Multi Family Strategy

Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes

6y

@Khizer Husain most banks right now are very bullish towards refying out quickly, as they like to see the property season and have some sort of movement with rent increases, work done etc... for at least 6-12 months and really more towards the later of 1 year. When you find a deal, you need to look and see what the sales comps are at that time, that way you will get a good idea of how much they are paying per unit or per sq.ft.

Multi family is a hot spot right now and has been for the last several years. Most deals that I see are typically anywhere between 4-7% cap rates. Hard to find those in the 8-10%. Although, there may be places where this is not the case. Make some good connections with commercial brokers and commercial lenders in the area in which you wish to purchase. This will help you understand that particular market from each of their perspectives.

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Scott RunyanPro Member

Rental Property Investor · Atlanta, GA · Member since 2014 · 29 posts · 29 votes

6y

My personal opinion is it was a great strategy a few years ago. The big question now is, are you able to get the projected rental increases you expect? If you can't what happens? If you get bridge debt for the purchase and renovations, what is your plan if the debt comes due, during a recession, and your value isn't there to refi?

I'm not saying these deals can't be done anymore, I'm just saying to be very careful right now.

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Greg Dickerson

Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes

6y

Originally posted by @Khizer Husain:

I have about 500,000 USD cash to invest. I am looking to start investing in the following type of multi family apartments:

I am looking to buy deals at 1-1.3 million (With Finance with an average of 20-25% down)

Cap rates between 8-10%

I would either aim get deals at distress and refinance immediately with existing cashflow to get my money out and move onto the next property

or I would buy deals where there is rehab required and I can increase rents and then refinance immediately and move onto the next property.

What is your opinion on this? My goal is to build a sustainable rental income and hold onto properties for many years.

In addition, what do banks look for while refinancing? I have been told some banks do CapRate Refinance and some do value of property. How is cap rate evaluated for a multi family property appraisal so I know how much Refi I can get and what the sweet buying spot is for me to get my money out?

A couple things to consider:

1. You will need 25-30% down right now plus escrows of 12-18 months payments and reserves equal to the at least 12 months payments. Net worth needs to equal the loan balance.

2. Refi will be based on appraised value which will be based on income with condition and location taken not account. The lender will order the appraisal so you are subject to their opinion of value.

3. True 8-10 CAP on actuals is going to be tough. You will likely be going in much lower but upon execution of a solid business plan you can achieve these returns within a year or two for this size of asset depending on the in place lease terms.

4. There is a lot of competition so you will need to target a couple of markets and look at a lot of deals.

5. Ground up in your price range can be a very good strategy with much higher return potential but you need to know what your doing and find the right land.

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Khizer Husain

OP

Member since 2020 · 64 posts · 10 votes

6y

Thank you all! There are deals at 8-10% cap ranges, I am primarily looking at Texas and I have found some but they are lower price ranges at around 500,000$ and Duplex/Triplex/Quadplex. I am looking for 5+ units and minimum $1 million price.

Question: How do appraisals and cap rates work? Do they take into account the last sold properties in the same zip code? please guide me on this.

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Chris K.

Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes

6y

@Khizer Husain

In theory, you use comps for single family homes. You use something call the GRM method for 2 to 4 units. Then the cap rate/income method for anything about 5 units.

In practice, it depends on the market. In my area, for example, most 2 to 4 units seem to sell at a practice using the income method. This suggests that most people in our area who buys these are buying them as pure investments. In more metropolitan areas, 2 to 4 units seem to sell closer to the price of single family homes. This generally suggest that people in the market are buying these for the sake of living there --- rather than as a pure investment.

The basic concept behind a cap rate is simple --- it's NOI/Sale Price = Cap Rate. Once you figure out the going cap rate of a given market, it can tell you whether you are paying a fair price. For example, let's say you have a property that generates $100,000 in NOI. In a 10 cap market like the area where I live in, the property would be worth $1 million ($100,000/10%). Now let's say that property magically moved to a more "desirable" location with a market cap rate of 5%. Then the building is worth $2 million ($100,000/5%).

To answer your question about whether these methods take account of the last sold properties, the short answer is that they all do to an extent. This is obviously the case for single family homes that solely rely on comps. But even the other two methods take account of this to an extent. If you have a historically 10 cap market but every body starts buying at 9 cap, then that means the investors are more bullish about that area.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

1 Reply

Tim Yusubov

Rental Property Investor · Baltimore, MD · Member since 2018 · 5 posts · 0 votes

6y

Khizer Husain, you need to educate yourself in the multifamily space as an active investor first! There is a lot that goes into the search, building broker network, evaluation, analysis, financing, acquisition, managing, and finally selling the asset. Your best bet is to find an experienced partner or join a mastermind. Where do you want to invest?

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Jonathan GreeneBusiness Member

Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes

6y

CAP rate does not apply to 4-units and less so doing the calculation like that is just skewing what your expectations are. For 4-family homes and less, you should be evaluating on residential multi-family comps only as the formula was not built for small properties and the smaller the amount of units, the less reliable usually the financing documents are. I would also caution you coming in hot saying you have 500k to invest in 1m properties. It just invites people to float you bad deals and their markets, especially on here.

First, you want to choose a market for a 5+. Then you want to study the trends in the area and use a combination of commercial agent for more units, residential investor-friendly agent for 4-plex and less, and experienced large-scale wholesalers. As COVID-19 gets under control more, we expect 5+ buildings to start coming available in the Fall in a lot of markets where tenants stopped paying earlier or now when jobs didn't come back and assistance is gone.

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