What Class do you Typically Target with Multifamily and why? 🤔

Question

Happy Wednesday BP!

I typically enjoy the b- to c type of class. My current mentality has a strong focus over value add and equity creation, and it does not benefit me the most at the moment to focus on a A-B and paying a premium for a more turnkey style asset. On the other hand, I think D class definitely has its pros and cons and large equity creation can be a result from changing the atmosphere in a class like this, but you may be up for a challenge. What do you typically prefer? 🤔

Have a great day today,

-Kyle :)

#Lowell #leominster #fitchburg #gardner #worcester #boston #manchester

Brian J Allen · Answer

All,

This is a wonderful discussion.  The biggest issue we have in Worcester is that you have to grade the AREA and the HOUSE and the TENANTS.  You can get an A house on the side of a hill with no parking, which might have great tenants, or a terrible house in a desirable area, with tenants that don't pay.  Lots of issues here.  I wish it was so simple.  The question is what is most important to you/the client.  It is so rare to get a nice house on a nice lot in a nice area with the tenants you want.  $710k for a 3 family.  And all the bad stuff with tenants might cost you $500k for a 3, and you still have to raise rents, move tenants, fix the house.  Doesn't seem like a value to most clients when you explain things to the.

The difficulty which arises with most people is that owning a multifamily is great in principal, but once you see where and how the tenants live, a lot of people are scared off.

Brian J Allen · Answer

@Bob Stevens what do you guys get for year over year appreciation on your buildings at those big CAP rates.  In Worcester 4 years ago we would get a 10% CAP on good buildings and anticipate 5% appreciation.  Ironically over that time we had 20% annual appreciation.  Right now we are at 5% CAP and anticipating 5% appreciation again year over year.  When markets have gone down in the past.  Values on A-B neighborhoods dropped very little and C-D areas dropped like a stone.  Most of this is that the tenants in those locations were least able to pay their rents.  On the latest run up, not many A-B stuff changed hands, it was just a huge run up on C-D stuff because the anticipated rents were increased due to HUD rents going up.  Basically the A-B location rents were always higher, and the C-D rents increased to match due to lack of inventory

How do people balance the need for cash flow vs the risk of properties in areas where an economic downturn leads to a loss of the income you are purchasing these properties for?

Additionally in the last 3 years people would buy distressed properties and hope to fix them up and refi.  That is sort of off the table as values aren't really going up enough to get out of the original loans.

Theresa Harris · Answer

I would aim for the best place I could get.  The D class is going to cause a lot more work and the return on your money on paper vs reality is going to be quite different.  Find a place in a good area where you are likely to get longer term tenants.

Saaj Patel · Answer

Not sure if my logic is 100% spot on, but I like B-class properties.

In market downturns, renters spending on A-class usually spend down to B-class (or go to live with their folks). In a flourishing market, your tenant pool will consist of B-class renters and C-class renters that are willing to spend up.

Either way, there is complete coverage of prospective tenants in any environment.

Stephen Jones · Answer

@Kyle Curtin

Great topic here! Will be following. Most of my assets are B class assets, but on my next purchase I am considering buying for cash flow, so I might have to start looking in a C class location.

Justin Hammerle · Answer

In MA Class B-C - highest natural rent growth due to inventory and less competition.  Unless subsidized you really can't build affordable rentals.

Bob Stevens · Answer

Well over the last 10 years pricing has more than doubled tripled or more in most of Cleveland, on top of the 20% ++ net caps. Also if you buy right ( all in about 65% of the ARV ) it all should work out well

All the best

Bob Stevens · Answer

Any, as long as the numbers make sense. I start with not less than 15% net cap, then go higher per the "class" Typically all my rentals have been 20% ++ NET

All the best

Paul De Luca · Answer

@Kyle Curtin

B & C class multi-family is what I like for the following reasons:

-opportunity for some value add but nothing too extensive

-you can find solid tenants that are reliable (less headaches than D class)

-better opportunity for cash flow than A class properties/areas due to better affordability without the management headaches in D class areas/properties

-more recession resistant sub-category of housing due to better affordability

Kyle Curtin · Answer

Hi Stephen! Thank you so much! I love that, that is a great idea! I definitely gravitate my attention towards buying in smaller sub markets outside of the cities that really have a strong population growth :)

What Class do you Typically Target with Multifamily and why? 🤔

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