Investor · North Saint Paul , MN · Member since 2014 · 78 posts · 3 votes
Hello BP
Recently I wonder what criteria would make a duplex or Four plex , a good investment ?
How much is good price for duplex, Four Plex ? how do you come up to that price ?
What Cap Rate is consider good ? why you think so ?
Do you use 1% , 2%, or 50% rule on duplex four plex ?
I live in Twin cities Minnesota and the price for Multi Family has gone up so much that I wonder if it is still worth investing or at what price point I should stop buying.
Contractor · Land O' lakes, FL · Member since 2014 · 129 posts · 56 votes
11y
@Account Closed
Hi Tommy. Usually with 4 or fewer units a GRM (gross rent multiplier is used) and not a cap rate. That's not to say you can't but it's not conventional to do so.
Say your gross annual rents are $12,000 and your purchase price is $120,000, then your GRM is 10. This multiple reflects how long it would take to pay off the property when multiplied by your gross rents. Some people may say when the multiple is X or a range between X and Y it's a steal but that's not always the case. Most of the time you have repairs that increase your asking price and consequently bump the multiple up.
Bear in mind that the 1%, 2% rules are really ideals you want to strive for but not set in stone. They validity of these rules is highly dependent on your market and the activity within it. The 50% rule is good when determining what your overall operating expenses will be over time. If you buy it new most likely you will not experience that directly but you will have paid a premium for that by having newer units/appliances/roof, etc... The advantage is that by purchasing it new you can roll that cost into your financing, lower your capex amounts you set aside and in general increase your roi. The bad part is if you get any type of investor that has half a brain on their head when you sell will realize stuff is about to break down in a few years and make his/her bid appropriately.
As for your last point I can't help. I'm completely ignorant on that market. There are other markets around the U.S. that are in various stages though. No one says you have to stay in one place and sit it out.
Investor · North Saint Paul , MN · Member since 2014 · 78 posts · 3 votes
11y
Thanks Dave for your explanation. That is really help me clear up some confusion that I had.
I think my future investment have to have GRM of at least 10 or lower. The 2% or 50% rule doesn't work in my market. I may even look at other state like you mention above to help me get the number that make sense.