Multi-Family Cap Rates

Buying & Selling Real Estate
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Multi-Family Cap Rates

Jonathan Marsh
Littleton · Member since 2018 · 43 posts · 14 votes

I'm actively looking for a multi-family property to buy. I'm particularly interested in the 4-10 unit size to start out. I have a few basic questions. When analyzing a multi family property, what are the main aspects you look for? (Cash Flow, Purchase price, Ability to Resell, etc.). 

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Alina Trigub
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
7y

@Jonathan Marsh 

1) you need to differentiate between the type of properties you're looking for: 2-4 units is considered residential MFH, 5+ units is considered commercial

2) in terms of the main aspects, there are too many to list. Search through BP, listen to podcasts, and read a few MFH books prior to starting your journey. You'll be a lot better equipped once you get educated. 

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  • Shmuel Waldman
    Member since 2018 · 124 posts · 53 votes
    7y

    Are you looking to Buy Rehab Rent Refinance?

    or Buy Rehab Sell?

    0Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    Buy, then rent. Open to buy, rehab, rent refinance. Probably will hold it for several years at least. The property will be managed by a property management company.

    1Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Jonathan Marsh 

    1) you need to differentiate between the type of properties you're looking for: 2-4 units is considered residential MFH, 5+ units is considered commercial

    2) in terms of the main aspects, there are too many to list. Search through BP, listen to podcasts, and read a few MFH books prior to starting your journey. You'll be a lot better equipped once you get educated. 

    3Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Alina Trigub-What they're called (residential/commercial) doesn't really matter to me. I'm looking for something between 4-10 units.

    Thanks, I've done that. I'm hoping to get some more detail from folks on here in regards to their personal experiences as to what they do.

    0Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Ethelind Walker

    You don't have any expenses? Mortgage, etc? What's the total with that?

    2Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    7y

    @Jonathan Marsh I think what @Alina Trigub was getting at is you're mentioning analyzing 4-10 units in size, it should be either 1-4 units (residential) being analyzed or 5-10 units (commercial) being analyzed, mainly because up to 4 units are analyzed differently than 5 units and up.

    I'm currently not buying small multi-family properties due to the market conditions. What I do look for mainly is the area (major metropolitan areas only, I do not invest in remote or small towns), property class (Class A- to C+, if the C+ is in a B neighborhood), cash flow will depend on the property condition and CapEx replacement needed, and of course price.

    3Reply
  • Christopher Lombardi
    Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes
    7y

    Look for a great location and an IRR that makes the investment worth it.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    I like rent growth.  I now only buy in areas where rent growth is strong.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
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    1Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Ray Johnson-Thank you, sir. In what ways are they analyzed different when looking at cap rates & cash flow?

    Good insight. I like that idea regarding major metro areas. Are there target numbers you shoot for each property class?

    0Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Russell Brazil-Smart move. I assume cap rates & cash flow have some factoring into your decision as well?

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Jonathan Marsh:

    @Russell Brazil-Smart move. I assume cap rates & cash flow have some factoring into your decision as well?

     Not really anymore.  Ive got some properties that cash flowed well 10 years ago in low to no rent growth areas, and they rent for the same they did almost a decade ago.  Ive got other properties that didnt cash flow at all a decade ago, and today after a decade of high rent growth they are cash cows.

    So I guess then maybe the cap rate and cash flow do influence my decision...I prefer low cap rate properties. Low cap rate is typically indicative of low risk, high appreciation and high rent growth.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    3Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Russell Brazil-That's insightful. I didn't think of it that way previously.  I'm somewhat new to the game, but those factors do make sense. Essentially buying a property that's low cap now, knowing it's numbers will grow in the years to come, making it a higher cap property, while also being low risk & knowing there is room for large appreciation values. Smart.

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y
    @Jonathan Marsh  What I was referring to is what @Ray Johnson clarified, it will be important for you to know, especially when you speak with brokers and lenders as commercial are valued differently from residential. 

    Originally posted by @Ray Johnson:

    @Jonathan Marsh I think what @Alina Trigub was getting at is you're mentioning analyzing 4-10 units in size, it should be either 1-4 units (residential) being analyzed or 5-10 units (commercial) being analyzed, mainly because up to 4 units are analyzed differently than 5 units and up.

    I'm currently not buying small multi-family properties due to the market conditions. What I do look for mainly is the area (major metropolitan areas only, I do not invest in remote or small towns), property class (Class A- to C+, if the C+ is in a B neighborhood), cash flow will depend on the property condition and CapEx replacement needed, and of course price.

    0Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Alina Trigub-Thanks. In what ways are they valued differently?

    1Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Jonathan Marsh residential are valued based on comps. commercial are valued based on NOI. Residential are sold (mostly) by residential realtors via Your state MLS, commercial are sold by the commercial ones (loopnet and etc.) Now for your spread there's potentially an overlap and hence you may want to reach out to brokers on both sides.

    2Reply
  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    7y
    @Ethelind Walker You’re getting $24,000 in revenue, assuming no vacancy or delinquency. Not cash flow. I’ve owned $500 a month rentals, they have plenty of expenses/vacancy attached to them that you haven’t included.
    2Reply
  • Lawrence Brooks
    Rental Property Investor · Northern Virginia · Member since 2018 · 5 posts · 0 votes
    7y
    @Russell Brazil What are the contributing factors that prevent you from raising rents in those lower rental properties? Were there no opportunities to increase value?
    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Lawrence Brooks:
    @Russell Brazil What are the contributing factors that prevent you from raising rents in those lower rental properties? Were there no opportunities to increase value?

