Buying under 20 unit locations

[Bill Vaughan]

My family owns a 12 plex in the dfw area and is looking to slowly add to our portfolio. We are interested in heavy value add in gentrifying areas. Is dfw good for that   What about ok or Ohio?  What kind of pro forma caps are you seeing on the distressed inventory on the small deals. 

[Victor Patel]

I’d look at DFW, OK, and Ohio, but I wouldn’t choose the market based on cap rate alone. For heavy value-add, the basis and the neighborhood trajectory are more important than the going-in cap.

DFW can offer plenty of opportunity, but there’s also a lot of competition and you really have to be selective about the submarket. Oklahoma and Ohio can be interesting for smaller deals because the acquisition basis is often much lower, which can create more room for a true value-add strategy.

On distressed small multifamily, I’d be cautious about quoting a blanket pro forma cap. The numbers can look great on paper, but taxes, insurance, deferred maintenance, and the actual achievable rents can completely change the deal.

I'd underwrite the stabilized NOI very conservatively and then work backward from the price. The best deals aren't necessarily the ones with the highest pro forma cap—they're the ones where you have multiple ways to create value and a reasonable exit even if the market doesn't cooperate.

With a 12-unit already under your belt, I’d focus on finding a repeatable niche in one or two submarkets rather than chasing the hottest market.