larger multifamily philadelphia

[Daniel Golub]

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.

[Jaysen Medhurst]

@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.