     The market. The market is what determines all pricing, whether rental or salea price.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    I have owned RE for 4 years so not an expert. However, commercial pricing is based on what the property will produce cash flow wise. For example a property that throws off 9k/yr would be priced at 150k at a 6% cap rate.  Cap rates represent risk. The higher the cap rate the higher the risk.  In the market i buy in 6% is where I want to be.  In say the Bay Area of CA 3% is normal. 

    There are many other factors to look at and you need to decide why you want to invest- cash flow, appreciation or both.   Also be aware of the cost of the money you are borrowing  - to me it doesnt make sense to buy a 3cap  with a loan with 6% interest :)

    For the most part commercial MF pricing is based on the income it will produce and non commercial residential pricing is based on comps but usually those comps sales prices were based on emotion 

    I have found 5+ to be where commercial pricing kicks in.  

    Also buying commercial also means a commercial loan.  Which is different than a residential loan.  

    2Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @Mary M.-Thank for the valuable input. 6% seems like a happy medium. What type of market size do you look for, for the 6% caps? 

    Personally, I really am looking for cash flow overall. However, appreciation is also important and the ability to resell the property in 5-10 years. 

    What are the main differences you have noticed between commercial & residential loans in regards to multi family properties? Rates, structure, etc?

    0Reply
  • David Fernandez
    Real Estate Agent · Vienna, VA · Member since 2016 · 289 posts · 253 votes
    7y

    @Jonathan Marsh

    These are some of the differences in the loans for 1-4 units and 5+ units. 

    1-4 units:

        - This is a residential loan. You can go with a traditional lender, whether you owner occupy it or as an investment. This means that you can walk into any bank or search online for a mortgage and they'll know what you are talking about.

        - Cheaper rates (usually), especially if you are buying the property as an owner occupant of one of the units.

        - Longer amortization period. 

    - Higher LTV

        - Appraisal cost and sometimes closing costs are also way cheaper. 

        - Loan approval focuses on YOU; your credit score, DTI, W-2s, paystubs, etc. Basically, YOUR ability to repay the loan and how good your behavior has been paying your debts. If your DTI is high already, you may not qualify for this type of loan.

    5+ units:

        - You need a commercial loan. Not all banks have this product available. Having a relationship with a bank may be critical to have access to this product, specially, at competitive rates

        - The cost of borrowing is usually higher and shorter amortization period (impact on your cash flow). 

        - Some of these loans are non-recourse, which is a good thing.

    - Loan approval process focuses on the asset and its ability to repay the loan (DSCR). Your personal financial situation is important (credit score, net worth, etc.), but the asset is more important. They underwrite the loan as if it were a business, which it is.

    It will be easier and a lot cheaper for you, assuming that your personal financial situation is good, to obtain a loan fora 1-4 unit, especially, if you buy it as an owner occupant. It may take some time to develop a relationship with a commercial lender to get a loan for a 5+ unit, especially your first one. It will be easier for you to go to a commercial lender and show them that you have experience with a 3-4 unit. 

    After you establish a relationship with a commercial lender and do one loan with them, they will offer you better terms and the underwriting process is easier, at least, in my experience. I had to go through an extensive underwriting process for my first commercial loan, but any loan thereafter I did with the same bank was a breeze. Basically, I only had to update my PFS (Personal Financial Statement) and give them some info about the property, wait for the appraisal, and show up at closing.

    3Reply
  • Bruno Araujo
    Los Angeles · Member since 2018 · 16 posts · 2 votes
    7y
    @Jonathan Marsh It sounds like we’re in a similar spot with the properties we’re looking for. What’s your thinking on apartment syndications? Anybody out there recommend a great multi family investing book? Perhaps one thats a bit more market focused (beyond the basics). @Russell Brazil is hitting on those topics.
    0Reply
  • Jonathan Marsh
    OP
    Littleton · Member since 2018 · 43 posts · 14 votes
    7y

    @David Fernandez-Thanks for the input. That's good to know regarding the differences between the 2 loan types. 

    0Reply
  • Brian O'Keefe
    Rental Property Investor · Philadelphia, PA · Member since 2017 · 3 posts · 1 vote
    7y
    @Jonathan Marsh good luck with the search! You may already be past this point but I’d highly recommend both Crushing It In Apartments and Commercial Real Estate and The Complete Guide to Buying and Selling Apartment Buildings. While I preferred the former, both offer 2 opposing strategies on commecial real estate investing that I found entertaining and insightful.
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    I'd underwrite a residential quad much differently than a commercial 5+.

    For instance, the quad has to comp well. Similar quads must be worth more than I pay.  Also because residential financing is fixed for long terms and doesn't bother me every year for my financials or have calls, I am not as strict.  I don't have to be compensated for the PITA and higher risk commercial loans carry.

    Commercial appraisals are also at least double the cost of a resi multi.  A quad might be $1500. My 10unit was $3500 and that was a long time ago.  Whether ' you' don't care or not, the appraisal cost is paid up front and the appraiser cares.

    5+ commercial must cap well vs the market and vs other investments like mutual funds. I'm not babysitting tenants and properties for 5%. However, if the market cap is 4% and I find a deal at 5, i know any added NOI dollar is worth $25 and I have plenty of room if my numbers are off a little.

    Don't invest in commercial if you don't know the market cap in that area.

    1Reply
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