Most important thing to remember when purchasing Multi-Family?

Question

Does it matter what part of town you purchase multi-family deal if it continues to cash flow?!

CJ M. · Answer

@Julius Gonzales

Hi Julius,

For me, it depends on how truly bad the area is. Are you talking about a war zone? All my duplexes are in a C to C- area. If it helps you, here are a couple for reference.

Duplex 1: $1,390/mo in total rent and $448 PITI

Duplex 2: $1,330/mo in total rent and $403 PITI

So long as I'm comfortable driving in the neighborhood, the cash flow is what's important to me.

Dennis M. · Answer

oh you will care once you get harassed by local thugs when you go out there or have your tools stolen from your truck .. or worse . The neighborhood mAtters and so if your scared or anxious to go to the property then don’t invest there . A great ROI on That duplex in the ghetto won’t really mean much when you are laying in a hospital bed with a Stab wound . But Hey atleast you’ll be able to afford your copay for the medical bill !

Michael Ealy · Answer

As someone who has acquired properties in all sorts of areas (I have bought properties in the war zones - "F" properties as well as properties in D, C, B and now hotels in A areas), I can say that the area or location matters FINANCIALLY for the following reasons:

1. Bad areas like D and F don't appreciate in value. You buy them for $30,000 today and 10 years from now, you'll sell them for $30,000

2. Bad areas will generally attract high maintenance tenants. Factor in 10% or higher in your repairs and maintenance PLUS another 10% or more in capex

3. Bad areas will generally attract high turnover tenants so factor in 15% vacancy

4. Lastly, Property Management companies generally stay away from F areas specially. That's a BIG problem because it's harder to scale and acquire more units because managing one building in an F area is a full time job!

Despite all the above, I made a LOT of money in buildings in bad areas. That's the reason that in 7 years I became financially independent because the cashflow is just great. Oh and my first building where I made over a $1M profit was a 48-unit building in a D area that became better and became a C area.

So, yes you can make money even in bad areas.

However, after acquiring over 1,000 apartment units, I'd rather stick with B&C areas for my apartment buildings and A&B areas for my hotels.

Bjorn Ahlblad · Answer

@Julius Gonzales it does to me! I won't buy properties in areas I have reservations about. I believe in buying the best properties I can, and filling them with the best tenants I can find. My wife is the PM and I will get fired, or worse, if I deviate from the program.

Mitch Provost · Answer

Responses to these kinds of questions always amuse me, but the bottom line is that real estate investing is a business. @Michael Ealy has the best response focused on the business aspect (his success makes this obvious).

Emotion should be put aside and a realistic view of what interests you specifically in the business should guide your decision. Everyone responds to risk differently and there are some very good responses here that help you identify some of those risks. You can then determine if you are comfortable with the risk and have a good mitigation plan or pass.

Location is only one part of a deal. All variables in a deal carry some level of risk.

Brent Shields · Answer

I bought a condo in a war zone one time, the reason was that I only had to pay $15,000 and I had someone who would rent it for $1000 a month.

So in 15 months I would collect in rents what I paid for it.

Of course I have all the typical nightmare stories and it took a lot of time and trouble. I had to fight for every dollar, but I ended up making money so I was ok with that.

My suggestion would be to buy something small and see how much you like fighting for your money, if it doesn't bother you then start moving up.

Joe Scaparra · Answer

Location matters, but also understand that duplexes, triplexes, and 4plexs usually are not in as nice neighborhoods as SFH.  The tradeoff is better cash flow.  We all get that.  Know your market, for example in San Antonio there are plenty of multi-family opportunities with varying quality of neighborhoods.  So you should be a little choosy.  However, in Austin, it doesn't matter much.  The entire city is booming and the bad or lower quality neighborhoods are getting better by the day because the place is booming so much the lower income is getting pushed out.  In Austin, you buy where ever you can find the best deals regardless of the neighborhood because what is bad today is good tomorrow and what is good today is great tomorrow.  One rule I would always use is don't buy in a neighborhood you don't feel comfortable going in to collect rent should you have to.  Good luck, cheers!

Luke Miller · Answer

@Julius Gonzales If you are buying based on speculation and assuming the neighborhood is appreciating/gentrifying then you could, but it doesn't sound like that's what you were asking.

The deal will cash flow, but your end buyer-pool will be much smaller. It's not a desirable product for lots of reasons, but there are people who use this strategy.

Theo Hicks · Answer

Hypothetically, sure. But just because a deal cash flows now doesn't mean it will cash flow forever. Plus, there are extra headaches that come from investing in D markets.

Christopher Hunter · Answer

@Julius Gonzales  Hello Julius.

Yes it very much matters what part of town you are in.  It also depends on the investors in the deal.   What does the business plan aim at accomplishing?  How long to you plan to keep the property?

Most important thing to remember when purchasing Multi-Family?

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