Basic multifamily questions

[Logan Turner]

Im studying multifamily in an effort to move from single family rentals to Multi's I have a few beginner questions. What's a good average to use for operating expenses? 40%? I'm asking because in evaluating gross rents vs actual net operating income, I'm trying to determine which properties offer a value add opportunity by cutting bloated costs. I'm seeing deals at caps of 3-5 percent for B- to C class properties in B to C areas. Their net operating income is 75-80 percent of gross rents. How can people make money on any of these deals? Have seller carry back, to boost Cash RoR? Examine market rents and try to pretty up the property to raise rents moderately? Lots of musings, sorry for the rant. Just trying to get my head around multifamily in today's market. (Market area: San Diego, San Antonio, Dallas and west Texas)

[Giovanni Isaksen]

In other words what @Nick B. is saying is that the market is so hot you have to pay a seller for the appreciation that you're hoping to create*. Now there is a lot of capital chasing deals and many people do the math on the best case and decide it's worth betting on the future appreciation or that the projected return is still better than other alternatives.

If you're a value investor like me maybe having to pay sellers for value they haven't created themselves (and may not materialize) is a sign that market prices have gotten ahead of intrinsic value and we're probably closer to the top of the cycle than the bottom.

From there it's a matter of deciding what your holding period will be. If you're syndicating the deal you've got about five years max before your passive investors start getting twitchy... no matter how long you told them their money would be tied up. If that's the case and you forecast that five years will mean selling in the down cycle maybe it's not a deal you want to do.

On the other hand if you are a long term investor (15, 20+ years) with your own money or permanent capital like Warren Buffett has then the market cycle and what you pay are not nearly as important as what you project the jobs, economy and population growth to be in the local market over your hold period. To illustrate let's hop in Giovanni's time machine and go back twenty years; what would you buy? Everything, right? Even knowing 2008 was going to happen. Now of course that's not true for every single market everywhere but if you're a long term investor you're focusing on markets that have good job, economic and population growth prospects into to 2040s.

To paraphrase the old saying then: "Begin with the exit in mind."

*And if it was so easy to create that value the seller would have done it already, right?