Multi family or no?

Question

It seems like multi families are suggested as the way to go for passive wealth building....And it also seems like most multi families (4 units or less) are geared towards lower income.

So what are you guys renting these places for? And what is your mortgage cost?

In my area, I see the retail cost of a multi family is still high. It’s a sellers market. And it’s not worth what I’d get in rent, since most are lower income.

So what’s the secret that I’m missing?

Joseph Firmin · Answer

You're making some broad assumptions. I own nothing but multifamily assets and none of them are low income. You can target low income if that is what your strategy is, but you can also target a Class A multifamily building. Set your goal and then choose the strategy that fits what you would like to do. If your immediate area does not support your strategy, it's time to look outside of your area. Make sure the numbers work and do your homework.

Ben Scott · Answer

I own two duplexes in my market and there are some of my best tenants. In my market, there were many multi-family units built in the 50s in and around the local university. These areas have gentrified and attracted quality young professions.

Whitney Hutten · Answer

@Shalom Benton I think you get the gist that MF can be lucrative and a great asset.  Just like SFRs, you want to be in a great market to attract a great tenant.  Also, for 5 units or more the asset is generally valued based off the net operating income the property generates divided by the market cap rate.  So if cap rates are ridiculously low in your market, think about finding another market to invest in.

Shalom Benton · Answer

@Evan Polaski this makes a lot of sense. Thank you for sharing from your stand point!

Evan Polaski · Answer

@Shalom Benton, this is all dependent on many factors.  In Manhattan, the cost to purchase anything is over $1mm, which traditionally means $200k to put down.  If your job pays your $250k/yr, you have a lot of options but being able to save $200k post-tax is a lot.

I would agree that in today's market building a brand new 4 plex typically does not make sense, and then the amenities with that building would not likely include onsite fitness facility, pool, reserved cover parking, etc.  If that is your definition of Class A, then you are correct, but not because there isn't demand per se, but rather the cost of construction does not make sense at that scale.

But if you are talking more generally of just nice places in nice neighborhoods, they definitely exist.

In general, the price of ALL real estate is very high right now.  Single family, duplex, 4plex, 400 unit complex.  The biggest difference being that 1-4 unit properties are an easy entry point so you have a lot more demand, and that demand drives up prices regardless of rent levels.  But this is true for low-income properties all the way to great assets in the best neighborhoods.  It is indeed a seller's market in general, but the smaller properties tend to be more biased to sellers than larger properties, where you tend to have more sophisticated buyers.

Shalom Benton · Answer

@Taylor L.

Good to know

Shalom Benton · Answer

@Joseph Firmin

True. But wouldn’t class A tenants normally prefer a home? My assumption is that most multi family units are lower income because class A would like to have a yard or HOA type of experience. And not share walls. You see what I mean?

Glad you’ve been able to do it without. I own duplexes, so when I say multi family I’m referring to 3-4 units that share walls.

Taylor L. · Answer

The 'secret' so to speak is to get to deals before they hit the channels that you're currently seeing. On the smaller scale, wholesalers may be a good source for you. As you go up in the unit count, brokers get involved and your relationship with them drives access to deals.

Andrew Wicklow · Answer

I would second that sentiment.  A lot of assumptions are being made there.  Rents follow housing prices to a large degree.  The higher the cost of the housing stock, the higher the rents will be for apartments whether in a 1-4 unit building or even a larger building.  Rents also depend on the amenities.  For someone starting out I generally recommend a medium priced community that is neither has high rents nor a low income community where rents are low.  A middle of the road that's pretty close where you live a great starting point.  No need to go further afield until you are more seasoned as a landlord and know this is something you like to do.

Andrew - Investor and Insurer of multifamily properties (nationwide)

Multi family or no?

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