Good markets for multi-units

20 Replies

Hi Everyone! 

I'm researching where would be a good market for investing in a mid level ($1M to 1.5M) multi unit for the best return rates and stability. Ideally somewhere near Detroit, Los Angeles, or Charlotte NC, but I'm open to all suggestions and why.  LA is ridiculous right now and I'm 1031-ing money from an LA based property for this purchase. I've heard the "research triangle in NC is a good area?

We're also open to MHP's in this price range too, but from what I know loans are harder to get. We'll have approx $300K for a down.

There are some areas of Hartford that are pretty good investments. You have to be careful where, but there's a good tenant market in the right areas where you can see good cap rates in the west and south end.

Hi @Drew Cobb ,

The toughest part about the LA market is getting in.  Once you're in, the low cap rates work in your favor.......I'd be reluctant to leave!  I'm a property manager and agent specializing in small/medium apartments North Los Angeles.....happy to connect with you over coffee if you like. 

-Ethan

Originally posted by @Ethan Vegas :

Hi @Drew Cobb ,

The toughest part about the LA market is getting in.  Once you're in, the low cap rates work in your favor.......I'd be reluctant to leave!  I'm a property manager and agent specializing in small/medium apartments North Los Angeles.....happy to connect with you over coffee if you like. 

-Ethan

 Plus you're kissing your Prop 13 tax base away!  In some cases you'll need $10,000+ in profit each year out of state just to make up for that loss!

Those are 3 drastically different markets. Out of curiosity what criteria puts Los Angeles, Detroit and Charlotte on the same list?

As for the original question, my guess is you seek a combination of cash flow and appreciation. If so, I've heard good things about Texas - Houston to be more exact. Also, Charlotte was showing strong signs a few years back. Not sure of the current landscape.

Detroit is rebounding, but the metro area is so spread out that'd you really have to dive into the sub-markets. You may want to look into Ann Arbor. When I lived in Detroit, the only are that I felt comfortable holding multis in would have been Ann Arbor. But that was before I purchased a single property and I'm from Ohio, so who was I kidding, I was never going to buy a property there, lol.

Originally posted by @Ethan Vegas :

Hi @Drew Cobb ,

The toughest part about the LA market is getting in.  Once you're in, the low cap rates work in your favor.......I'd be reluctant to leave!  I'm a property manager and agent specializing in small/medium apartments North Los Angeles.....happy to connect with you over coffee if you like. 

-Ethan

Hi Ethan, pardon the noob question, but how do low cap rates work to your advantage? Is it just the increased value if you "back into" a valuation using NOI and prevailing market cap rates? Or is there some other advantage? Obviously, it makes valuation as a buyer difficult as it's hard to get a cash-flowing property 'round these parts estimating value using a 3% cap rate. As you said, the toughest part is getting in...

Great question @David Tipton ,

For the same incremental improvement in NOI, you get a much higher increase in equity in a low Cap environment vs a high cap environment.

For example, a $50k NOI increase in a 3% area (Beverly Hills?) will yield an increase in value of $1.6MM vs a value yield of $300k for the same $50k NOI increase in a 15% Cap area (San Bernardino?).

Cap rate is essentially a measure of risk/reward & supply/demand.  If you own property in highly desired areas (demand) with low risk, supply is likely limited and investors are willing to pay a higher price for the same amount of return (reward). If your building is in a D neighborhood with high risk, there is likely to be a glut of available property and investors will pay less for the same relative return. 

Being an active property manager, I'm always managing to improve NOI even if only by small margins at a time. Being a landlord/manager means that small choices (good or bad) have large implications. The lower a Cap rate is, the more dramatic the implications.

Assuming that capital is not an issue (which of course it always is), the greatest increases in appreciation can be had with mismanaged buildings (NOI that can be easily improved) in high Cap Rate areas.

Hopefully this helps....

Originally posted by @Ethan Vegas :

Great question @David Tipton,

For the same incremental improvement in NOI, you get a much higher increase in equity in a low Cap environment vs a high cap environment.

For example, a $50k NOI increase in a 3% area (Beverly Hills?) will yield an increase in value of $1.6MM vs a value yield of $300k for the same $50k NOI increase in a 15% Cap area (San Bernardino?).

Cap rate is essentially a measure of risk/reward & supply/demand.  If you own property in highly desired areas (demand) with low risk, supply is likely limited and investors are willing to pay a higher price for the same amount of return (reward). If your building is in a D neighborhood with high risk, there is likely to be a glut of available property and investors will pay less for the same relative return. 

Being an active property manager, I'm always managing to improve NOI even if only by small margins at a time. Being a landlord/manager means that small choices (good or bad) have large implications. The lower a Cap rate is, the more dramatic the implications.

Assuming that capital is not an issue (which of course it always is), the greatest increases in appreciation can be had with mismanaged buildings (NOI that can be easily improved) in high Cap Rate areas.

Hopefully this helps....

Thank you for the detailed response. That makes complete sense. The low cap rate essentially acts as a multiplier to value with increases in NOI. Never thought of it as an advantage before, but like you say if you can find ways to improve performance it has a treble effect on value.

Hey guys, appreciate all the input. I have to get ready to fly to Atlanta early in the AM, but I'll have my laptop and some time to respond more thoroughly once I get there.

