Making Money in Multi-family and Apartment (5+ units) Investment - Real or Myth
Hi I am relatively new to Real Estate Investing and have been mostly buying buy and hold properties for rental income for past 9 months or so in Chicagoland area - primarily in suburb areas. Have acquired a few SFR / Duplex properties with my partner. At this point exploring the idea of investing in multi-unit / apartments with 5+ units. We saw quite a few apartments in last few weeks and and to be honest are attracted by relatively low prices of entry. In few cases some modest to gut rehabs are necessary as well. But the main stumbling block my partner and I are facing is can we really generate decent cash flow by acquiring these 5 - 8 unit buildings. Here are some example numbers we ran through and figured out Cash Flow is really not that attractive at all and probably we are better off sticking to SFR/Duplex investment for Cash Flow.
1. Building 1 : 6 Units ( 5 2BR + 1 1 BR), Purchase Price: 120K, Rehab: 100K
Rental Income: 55K Annual, Taxes: 10.5K, Ins: 2.5K, Utlities: 12K, Vacancy/Reserve/Maintenance: 5% each, Property Mgmt: 8%(about 12K)
Operating Expenses: 37K
Gross Operating Income without Debt Service 18K, Cap Rate: 8%
Net Operating Income with Debt Service: 6K, CoC Return - 11%
Net Cash Flow Per Unit Per Month: $80/month
2. Building 2 : 7 Units ( 6 1BR + 1 Studio), Purchase Price: 120K, Rehab: 70K
Rental Income: 47K Annual, Taxes: 8.2K, Ins: 2.5K, Utlities: 11K, Vacancy/Reserve/Maintenance: 5% each, Property Mgmt: 8%(about 12K)
Operating Expenses: 32K
Gross Operating Income without Debt Service 15K, Cap Rate: 8%
Net Operating Income with Debt Service: 5K, CoC Return - 12%
Net Cash Flow Per Unit Per Month: $60/month
Compare these metrics to SFR Investment where I can generate about 350 - 600 /month cash flow per unit with Cap rate of 12% or greater and CoC return of 18% or more.
Is there something wrong with my numbers - the way I arrive at them? Or is it the reality in apartment/multi-unit investing that we have to come to terms with.
Thanks for your insight or feedback or experience that you may be able to share.
Anant
I was looking into the same thing, and wondered the same. Where are you looking at for your 6-7 units?
I was looking mostly in the SouthWest suburbs of Chicago.
Anant
There's tons of money in the bigger properties - and I would suggest most bigger investors like those because there's lots of economies of scale. All I'm doing any more is 8+ unit properties and making between 10% and 18% cash on cash. The key is where. A lot of markets are too over priced where you can't make any money - all the higher end ones like LA, NY, SF - parts of Chicago and the like. So, you have to be looking in sub-markets where you can find those returns. What you are saying above is you aren't finding deals that pencil out - which is true for 80-90% of most deals initially. You should either expand beyond the closer in 'burbs there, or go to a different geography all together. There's a lot of smaller metro areas that can get you very robust returns on those kind of properties.
In my experience $100 door minimum per month because your cash flow can easy get spent on repairs x7 units very quickly.Also multi units are more work so it needs to be worth it.
Hi Anant,
I started with duplexes, triplexes etc. renovated, rented for little cashflow. Appreciation happened both because of rehab I did and also as a result of the market rising. Then I 1031 exchanged into larger properties, 6, 10 and 14 units, still needing a lot of renovations. Once those renovations were done, I 1031 exchanged again into larger properties. It's taken 15 years (with a few ups and downs) to go from 2 to 200 units. I could have done it faster had I been more focused... I have three property managers at 3 different complexes. If I tried to manage 200 houses, I would need a spreadsheet to figure out where they are at and probably more than 3 property managers to keep track of them all.
It takes time, but the growth can be exponential, not one at a time as with single family residences. If you look at the smaller multifamily properties as stepping stones, it may give you another way to look at them. Let's say you buy the 6 unit property for $120K and rehab for $100K. Keep in mind that your building is valued based on the NOI, so make sure every dime of your renovation budget goes toward items that can increase your rents or decrease your operating expenses. Also, don't over renovate for the class of apartment and area. I.e. don't put in dishwashers and stainless appliances, if your competition doesn't have them. That may be worth while in a flip, but overrenovating an apartment is wasting money. Any apartment you can buy for $20K/door is a class C or D, mostly basic stuff in there. To refresh a Class C apartment, I usually spend $4-5K/door. Paint, light fixtures, paint the kitchen cabinets, a new countertop, used appliances and flooring (vinyl or tile). You are proposing to spend over $15K/door, which sounds way to much to me, unless you are doing the foundation, structure and roof at the same time.
