Is it still a good time to invest in an small multi family?

Question

I recently had a 5-plex under contract for $450k it’s a in a C class neighborhood in Tucson Arizona, cash flow about $3275 per month. Rent can be increased a little to $3700 per month.

I’m putting 25% down for this project, and have reserve to do a few updates so I can charge more rent.

Wondering if this is a good investment opportunity, or the market is too inflated now and it’s not a good time to buy.

Account Closed · Answer

Hey Patrick, as others have suggested the market in Tucson is still strong. It is always a good time to buy a property you plan to hold for the long term but if you plan to turn it over quickly you'll want to make sure you are staying conservative and have multiple exit strategies. That being said based on the fundamentals of our market I am still flipping homes. As far as the rental increases I would make sure you have drilled down on the unit and rental comps to make sure you can do those rent raises successfully. Class C rents in Tucson tend to be skewed when comparing properties with evaporative cooling and central air. Also if you want to drive the higher end of the rental rates for the area is your property going to be one of the best? How do the units that are currently getting what you want in rent square with your units? Also having experience in C class rent rate increases in Tucson I would say be prepared for a large tenant turnover even if they tell you they would love to stay. If you've gone through all of this then you're good to go.

James Bradin · Answer

I just want to confirm that you are saying the right thing. Cash flow is the amount of money left over after all expenses (Mortgage, Taxes, Insurances, Utilities, Maintenance & CapEx Reserves) have all been subtracted out. Typically I try to shoot for at least $200 of cashflow per door per month (ie. $400 for a duplex, $800 for a quad). If your 5-plex is going to actually cash flow at $3700 a month that would probably be one of the best deals in recent years.

If that is your gross income for the property (as I am guessing that it is), it is probably not the greatest deal. With a $112,500 payment and a mortgage payment of roughly $2000 a month, $250 for insurance, $220 for taxes, $370 for Cap Ex, $296 for Maintenance.....and we are already at $3136. And that is without utilities, lawn care, property management, and vacancy. With those numbers your ROI will be pretty low. Just using the quick 1% rule you would want the gross rental income to be at least $4500 a month. With it being a 5-plex you cannot qualify for an FHA loan or any other type of loan that would allow you to decrease your down payment.

To answer your initial question, no it is not a bad time to purchase small multi family units.  However I would say that your money could be spent better.  That is a very significant down payment for a property that is not a "home run".  I am under contract on a similarly priced duplex that I secured with a fraction of the down payment that you are preparing to drop.  If I had that amount of investment capital I would look at 2-4 unit multi family units funded through an FHA loan (3.5% down instead of 25%)

Let me know if you have any specific questions.

Brian Kimminau · Answer

Exactly as Account Closed is getting at. Amenities as an insurance. 2x1's and backyards and especially a/c's will always have a healthier pool of prospects. It probably wouldn't be too difficult to make your property the "creme de la creme" in our C neighborhoods. Modern paint hues, ac, parking blocks, some sexy lighting, new A-E markers, fill some dirt/rock and have everything trimmed up/blown out. You will have the high turnover but that should stabilize once the right tenants move in. Having some protection against car break-ins for your tenants seems to matter a lot.But then again, a good number of people in my network are very pessimistic about Tucson's future. I am not.

Ari T. · Answer

Patrick,  My concern is the increase in rent at current situation. The C Class in Tucson normally will show resistance due to limited income. How soon are you thinking of the increase? How much money will you put into in order to justify the increase (Estimated Repair)? I would go conservative on Increasing rent in Tucson at this time.

Is it still a good time to invest in an small multi family?

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