But, the reason for those 3 diverse markets: My partner, who also is a property manager is in Southfeild, and manages and owns several hundred SFD's so Michigan makes probably the most sense. But a side note, we're both kinda over the hassles that come with Detroit real estate from top to bottom. LA, because I'm out here and I'm lead on this project, and Charlotte/Raleigh because I have brother who would be our potential manger who lives out there, and if it made financial sense. And if it is somewhere else I want it to be a place I like visiting. But that's the least priority on the list.  :)

After investing both in and out of LA I've concluded that I will stick with 80% of my holdings local.

Looking at basic numbers- grm, cap it looks good on paper to invest out of state...but there are so many other variables.

I guess you are finding a bit of a common ground since at least you have family in that area so you would have a reason to visit.

I'd still recommend most LA investors to local -- find a fixer upper, lower socioeconomic area within the city limits, or property just outside your immediate area, or sub-markets within your area because there are so many withing an hour drive of us.

@Ethan Vegas I agree about the lower cap rates in la. that's how you can accumulate massive wealth when you resell or refi a value-ad property. The way Ethan is describing building value through CAP rates and NOI is like the banks and they are the one's who will ultimately value the property with the loan amount they give.

I used to get fed up with LA real estate and my conclusion was to invest out of state... but there's a lot of up and coming area's withing LA County that are gentrifying as well as surrounding markets like the inland empire.  It's funny that we think we need to go to vastly cross country markets when there are so many sub markets withing southern california that are already vastly different from LA.

Either way everyone has different strategies so you gotta find your own... just might have to find out the hard way

Originally posted by @Will F. :

After investing both in and out of LA I've concluded that I will stick with 80% of my holdings local.

Looking at basic numbers- grm, cap it looks good on paper to invest out of state...but there are so many other variables.

I used to get fed up with LA real estate and my conclusion was to invest out of state... but there's a lot of up and coming area's withing LA County that are gentrifying as well as surrounding markets like the inland empire.  It's funny that we think we need to go to vastly cross country markets when there are so many sub markets withing southern california that are already vastly different from LA.

Either way everyone has different strategies so you gotta find your own... just might have to find out the hard way

 I've preached it a 1000 times - out of state investing is for people too lazy to do the work locally. There are so many great deals to be found right here, but people see the price tag on the real estate agent listed home and decide to make the horrible decision to buy some midwest, non-appreciating junk because they think $30K-$50K is a bargain.

Originally posted by @Ethan Vegas :

Great question @David Tipton ,

For the same incremental improvement in NOI, you get a much higher increase in equity in a low Cap environment vs a high cap environment.

For example, a $50k NOI increase in a 3% area (Beverly Hills?) will yield an increase in value of $1.6MM vs a value yield of $300k for the same $50k NOI increase in a 15% Cap area (San Bernardino?).

Cap rate is essentially a measure of risk/reward & supply/demand.  If you own property in highly desired areas (demand) with low risk, supply is likely limited and investors are willing to pay a higher price for the same amount of return (reward). If your building is in a D neighborhood with high risk, there is likely to be a glut of available property and investors will pay less for the same relative return. 

Being an active property manager, I'm always managing to improve NOI even if only by small margins at a time. Being a landlord/manager means that small choices (good or bad) have large implications. The lower a Cap rate is, the more dramatic the implications.

Assuming that capital is not an issue (which of course it always is), the greatest increases in appreciation can be had with mismanaged buildings (NOI that can be easily improved) in high Cap Rate areas.

Hopefully this helps....

So really you mean decreasing NOI or increasing revenue by decreasing vacancy, maintenance, man hours etc, increasing rent, adding extra units or increasing the value of units? What are other ways to optimize NOI?

I'm in the Bay Area so defenitely low cap rates, a few people have mentioned finding fixer uppers and trying to improve value but it's still such an expensive market to get into. I suppose if I could add an extra unit to a property that would greatly increase the value and NOI.

Thanks for the explanation.

Originally posted by @Bob Bowling:
Originally posted by @Ethan Vegas:

Hi @Drew Cobb,

The toughest part about the LA market is getting in.  Once you're in, the low cap rates work in your favor.......I'd be reluctant to leave!  I'm a property manager and agent specializing in small/medium apartments North Los Angeles.....happy to connect with you over coffee if you like. 

-Ethan

 Plus you're kissing your Prop 13 tax base away!  In some cases you'll need $10,000+ in profit each year out of state just to make up for that loss!

 I realize. However I have a situation with my loan and I'm going from having a $700 per month positive to a $300 monthly negative. Tho my tenants are willing to renegotiate to stay. My prop 13 tax base is ridiculous…

Problem is I haven't showed any income in the past couple years so even tho I have assets , they won't refinance. 

@David Affonso

Finding ways to increase NOI is the creative part of property management, like solving a puzzle. It will be different in different locations, asset classes, economic levels, etc. There are the obvious ones like optimizing your rent levels and tenant base to reduce vacancy. But consider other options like installing coin laundry, building storage sheds onsite (or charging for existing storage), charging premiums for choice apartments (not a flat rent for all).....the options are endless! The two questions that feed into more profit are "How do I increase the value to a tenant" (increase revenue through higher rents) and "How do streamline expenses wherever possible". Easy questions with many answers.....