larger multifamily philadelphia

Multi-Family and Apartment Investing
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larger multifamily philadelphia

Daniel Golub
Philadelphia, PA · Member since 2018 · 24 posts · 7 votes

Hey all.

I invest in Philly and my limited experience is in single family flips but want to move on to larger multifamily rentals. Im having trouble analyzing these deals and was looking for some input from people who do this type of investing in Philly. Ill give you an example:

I saw a deal for a 11 unit mini-apartment building in Rittenhouse square. The Pro-forma rent role was an annual total of $220,000 (this was fair I pulled comps). Proforma annual expenses was $30,000, then throw in another $30,000 for vacancy, and you get a NOI of $160,000 annually. So being someone who goes by ROI (I always want above 30% on single family flips), and figured 15% ROI is a fair thing to ask for on a rental project this size, the math comes out to me not being able to spend more than $1.06 million in cash on that property to achieve this desired cap rate. To my surprise, they were asking $3.5 million!! So I guess my question is, where lies the discrepancy here? What gives?

Is it just because Rittenhouse square is such an upscale area and that comes with low ROI/Cap Rate?

Any input is appreciated! Thanks.

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y

@Daniel Golub, once you move to commercial multi-family (5+ units) you have to get out of the SFR/flipping mentality. Things work differently

As I think you know, values are determined by NOI / Cap Rate. That Cap Rate is "the market" at work. In a place like Rittenhouse square (nice neighborhood / good properties) the Cap Rate may be 5% or lower. So by that metric a $3.5MM property at a 5% Cap Rat should have an NOI of $175k/year. In these areas investors are counting on appreciation more than cash flow.

If you want 15%+ cash-on-cash returns (which is not outrageous) you're going to have to look at leveraging properties with higher Cap Rates.

BTW: rule of thumb is that 50% of GSR goes to expenses. This does tend to push down with larger properties as you realize economies of scale, but $30k of expenses on a property with $220k is bonkers. Taxes alone are probably a lot more than that. Take a minute and look them up on the city tax assessors web site. It's all public info. Never trust pro forma numbers from a broker. They're usually laughable at best.

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y

    @Daniel Golub I do not know that specific area. MF is very hot at this time in most markets and sellers want to squeeze out every bit they can so prices have become ridiculous and buyers are still paying them. Distressed properties in reasonable areas with a desperate landlord is what we are all looking for now! All the best.

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Daniel Golub, once you move to commercial multi-family (5+ units) you have to get out of the SFR/flipping mentality. Things work differently

    As I think you know, values are determined by NOI / Cap Rate. That Cap Rate is "the market" at work. In a place like Rittenhouse square (nice neighborhood / good properties) the Cap Rate may be 5% or lower. So by that metric a $3.5MM property at a 5% Cap Rat should have an NOI of $175k/year. In these areas investors are counting on appreciation more than cash flow.

    If you want 15%+ cash-on-cash returns (which is not outrageous) you're going to have to look at leveraging properties with higher Cap Rates.

    BTW: rule of thumb is that 50% of GSR goes to expenses. This does tend to push down with larger properties as you realize economies of scale, but $30k of expenses on a property with $220k is bonkers. Taxes alone are probably a lot more than that. Take a minute and look them up on the city tax assessors web site. It's all public info. Never trust pro forma numbers from a broker. They're usually laughable at best.

    4Reply
  • Daniel Golub
    OP
    Philadelphia, PA · Member since 2018 · 24 posts · 7 votes
    7y

    Thank you both for the valuable input. Just wanted to make sure I wasn't missing anything huge!

    Totally agree 30k in expenses on a property of that size in that area is laughable, just wanted to give out some proforma for the sake of it. 

    Big takeaway here for me from what you guys said is that for someone like me, who's in it to build wealth as opposed to maintain it/ hold for appreciation, stabilizing distressed properties is the way to go! Clearly this deal is more of a wealth preservation one.

    Thanks again

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  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
    7y

    @Daniel Golub My brokerage is in Rittenhouse, we own a few condos there as well. Rittenhouse you are looking at around 3.5-4% cap rates, very low cashflow, especially if you're using debt. But, you are correct, it is a wealth preservation move, like a bond, because when things fall apart, Rittenhouse will be more insulated than other markets. Also, if you wait, you can find some decent deals in down markets next time things collapse, one of our Rittenhouse condos we picked up in 2013 has appreciated 40% since then, so no complaints there. If you're looking for a good combination of income/appreciation potential, you're looking at the edges of rapidly growing areas like fishtown/kensington, point breeze/greys ferry, brewerytown/francisville, etc.

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