Multi-family Creative Finance in 2021

[Chris Gomes]

I'm an investor based in Denver, I own one duplex so far, and it is a goal of mine to acquire a multi-family property of 5-20 units this year. I'd love some input on good regions/cities to look into multi-family in 2021. I am strategizing on a few creative finance methods for small apartment buildings and would love some advice on good places to do start doing some marketing. Thanks!

[Erik W.]

Hi @Chris Gomes and welcome to BP!

First, let's start with your goals: do you prioritize appreciation or cash flow more?  

The reason this is important is some markets, like mine, are cash flow kings.  Here you can buy a house that meets the 1.5% rule, meaning the monthly rent is at least 1.5% of the "all in" costs (purchase, closing costs, rehab, holding).  Up until about a year ago, you could get the 2% rule.  Folks on the coasts can't believe such deals exist, but the fact that I have many of them proves the concept.  But...until this year appreciation was slow and steady at around 2-3% per year.  We didn't see double digit gains like you do on the coasts and in higher cost of living market.  The Mid-West and the South, as a very oversimplified/generalized rule, favor cash flow due to the lower cost of land.  California and New York, on the other hand, barely hit the 0.7% rule at times.  Investors there settle for less cash flow per dollar invested, but when they sell they often have doubled or triples the value from 10 years ago. 

Second, how will you achieve that goal? If your investments bring in less cash flow, you'll have to ride the waves of market ups and downs, particularly with adjustable rate financing that is common with most small commercials loans. 5-20 units is small, btw. Likely you'd get no more than 80% LTV on a 5-year fixed rate that adjusts afterwards. If your rate starts adjusting and you need to refinance to get another locked rate but the market is down, you may be out of luck unless you've achieved significant principle paydown. Keep in mind that high appreciation markets are also have more room to fall, which is one reason many investors got clobbered in 2008-2009.

So, step 1: set your target.  Step 2: how will you ride out the storms that will come until you get there?

I can only testify to Mid-West markets, having invested here all my career.  I practice the philosophy of "digging for diamonds in my own back yard."  It's worked well for 16 years, and I'm still here whereas many others who ran all over the country are not.  Distance investing can be done, but it's a whole different animal.  Still Steps 1 and 2 apply wherever you go.

Good luck!