Multifamily- is the rent worth it?

Question

Everyone says to buy multi families but are they worth it....

In my area a retail priced multi family is expensive, and often you only profit the value of 1 unit after the mortgage. And Often low income rent prices!

So how much are you all renting these places out for? And how much are your mortgages?

I’m wondering because it seems like I could just do section 8 on a single family home (3-4 bedroom) or duplex and it would be an easier entrance to passive income, with less tenants.

Anthony Wick · Answer

@Shalom Benton. Have you heard of the 1% rule? Some here do not like it, but for a 2-4 plex I like to use it as a way of deciding whether or not I should even look at a property, or run the numbers. It is 1% rents to purchase price. For example, you state maybe a 4 plex would be $300k, and garner $3,200 rent. Above the 1% rule. But, unlike a possible duplex with utilities separated and all paid by tenants (it is what I own), a 4 plex will require you to pay for some utilities. Hence, the 1% rule probably doesn't get you much cash flow, if any.

The BP calculators are a must use. Always use real numbers if you can. Property tax from county assessor page. Actual utilities from local services. Actual garbage bills. Actual lawn care and snow removal costs, or close to it. And maybe even actual vacancy rates from Pro Forma's (but never blindly trust a pro forma). Actual rent rates from actual leases (including estoppel agreements if analyzing an actual property for sale).

Like Evan said, it's tough out there right now. I've been looking for a 4-8 plex this entire year. Everything I see is not to my liking when it comes to cash flow. I'm in the Midwest, I buy for cash flow, with appreciation being the bonus.

Good luck to you. And again, run the real numbers. You should never be under contract and not know what your cash flow will be at closing.

Evan Polaski · Answer

@Shalom Benton, you are seeing the same problem a lot of people are.  Small multifamily properties are overpriced right now.  Then again, decent single family rentals are as well.  There are several factors to weigh here when comparing small multi to single family.  At a high level, look at price per door vs rent.  This will clearly not give you a full picture, but it is a start.

Diving deeper, is LL responsible for any utilities at MF that would not be the case at SFR?  Landscaping?

But for a lot of people, it comes down to management ease, scaling a business, and capital items.  In my market a 4 family (2 up 2 down) roof is going to cost about as much as a single family roof, but I have 4 tenants paying into that reserve.  In a 4 family, 1 vacancy means you break even that month per your numbers, in a single family, you are out money.  With a 4 family, you have 1 tax bill and insurance bill, if you plan on owning 4 units, but they are all single families, that is 4 tax bills and 4 insurance bills, maybe 4 LLCs and bank accounts.  It is one location to drive to and monitor versus 4 separate houses that may or may not be close to each other.

But to your point, I agree that what I see in my market, and hear about more broadly here, is that the numbers generally don't work for small multi family right now.  Everyone wants in and it is still an approachable entry point, so prices are getting bid up so high by novice buyers that there is no return left, and typically cash flow negative if you outsource management.

Steve Morris · Answer

"275-300k for a 4 unit.  Most that I’ve seen rent between 650-800 a unit. Sometimes, section 8 will pay for a portion of it."

If that's a clean property otherwise and the numbers work (esp CFBT and DSCR), it doesn't sound like a bad deal.

As far as Sec 8, the big benefit is you get the check like clockwork on the 1st.  You'll still need to chase down the co-pay from the tenant, if any.

Also, HUD FMRs have jumped a lot the past 3 years, but I wouldn't expect those kind of increases the next 5 years.  Most H/A use the HUD FMRs (Fair Mkt Rent) for vouchers and what they'll pay.

Anthony Wick · Answer

@Shalom Benton.  The only way I see you having 1-2 units pay off all expenses is if you buy D class properties, or huge down payments. I'm assuming fixed expenses of PITI, plus Property Management. As an example, I'll talk about my last two duplexes I purchased. Identical duplexes on the same block, purchased 6 months apart.

It basically takes me 3 units rented to pay the fixed expenses. With the fourth unit rent of $1,480 as net before reserves (Capex, maint, vacancy). But after reserves, I'm basically pocketing "only" $828 per month for the two duplexes. But over $200 per unit works out well for me. And once the reserves are capped at a level I like, then we may be talking as much as $370 per unit. And I cannot find anything better than that around here right now, for Class B properties that are newer and nicer.

Now, I suppose I should also mention that I have "made" about $70,000 appreciation on these two duplexes in less than two years. We did two cash out refi's earlier this year for 75% loan-to-value (new appraisals).

Shalom Benton · Answer

@Anthony Wick very good points! I had not heard of the 1% rule before. I own two duplexes, and cash flow 100% because they are paid off. I got lucky and purchased them off market in 2011. Today’s market is so much different! I realize that it is a sellers market but I still want a good deal, and if I purchase a 3 or 4 unit, I’d at least like for the mortgage to be paid by 2 units. Ideally, 1 unit. But that doesn’t seem to be the current reality in my area- for retail.

Shalom Benton · Answer

@Anthony Wick

That’s a good point! I’ll have to figure out this app to see if I can update my original post.

In my market what I’m seeing is this:

￼￼

275-300k for a 4 unit.

Most that I’ve seen rent between 650-800 a unit. Sometimes, section 8 will pay for a portion of it. ￼

Anthony Wick · Answer

@Shalom Benton

You have not given nearly enough info here for us to answer your question. Give specific areas and numbers and types of properties. Also, obviously many of us are making money off multi-family.

Multifamily- is the rent worth it?

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