especially in the cities where the market is piping hot. My strategy would be to buy and hold. According to Zillow, my home states capital of Denver, came up as #1 on the housing market. The first example is in Denver, second in Richmond, VA (another hot market)

4295 Hooker Street (seriously)

Asking Price: $595,000

Cap Rate: 6%

Units: 4

3806 Chamberlayne Avenue

Asking Price: $430,000

Cap Rate: 9.37%

Units: 8

While I don't fully comprehend the idea of cap rate yet, I would be willing to guess the higher it is, the better it is. The property in Richmond is nicer than the one in Denver, yet is more expensive.

Chris Soignier · Answer

NO - sorry to be disagreeable, but that is flat out wrong and potentially dangerous misinformation.    When you value a MF property, you're paying for NOI, not rent.     Rent should never be used in isolation to value a property!   Also, cap rates are dictated by the market, not your desire.   ;)  What if you have 2 C class properties, both w/ same rents?    One is ABP (higher utility expense), one not, but they otherwise have similar P&L's.    By your logic, you'd pay the same for each, whereas in reality the non-ABP one is worth a good bit more.

Adrian Stamer · Answer

higher cap rate isn't always better, I haven't looked at either but chamberlyne in Richmond va typically the hood

So you get a higher cap rate because the investment is riskier but also most likely faces less potential for appreciation

Steve Vaughan · Answer

I would try to retain a good investor realtor @Derik S. if you are a qualified buyer.

Comparing single-family median home prices vs a commercial 5-unit is apples and hammers.  Not even oranges!

I wouldn't buy a 6 cap anywhere.  Can beat that in my sleep with equities or debt instruments that don't call me with drama or repair needs.

Find that quality realtor @Derik S.!

Tina Morris · Answer

Ditto what Adam said. I know the property that you are talking about and it is appealing for an 8 unit at that price but you will be dealing with section 8 housing there for sure. So, yes, that would be a pretty risky investment which is probably why it's been sitting on the market for that long.  I think you could probably negotiate that price quite a bit.  Let me know if you need a realtor. I'm sure I can dig one up....hint, hint.  No, really, I'd be happy to help you in any way I can..

Micki M. · Answer

This is why Ben made the point of knowing how to figure that out.  For a very simplistic start: $20k/door in the Midwest where each unit rents for $550 versus $120k/door in Denver where each unit rents for $1500.  You're going to see a different return on your cash invested.  Actual analysis is far more involved and there may be factors like upkeep costs, turnover, potential appreciation, etc that would even the score or widen the divide. I recommend downloading his multi-family analysis course and spreadsheet to start learning what numbers you need to know.

Micki M. · Answer

Rather than ask what you could pay - since you already know that figure will range dramatically based on location and quality - look at your ROI.  Cap rates are what a lot of people use, I personally find them to be a little subjective since a "good" cap rate in one city is a terrible cap rate in another.  And cap rates don't account for cash flow & debt service which is usually more important to the newer investor.  @Ben Leybovich has some great education pieces and calculators for analyzing multi-family.

Derik S. · Answer

Obviously, I would try to reel in the bigger return fish, over the smaller fish. Let's take this property for example. It is a property I found on Loopnet in Arvada, Colorado. The average price for properties in that area, according to Zillow, is $318,000. The properties overall price is $610,000, with the price per unit being $122,000 (for 5 units) with a cap rate of 6.72%. The NOI for the property is $40,966. Its 5415 Carr Street.

Ben Leybovich · Answer

Well - say paying $120,000/door will net you a 15% return, while paying $20,000/door will net a 3% return, which would you rather? :)

Derik S. · Answer

Maybe you ca help me figure that out, by breaking that down. How can a property that has $20,000 going per unit,, be as good as $120,000 per unit (by door, I am guessing you mean the unit).

Ben Leybovich · Answer

You can realistically spend $20,000/door or $120,000/door. What makes this game hard is that both of the above can be good deals, and both can be bad. Until you figure out how this can be, I'd sat - buy nothing :)

Thanks for the mention, Account Closed!

How much can I expect to pay for a multi family apt?

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