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Small Multifamily Properties = Big Profits

by Spencer Cullor on October 15, 2011 · 6 comments

  
advantages to investing in small apartments

Many real estate investors overlook some of the most profitable investment properties because they don’t understand how smaller properties can equal big profits. They get caught up in the “bigger is better” mentality and miss out on some of the most profitable investments right in their own backyards. Contrary to what some real estate gurus say, you don’t have to buy multifamily properties of 150 units or more to make a big profit. Smaller multifamily properties can provide an investor some of the strongest investment opportunities if you know what you are looking for. You can find them everywhere, and often times can buy them for much higher immediate returns and at better purchase terms than larger properties.

We define smaller multifamily properties as those having four to 100 apartments or units. This size of property can be a great fit for individual or a small group of investors. At this size, the income can adequately cover the expenses of the property and factor in management, debt service, and vacancy expenses.

Some of the advantages of investing in smaller multifamily properties are:

  • Smaller properties usually have less competition than larger properties. When acquiring smaller properties, you are usually competing against individual investors instead of large companies, institutional investors, or investment groups.
  • You can find properties with higher cash on cash returns. Often times you can buy smaller properties that provide higher cash on cash and internal rates of return on your investment dollars.
  • They take less equity to purchase. Because they are smaller, they don’t require millions of dollars in equity to purchase, allowing you to purchase them individually or with a small group of investors, and own a higher percentage of the property.
  • With smaller properties, you can often make more money per unit each and every month than with bigger properties.
  • There are more of them in your backyard. There is a larger number of smaller properties than large apartment complexes which makes them easier to find.
  • Many have more flexible sellers. These properties are normally owned by private individuals who have the ability to get creative if they want to and don’t have to go to a large ownership group for approval.
  • They are often managed by less sophisticated investors who are scared to raise rents, fearing that their tenants will move out. This provides more opportunities for hands-on owners to achieve management improvements and value creation.
  • They can be closed on quicker than larger properties.

As you can see, there are many advantages to investing in smaller properties, where some of the biggest returns can be found. It’s easy to get caught up in the game of trying to compete with larger investors who own more units, but like a mentor of mine told me early on in my investing career, “It’s not how many multifamily units you own, it’s how much you make per unit.”

Photo: Yuri Long

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{ 6 comments… read them below or add one }

N Modi October 17, 2011 at 10:22 am

Where would you possibly find listing online for Small Multifamily properties? I have reviewing loopnet and other listing website but they tend to have very few listings for this type of properties.

Reply

Joshua Dorkin October 17, 2011 at 12:56 pm

We’ve got these kinds of listing on the BiggerPockets Properties directory, and you can find others at: Commercial Real Estate.

Reply

Vito Boscaino October 17, 2011 at 1:22 pm

N. Modi – If you have any interest in smaller multi-family properties in the Central Ohio area, you can check out our site: http://www.servingcolumbus.com, or call me directly to discuss 614.571.9054.

Vito Boscaino
New Perspective Realty

Reply

Spencer October 17, 2011 at 5:33 pm

N Modi,

We have found smaller multifamily properties through a variety of sources. We have found them through everything from brokers, to the MLS, to driving by a property and calling the owners that we looked up from the tax records. One of our top performing assets is one that we found from a mailing campaign that we mailed to multifamily property owners in our area. The owner of a 40 unit complex called us from our letter, 6 months after we sent it and we negotiated the deal over his dining room table. The key is letting people know what you are doing and what you are looking for and you’ll be surprised by how many deals start coming your way.

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Gary Seidel January 17, 2012 at 9:36 am

Any idea on cap rates on multi-family….?

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Spencer Cullor January 17, 2012 at 6:15 pm

Gary,

Good question. It really depends on your local area, local conditions, and property condition. There are some historical ranges you usually see them in. A 5-7.5%, B 7.5-8.5% C 8.5%-10 D 10%+

I would highly encourage you to talk to brokers, mortgage brokers, and other professionals in your area so that you are comparing apples to apples. Best of luck.

Spencer

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