Deal analysis, 2-4 unit vs small mu cap rates in Washington State

Seattle, Washington
Multi-Family and Apartment Investing
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Deal analysis, 2-4 unit vs small mu cap rates in Washington State

Jonathan Gordon
Investor · Bremerton, WA · Member since 2018 · 7 posts · 7 votes

Hi BP,

I live in the Silverdale-Bremeton area west of Seattle, and I just want to make sure my numbers are right when I do deal analysis.

When I run cap rates on 2-4 units selling in my area, they usually end up at around 4-5% assuming market rents in place (many are not even close). I factor close to 24% for maint, capex, and professional management.

When I do the same for small multifamily for sale or sold in the area (5-16 units), I get closer to 5-6% again with market rents that are far above current rents.

To get conventional financing, I am having to put down 35%+ to qualify with a small upside of at most 1% and next to no cashflow. Im betting everything on rent growth and appreciation. 

Am I missing anything? I am looking solely at the MLS and nothing that needs major repair or is a slumlord tier property.

It almost seems more convenient to buy a duplex or a pair of condos all cash but I know that limits my upside long term. 

~Jonathan

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Sherief Elbassuoni
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
4y

@Jonathan Gordon, you are not missing anything. We see the Cap rate numbers all the time. cap rate for 2-4 units are many times lower than 5+ units because the demand is higher

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  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    4y

    You are not missing anything. This is a reality in many markets right now. With rising interest rates, buying all cash can deliver a HIGHER return with less risk than buying real estate with leverage. Try it out on the calculators (you can use the calculators a few times for free (go to tools - rental property calculator). Run the report, and then make conservative assumptions around appreciation, rent growth, etc. 

    Then, toggle the slider for the down payment and/or interest rates. 

    You may find that adding leverage hurts the return, while adding tons of risk. Especially if interest rates get a little higher than where they are currently.

    If that's what your analysis tells you, trust it. That is definitely not limiting your upside long-term. Whenever you believe something different about appreciation/rent growth, you can always pull cash out and buy more.

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  • Patrick DruryBusiness Member
    Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
    4y

    @Jonathan Gordon
    If you're not able to invest locally or are not able to get the returns, you are looking for you should invest out of state. I would recommend looking in the Midwest. Columbus OH is a great place to start looking in the Midwest. It's a nice balance of cash flow and appreciation. Also, it has lots of job opportunities and population growth. I also live and invest locally here in Columbus.


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  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    Not missing anything. Seattle and around has been an appreciation play for some time. It extended into Bremerton some time ago as well! Leverage will stretch your investments further but you won’t have cash flow unless you look very very hard and probably buy something that needs a renovation

    0Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    4y

    I would agree.

    I found the 2-4 units sapce is more competitive then 5-10 units and therefore cap rates are lower. The competition is due to lower overall price points therefore lower downpayment required, conventional lending is available, and house hackers love them.

    the Seattle area has been more of an equity play in the short & long term than cash flow. Long term 3-5 years the market has been quite generous with YOY rent increases factoring out the COVID restrictions of course.

    1Reply
  • Jess Haas
    Realtor · Seattle, WA · Member since 2019 · 117 posts · 165 votes
    4y

    Trust your numbers. If it gives you 5-6% cap rate, trust it. Don’t force a deal to happen that isn’t there. In general Turkey properties have lower cap rates. If it’s a good deal on the market any investor would see it and add it to their portfolio. The distressed and dilapidated houses are a good target for you if you want to have higher cash flow and better cap rates. There’s more risk with fixing it up but the value add is what will boost your numbers significantly. Are you looking to v live in one of the units?

    1Reply
  • Sherief Elbassuoni
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    4y

    @Jonathan Gordon, you are not missing anything. We see the Cap rate numbers all the time. cap rate for 2-4 units are many times lower than 5+ units because the demand is higher

    4Reply
  • Jonathan Gordon
    OP
    Investor · Bremerton, WA · Member since 2018 · 7 posts · 7 votes
    4y

    @Jess Haas 

    I do not plan on living in one of the units. Yes, it is not distressed so I know the risk is lower 

    @Julien Jeannot @Sherief Elbassuoni

    The frustration Im having is that Small multifamily is really not much more profitable than 2-4 units. 

    I am doing a walk through on a 11 unit property with a current cap rate of 5% today that I believe I can bump up to 6% with  market rents. 

    Or I could buy a duplex with larger units in a nicer area for maybe 4.5% Cap and self-manage two bigger units for extra income. 

    0Reply
  • Will KennerPro Member
    Rental Property Investor · Seattle · Member since 2018 · 134 posts · 100 votes
    4y

    @Jonathan Gordon As mentioned by others, the Puget Sound area continues to have compressed cap rates, and it's important to not "force" a deal that doesn't make sense to you. With current conditions, I wouldn't want a deal that is dependent on rent rates continuing as aggressively as they have been. Returning to the fundamentals of a property being valued based on current income generation, not projected, is a better metric. After running your numbers on a property, you can always adjust your offer price to give you the desired cap rate. If the seller doesn't like it, then move to the next. I run into the same issue all the time. On my last deal, I made an offer based on the cap rate that worked best for me - 6.5%. The asking price was just under a 5 cap. The seller accepted and I got a deal that I feel very comfortable with at current rents. If they continue to rise, fantastic. If they stay the same, no problem. If they soften, I have working room. 

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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    @Jonathan Gordon- if it helps - there are many lenders  allowing loans on 3-4 units  with  25% down 

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