Should I purchase 6 Multi Unit in great area versus 30+ unit bldg in not so great area with almost the same investment?

[Zulf H.]

Dear BP Members,

I am looking at adding a new  new multi unit property in 2015 to my portfolio, however I am confused and looking for some advice from members who own multi unit buildings and large buildings with more than 30 units.

Here is the current situation with my new purchase

Option 1 – Buy a 6 unit building in a great area with high rentals.

Option 2 – Get a 32 unit building in a not so good area (Low rental  about $700 but 90% occupied – I think majority is section 8) –

I own few other multi-unit buildings (3 units) , apartments and a SFH and they are all in very good area. I don't have a property manager on these as I manage these myself in my spare time, however I do have a good handy man and a good real-estate agent.

The price of the 6 unit is close to the price of the 32 unit building ( price is because of the neighborhood), however the 32 unit building is giving about 15% return versus 8% return on the 6 unit building.

Should I persue the  6 unit building in the good neighborhood and settle for the less profit which will also come with less headache. I have never owned a 32 unit building and don’t know everything that’s involved. I also have  a  job and travel extensively so I would need to get a property management company to handle the 32 units. I don’t have experience and am confused, at one hand I would like to make the additional profit of 15% but I don’t know if the headache is worth it.

Your input/advice is greatly appreciated.

Thanks,

ZH. 

[Jordan Concepcion]

It really does depend on your goals of an investor. Typically, a smaller 6 unit building in a good location (ie coastal, good neighborhood, high density downtown, etc) has a better bet on appreciating over the years since the land is so valuable. However, your ROI and cash flow will certainly be lower. If you are in a stage of being conservative and are looking for a safe place to place your money with steady returns, this is a great route.

As far as the 32 unit building, you have to assess the neighborhood and the volatility of values in that market.  If it is in C or D markets or an older building, make sure you do your homework on the demographics, household incomes, and historical values (especially when the market dropped).  It will certainly give you more cash flow but keep in mind that the area might have some challenges (raising rents, evictions, etc).  Larger buildings have larger expenses.  However, the upside is that equity and rent growth can be exponential.  Let's assume the following:

Scenario 1 (6 unit building in good area)

1. If you raise rents $150 per unit across the board a month, you are making $900 more dollars a month ($10,800 a year).

Scenario 2 (32 units in a challenging area)

1. If you raise rents at $150 per unit a month, you are netting $4,800 a month ($57,600 a year).

2. Even if you raise rents at a moderate rate of $50 per unit a month (assuming it is a lower income area), you are netting $1,600 per month ($19,200 per year).  

Both have their pro's and cons but it really does depend on where you are in your investment cycle and how much risk you are willing to take on.  Keep in mind that, since you will be hiring a property manager, many of the day-to-day "headaches" or duties will go to the property manager.  I've dealt with some clients who actually say that moving into more units is less of a headache since they are delegating the responsibilities to a Property Manager. This is just my take and I hope it helps.

Feel free to reach out if you have any questions

-Jordan