Multifamily Homes - Too Expensive to cash flow?

Question

I am in Cleveland and have been trying to find the right Multifamily property for a few months. 99% of the properties that have gone on the market seem to be very over priced when considering the 50% of gross income rule and trying to get $100/unit/month. Is this because there are not a lot of properties for sale in this area? Is it bad timing?

I am trying to stay in one of the relatively nice neighborhoods of Cleveland. I could obviously buy a property on a less desirable part of town for much less.

I should also add that in a perfect world, 5 years from now I would have many properties cash flowing. Maybe this is everyone's goal, but that being said. Does it make sense for the first property to be a 2 family home, or would it be more profitable to look for a 3 or 4? I don't have enough saved to pay 20% down on a 5+ unit, so conventional financing is required.

Christian Carson · Answer

John T. : two things I see here.

Are you counting the "rent" you would be paying yourself by occupying a unit? If you don't, you're going to have a very hard time finding a property that cashflows positive. According to my calculations, if you're only counting half the rent due as income, you'll need to find a property at about a 15% cap rate to satisfy this criteria. That's going to be very hard to find in any neighborhood that Clevelanders won't judge you for living in.

Second, Lakewood price-to-rent ratios are out of whack. Rents on the east side are about 50% higher in comparable neighborhoods and the units tend to be bigger.

That having been said, it's possible to get those numbers in certain parts of Cleveland Heights if you don't care too much about being within walking distance to a major university or one of the "bar streets." This applies to side-by-side duplexes only.

Adam Hill · Answer

@Brandon Hicks is probably right.  My experience in appraising apartments, quads and triplexes and looking at all of the leases is that 1/1 tend to have long term tenants.  Not suggesting that is always the case but it does seem to be typical.  So it could be more screening work on the front end, but that too could help you retain tenants.

There is a good book on this called "Investing Duplexes, Triplexes and Quads" by Larry Loftis.  I really think this book leans way too heavily toward the appreciation side.  That could be a realistic play in Nashville right now.  But in multifamily, the pricing is structured on either (1) ROI, or (2) an appreciation play.  High income areas usually have bad returns and good appreciation and lower-income/middle America type places have better ROI and may not appreciate at all.  If you have a buy-hold strategy you could benefit from the appreciation but you should probably not consider that as the returns are really the point.

Jeff Trevarthen · Answer

What type of multifamily are you looking for? 2-4 units or 5+ units? 2-4 units are considered residential and 5+ is considered commercial.  You'll have to use your personal income to qualify for the 2-4 unit properties which may make more sense if you're going owner occupied. The commercial multifamily will require 20-25% depending on what lender you can find to do the deal.  But then again, the commercial banks don't care where the down payment comes from.  You may be able to raise money from investors if you find a good deal.

Remember that an asking price is just a number.  The owner is trying to sell property as high as possible.

If you're investing, you want to buy the property based on the operations...actual operations and not proforma. If you dig a little deeper, you may be able to find, good deals that cash flow, but they are definitely tricky.

Good luck.

Steve Wilcox · Answer

Most of the time to be in a nice area you will have to sacrifice some cash flow, but some investors do not mind as they feel their properties will appreciate and value will go up.

Good deals are not easy to find, and are not all over the place. If they were everyone would be rich.

In terms of unit mix, the more units in a building the greater protection against vacancy loss, however the more units the higher the price

If you do not have 20% to put down odds are that you will have to use FHA financing which is only available for owner occupants.

Where I live I could not get a good cashflowing property in an area I would like to live, so I buy in more urban areas. You should talk to realtors who work in your area are realistic, if not you may have to adjust your aquisition criterea. You may need to look in other areas.

Brie Schmidt · Answer

I don't know Cleveland but I believe @James Wise knows it very well

James Wise · Answer

John T. There are a few 5+ unit buildings in the area that will meet your needs.

Ivan Burley · Answer

@Adam Hill . Thank you for the info.  It's always good to hear from someone familiar with your area.  I will definitely be giving the 1br units a serious look given some of the info I've received here.

Also I'd like to keep your contact information.   I'm sure I'll be needing appraisal services once I find a property that I am interested in.  (Coincidence your responding lol).  I'm just kidding I love the feedback we receive here at BP.  Thanks again.

Ivan Burley · Answer

@Brandonhicks You make a great point about the ease of rehab and less wear.  I guess I was just thinking that it may ne difficult to rent them becuase I'd need to find 2-3 seperate individuals/couples with no kids,or one small child max, and qualifying backgrounds.

Nashville is a big city so there are plentg of potential tenants.  I'll just need to do a little more research into the 1br units.  Although I myself have rented in a similar unit I am a bit skeptical.

You make a very good point!

Multifamily Homes - Too Expensive to cash flow?

Most Popular Reply