What to consider when buying multifamily for the first time

Question

My husband and I are thinking to add a multifamily to our investment portfolio. We mainly have single family properties in Texas at the moment. We came across a property that is walkable distance to a university, 6 one bedroom units and one 3/2 unit. On the listing, it said the property's projected 5 Yr IRR of 20.2% IRR before Value Add Program. The listing stated if we put in 3k into each unit we could raise the rent $100 more than it is currently rented out for.

Is it a realistic IRR? And what other numbers or important factors should be considered prior to moving forward with the deal? Thank you in advance.

Taylor L. · Answer

Don't bank on the listing's underwriting, do your own. Odds are very high you'll come up with much lower returns than they did. They're probably underbudgeting on repairs & maintenance, vacancy, and property management costs. $3,000 goes very quickly when you're doing value add.

IRR is also, honestly, a poor metric to use despite its popularity. Look at your cash on cash return first and foremost.

At this point you need to (at a minimum):

- Run the numbers for yourself

- Do your own rent comp analysis

- Independently research the area

Billy Daniel · Answer

I wouldn't make any decisions based on IRR. I don't even calculate it for my properties. Look at cash flow and projected appreciation (your own calculations).

I'm not sure how only $3k in repairs can raise the rent $100/month. That's not very much when it comes to value add. MAYBE if it's materials only.....

Good luck and trust your numbers, not thiers!

Nathan Gesner · Answer

You have to verify everything they are telling you. Why would they sell a property producing a 20% return? How did they determine the cost of renovation and the return it would produce?

It sounds good, but do your research.

What to consider when buying multifamily for the first time

What to consider when buying multifamily for the first time

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