Multifamily Properties- too good to be true?
Hey all,
First time poster here on BiggerPockets. Lately I have been reading a lot about multifamily properties. They seem to be much more profitable, dollar for dollar invested, than single family properties and possess a number of advantages from the investor's POV. However I am hoping the whole thing doesn't end up being too good to be true, or there is some huge disadvantage or roadblock that explains why the market has such high returns.
I noticed that lower income multi family properties have a much higher rent to purchase price income. When I first started thinking about buying property for investing, I was dreaming of a beautiful antebellum estate somewhere in the Charleston, SC. Okay, I don't think I have the cash to float that anyway, but we can all dream right? Turns out, the actual ROI per year on such property was around 4-7%. Why? Well, more liquidity means lower rents. People with money typically pay less for money. Look at NYC where its not uncommon to get 2-3% returns on investment properties. So anyway, I started looking into the economics of buying properties in the 80-120K range and the ROI was around 15-20% per dollar invested.
How do I get 15-20%? Say you invest 20K down on a 100K property, and that property has 4 units in it renting at $400 a month. I have actually found these properties myself on zillow and realtor.com. That's $19200 a year in rent. Now, apply the 50% rule. That's $9600 a year. Subtract mortgage and taxes ($4560+$1300). That's $3739 a year in profit. $20000/$3739 = 18.70%. That's almost triple the return you will get from running a single family home in an established market. Also that is after applying the 50% rule, which is a very conservative way of estimating rent loss, repairs, evictions etc. I think it might even figure in taxes too, so my return might be even higher than 18.70%. Paying cash for the property is actually less profitable, the lower down payment you make, the more profit you make as the real gains are to be made from the difference between mortgage and rent. Putting 50K down only yields a profit of 11%.
So... is this a real thing? On paper it looks great, but I may be overlooking some major risks that explain the high (potential) profit.
Also, you would obviously need to acquire a large number of these. Nobody is going to be able to quit their day job on $3700 a year. That brings up the issue of financing. If I have saved 100K to invest in 5 of these, how do I get a bank to lend me the other 80K per house? The first and maybe second one will be easy for someone with good credit, but I have never owned more than one property at once and I'm not sure how this kind of financing works at all. I'd also want to keep acquiring them once I figure out what I am doing and turn them over to a management company, to create a large passive income stream. How do you keep the ball rolling once you run out of your initial savings?
Thanks again and I look forward to seeing what people on here think about this topic.
-Matt