With commercial properties, you can use the cap rate to figure out if your improvements are worth while. Look at your expenses and figure out where your money is spent. If you are spending a lot of money on water, you can calculate how much you will save by installing water saving fixtures. Divide your savings by your prevailing cap rate and see how much more valuable your building is with the lower water bill.
On the other side of that equation, you can also evaluate your proposed repairs and improvements to see if they will generate enough of a rent increase to pay for themselves. Back to the example, you buy the property for $120K and spend $100K on repairs. At a 10% cap rate (adjust to your market) those repairs should justify a combined rent increase of $10K/year, $833.33/month or $138.88 per unit per month. If not, you are overspending on repairs.
Sorry this got a little long winded, but one of the advantages with multifamily over single family is that you can calculate and to a large extent control the value of your property by knowing the prevailing cap rates. Increase rents or decrease expenses and your NOI goes up, divide by the cap rate and figure out how much value you added. With SFR's, you are at the mercy of the comps, over which you have no control.
Good luck and keep looking at deals, the more you look at the better you become at picking out the winners.
Erik
Thanks Erik for sharing your insights into apartment/multi-unit investing. It gives me a different perspective in looking at and understand the numbers in evaluating apartment deals. You are spot on in determining the value of multi-units based on NOI and cap rate. By that measure I should not be spending more than 70K in rehab considering my NOI is only about 19K and cap rate of 10%. Even then my Cash Flow numbers don't cut simply because (A) even after renovation in that are (for first building) I can not expect a rent increase as there are similar units in similar buildings (quite a few of them) are renting at 800 - 850 for 2BR units. (B) In this area all utilities for tenants are included in the rent, meaning owner has to pay for heating, electricity, water and sewer, garbage disposal which is substantial. I don't know how much control you have controlling these costs. My guess is probably very little. On top of these two you have to account for management fee, vacancy and reserves & maintenance.
In this particular case as much as I want to contain the rehab cost, I still have make them livable. And all 6 units require extensive work everywhere. Even 70K rehab estimate may fall short. I will pass it anyway.
Again thanks for your inputs. Really appreciate it.
Consider this though.
With SFR it's an all or none proposition, meaning that either it's vacant or it's not vacant. With MF it would be extremely rare to have 100% vacancy. Most deals you can determine the 'break even point' for the vacancy rate and then decide if that's feasible. Vacancies are the killer in rentals, especially SFR.
In addition to that, the 'equity' you have in SFR is more comp sales driven and less operator efficiency driven. If you're in a hot real estate market a SFR may improve in value even if you are a bad operator, which can be nice. However, the opposite is also true. MF values are driven by operator efficiency.
As an example. Lets say the market Cap Rate is 7% for a class C fully stabilized property. If you're an efficient operator you can drive equity by increasing your NOI. As a SFR operator whether you're efficient in your management of expenses or tenant selection, it's only worth what the other SFR sales in the area are worth, give or take a small margin.
im with @Mark Mosch. The deals you've seen may not be worth it, but it doesn't mean MF cash flow is always worse than single family. And as @Erik Nowacki said, you have a lot of control over the value of your property since it's based on NOI rather than comps.
I shoot for 10% or better cash on cash, but a total return of 100% or better based on a 5 yr sale or refi. They're definitely harder to find right now, but I've got offers on two properties that are likely to be closer to 15%-20% cash on cash years 1-5, with well over 120% total return. I may not get them, but the sellers are happy with the number, so I'm just saying the deals are out there that DO provide cash flow, you just have to look at a lot of them. Just be careful in your analysis, and don't assume the current rent growth and occupancy will always be as strong.
I agree that the way to real cashflow is to build a lot of equity. Buy undervalued properties, make them more valuable, sell and trade up. Settle into a cashflow property when it makes enough to be worthwhile.
Hello I am new to real estate , but have a 750 credit score and quite a bit of savings, I was interested in starting with a 6 unit property, where could i go to learn about the business of real estate within chicago ? Is there a school or course you would recommend before i dove in ? All the best - Ken