Duplexes to small apartments....numbers don't seem as attractive.
Jerome, MI · Member since 2015 · 26 posts · 1 vote
I've got 5 duplexes in Jackson and Adrian Michigan that I own and am starting to look into transitioning to small apartment buildings, however, the cash flow doesn't appear to be as good (which goes against everything else I read and listen to). As I use the bigger pockets calculators to analyze potential deals, for the extra upfront money required to get into the small apartment deals, it does not produce extra cash flow in comparison to what is required for me to continue with duplexes. There is a strong likelihood I'm missing something or not doing something correctly but.......thoughts, advice, and knowledge would be appreciated.
@Brian Spink
Your not wrong. Generally the jump to small multifamly does not yield higher returns in your under writting. The piece you are missing has to do with forced appreciation and market cap rates. When you get above four units the lending requirements and appraisal techniques become dependent on your sub markets cap rate. Just because you buy a property at a 6 cap does not mean it will stay a 6 cap. You need to change the way you under write and look for value add opportunities.
Make a phone call to your commercial lender and ask what cap rate they use to under write small multifamly in your sub market. Begin using this cap rate to determine value. Noi/cap rate =value. Next determine weather cap rates are trending up or down. You want them trending down this indicates high demand in your market.
Now you need to increase noi. Look for below market rents, out dated units, poor management, utilities paid by landlord. Any increase in noi devided by cap rate will equal appreciation in value.
You always need cashflow in real estate. Cashflow provides security, proof of concept, financial freedom, and the ability to keep your investment in a down turn, but wealth in multifamily is built by forced appriciation, and tax incentives. Most apartment syndications archive their projected returns through forced appriciation. Value add is an extremly poweful strategy if deployed in the right asset in the right market, and with a solid business plan.
I've got 5 duplexes in Jackson and Adrian Michigan that I own and am starting to look into transitioning to small apartment buildings, however, the cash flow doesn't appear to be as good (which goes against everything else I read and listen to). As I use the bigger pockets calculators to analyze potential deals, for the extra upfront money required to get into the small apartment deals, it does not produce extra cash flow in comparison to what is required for me to continue with duplexes. There is a strong likelihood I'm missing something or not doing something correctly but.......thoughts, advice, and knowledge would be appreciated.
You are more than likely correct in your calculations. Smaller deals generally offer better CAP rates but are harder to scale.
Larger apartments are more of a fee play vs cashflow but offer greater appreciation through value add on the exit.
Care to share some numbers?
3 of my 5 duplexes all have similar numbers. 60k purchase/renovations, 45k loan. Average rent at those 3 is $1250 per month. Mortgages/taxes/insurance average between the 3 is $575 so that's about $337 cash flow per unit/$676 per duplex (on perfect months).
I'm looking at a couple different 6 unit buildings. Rental income is about $3300 per month. Mortgage/taxes/insurance would be around $1693. Landlord is responsible for some utilities as well as water so that's an additional $300 or so per month. Total cash flow would be around $1307 a month or $217 per door. It's been similar numbers on the 4-12 unit places I've looked at.
For the extra risk I'm putting into the upfront money, I was hoping to see an increased cash flow but I'm not, and it goes against everything I've read and listened to. Based on what I'm seeing, if I want the best cashflow I should stay with duplexes and triplexes. Hoping people can share experiences and knowledge.
@Brian Spink, you are not alone. I too have mostly SFHs and small plexes (dups and quads). I generally hit the 2% rule on all of them. Monthly rent is at least 2% of the "all in" costs.
Apartments in my area are lucky to be 1.3%. Anything in the 1.4%+ range are total crap and I don't want them.
The advantages with apartments are you concentrate capital, you can increase value by boosting rents and decreasing expenses, and if you get above a certain price point you can get non-recourse financing. You'll never get any of those things with small deals. Too, if you pick up 100 units, you can hire a full time maintenance man and pay $18/hour + employer costs vs. $50/hour for someone dependable because you have enough work to keep him busy. Also, insurance and taxes per unit are more efficient. Capital costs are too. I priced out a roof replacement on an 8-unit building (4 upstairs, 4 downstairs) and I can get a new roof on an 8-unit apartment for the same cost as 3 SFHs.
Scale is also a magic word along with Exit strategy. Lots of folks with deep pockets want to buy 100-unit apartment complexes. Cheapskate low-ballers like me want to buy SFHs and duplexes. I say that with a degree of pride. ;-)
@Brian Spink
Your not wrong. Generally the jump to small multifamly does not yield higher returns in your under writting. The piece you are missing has to do with forced appreciation and market cap rates. When you get above four units the lending requirements and appraisal techniques become dependent on your sub markets cap rate. Just because you buy a property at a 6 cap does not mean it will stay a 6 cap. You need to change the way you under write and look for value add opportunities.
Make a phone call to your commercial lender and ask what cap rate they use to under write small multifamly in your sub market. Begin using this cap rate to determine value. Noi/cap rate =value. Next determine weather cap rates are trending up or down. You want them trending down this indicates high demand in your market.
Now you need to increase noi. Look for below market rents, out dated units, poor management, utilities paid by landlord. Any increase in noi devided by cap rate will equal appreciation in value.
You always need cashflow in real estate. Cashflow provides security, proof of concept, financial freedom, and the ability to keep your investment in a down turn, but wealth in multifamily is built by forced appriciation, and tax incentives. Most apartment syndications archive their projected returns through forced appriciation. Value add is an extremly poweful strategy if deployed in the right asset in the right market, and with a solid business plan.