Duplexes to small apartments....numbers don't seem as attractive.

[Brian Spink]

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.

[Ryan Webster]

@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.