Investing In Stabilized Small Multi-Family (4 Units Or Less)

[Hannah Smith]

Hi all!

Hope everyone has had a great start to their week! 

For those that have purchased small multi-family (under 4 units) - if those properties cash flowed well and you bought slightly under market - did you have a plan OR a strategy in place to increase the NOI and upside potential of the property? Or did you go into the property generally happy with the performance with the idea to maintain cash-flow?

I know for larger deals (50 units, 100 units, etc.) there is usually capital improvements and strategy baked into the acquisition to improve the asset and raise rents but is this something that should be applied on a smaller level? Have you found that is even possible? 

For some of the smaller deals I am looking at, the market rents are seem to be as high as they can go and there aren't the economies of scale with regard to capex you'd receive in a larger property even those these deals more than meet the 1 percent rule, etc.

[Justin Kane]

hey @Hannah Smith you should always go for forced appreciation, but you should ALWAYS buy based on actuals for that time not projections. Also sometimes we buy large multifamily that is new construction and only 4%cap rate because its in the right location and doesnt need work.. so no forced appreciation there, just good planning for safe returns.

Did that help?

[Hannah Smith]

@Justin Kane Hey Justin! Thanks for your input/response! I greatly appreciate it.

Your response does help, I think my question becomes then, would you still proceed with a deal if it's likely you may only get stable cash flow? Or would you reserve those types of deals for A Class/Highly Desirable Areas like you mention above? 

There are smaller cities outside of the urban core of Raleigh/Durham that I think have enormous multi-family potential but I wonder about the possibility of forced appreciation - that's all based on being able to reduce expenses and raise rents right? In a smaller multi-family that is already fairly efficient it might be difficult to move the needle. However, I want to start off with smaller deals in order to build a knowledge base for larger ones in the future. 

[Justin Kane]

it depends.. if you are starting out.. and you dont mind buying in a rougher neighborhood that you know wont appreciate but conversely wont be too affected by a market decline either then yes, if it has strong cashflow (300$+ NET per door) then I would take that all day

[Hannah Smith]

@Justin Kane the properties I am looking at cash-flow $150-$200 NET per door, which for a duplex or triplex isn't insignificant but the ability not to be able to force appreciation/have a bigger upside makes me want to research a bit more.

Does multi-family work best in urban core areas? 

[Justin Kane]

the closer you are to urban/industrial centers the better for longevity but ultimately youll want to look for gentrified neighborhoods in areas with YoY positive population growth and stable work from fortune 500 companies. but 150-200 net is not bad.. if you dont feel like you need to carry a gun every time you collect rent :)

[Hannah Smith]

@Justin Kane Agree :) Thanks Justin :)

[Matthew Baltzell]

@Hannah Smith I'm in agreement with @Justin Kane . It all depends on your investment strategy. What are you looking for cashflow, appreciation, value-add, etc?

If you're looking to force appreciation, you wont want to buy a property that already has rent's at market as you stated. 

I would recommend looking at the comps surrounding the property you're interested in. This will give you a better idea of what the rents are going for. 

Don't hesitate to call a property to verify the rent's either. Sometimes they're different from the price on the internet. 

Best of luck:)

[Hannah Smith]

@Matthew Baltzell Hey Matthew, Thanks for commenting :) 

I think my strategy, if you will, ideally would be a combination of all three, but the primary focus in my early days would be cash-flow, followed by value-add. 

I am okay with properties that cash-flow well that don't have the other two pieces (appreciation, value-add) but I think I want to research my market more because it seems like a short-sighted game plan not to have at least 2/3 as a contingency plan if you need to shift direction, course-correct, etc. 

[Dennis M.]

Buy a cheap distressed property at a drastically reduced price and add the value yourself

[Hannah Smith]

@Dennis M. Definitely! I think the question here is if those cheaper, distressed properties have as much upside in lower-income or more rural areas than in a bigger market where you can force appreciation and there are other market factors at work