Small Multifamily in a hot market

[Dustin Turner]

I'm looking to buy small multi-family in downtown Frederick, MD. It's a growing city about an hour north of D.C. Prices here increased significantly over the year and there is limited inventory. As I'm analyzing deals I'm finding some properties that will cash flow. Unfortunately the cash on cash returns hover around 5%. In properties where repairs/updates are needed the ARV's are not high enough to recoup all of the cash put into the property when refinanced. I'm curious to know what others are using as target metrics in hot markets? I've heard on the BP podcasts recently that I shouldn't look at just the first year cash flow and/or returns but consider a few years out.

[Russell Brazil]

Consider how the asset performs over time. I call this thinking 4 dimensionally (taking time into consideration) instead of 2 dimensionally, focusing on the here and now.  

This example isn't Frederick, but it illustrates my point. This property is in Rockville (and dont count on the same rent growth, Frederick is lower). I bought a 3 br sfh in 2009 that at the time rented for $1900 with a PITI of $1700. Free cash flow was only $200 and was probably break evenish after othet expenses.

Today that property rents for $3250 with PITI of $1300 (refinance brought the payment lower. I have free cash flow of $1950 per month, plus my value is about $250k higher than when I bought it.

Keep in mind, both equity and rent growth will be highest in DC proper, then the metro line suburbs after that.