Hawthorne , CA · Member since 2015 · 34 posts · 11 votes
Hello everyone, I'm sort of new in buying multi-unit properties. My client is looking to widen his portfolio in real estate and love the idea of multi-unit, considering that he will just rent out the units and not stay on the property. He not necessarily concerned with a huge return on rent, as long as the rents are covering the mortgage. With that being said, what should I be looking for when searching the MLS? I've noticed a few in the south bay, but want to make sure the deal is good before we submit any offers.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
50% rule has always seemed reasonable to me as a first cut.
You as his realtor should be doing a normal CMA for him, and a rent CMA for properties, as well as asking for what the units currently rent for when you ask for the seller disclosures. You also need to know about rent control laws in the areas you're checking out for him.
You want this property to be a huge money making success for your client, because then he will get the "Real Estate Bug" and come back to you to purchase future homes. This isn't one where you think of selling a home, this is one where you think of setting your client up for as much financial success as possible and truly adding value to his life. That very well might mean you tell him "bad idea" on the first 3 homes he wants to write offers for $X on - tell him to either not write the offer, or to write the offer for much less than his $X. These investor types are huge freaking money makers for you, **if you help them make money** in turn.
For owner occupied FTHBs, you nudge your clients to make higher, more 'serious' offers. For these guys, it would be OK if you wore your wrist out from making so many vaguely lowball just to see if any stick. Don't get stupid with it, but find the balance.
Investors are about 5x as much work for you per closed transaction, if you're doing it right. But they pay better in the long run, so this is opportunity knocking.
You aren't selling a home, you're playing kingmaker and setting your client up for an empire.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10y
The answer is not a forum post it is more like a book or a week long course.
First of all if he is just covering the mortgage with rents he has strong negative cash flow every month. There are many many expenses that new investors don't consider when evaluating a deal.
Expenses OTHER THAN the principal and interest and generally 50% of gross rent (crude rule of thumb) in larger multi family building sit can be even higher. What size buildings are we talking about 2-4 units, 5-20, 80+units?
Search here for how to evaluate deals. Check under the education tab and the Tools tab.Two terms you should be familiar with for Multi Family buildings are "Cap Rate" and "Gross rent multiplier". Both are crude tools but can be used to screen deals.
.Two terms you should be familiar with for Multi Family buildings are "Cap Rate" and "Gross rent multiplier". Both are crude tools but can be used to screen deals.
Cap rates do not screen deals. Actually GRM's don't screen deals. Neither screen deals. Maybe you are thinking about MAO's.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
50% rule has always seemed reasonable to me as a first cut.
You as his realtor should be doing a normal CMA for him, and a rent CMA for properties, as well as asking for what the units currently rent for when you ask for the seller disclosures. You also need to know about rent control laws in the areas you're checking out for him.
You want this property to be a huge money making success for your client, because then he will get the "Real Estate Bug" and come back to you to purchase future homes. This isn't one where you think of selling a home, this is one where you think of setting your client up for as much financial success as possible and truly adding value to his life. That very well might mean you tell him "bad idea" on the first 3 homes he wants to write offers for $X on - tell him to either not write the offer, or to write the offer for much less than his $X. These investor types are huge freaking money makers for you, **if you help them make money** in turn.
For owner occupied FTHBs, you nudge your clients to make higher, more 'serious' offers. For these guys, it would be OK if you wore your wrist out from making so many vaguely lowball just to see if any stick. Don't get stupid with it, but find the balance.
Investors are about 5x as much work for you per closed transaction, if you're doing it right. But they pay better in the long run, so this is opportunity knocking.
You aren't selling a home, you're playing kingmaker and setting your client up for an empire.
Thank you Ned, he is interested in 2-4 units. This is a first time multi-unit, any books that you would recommend for multi-unit?
I liked Multi Family Millions by Dave Lyndahl. It is not going to go into analyzing the numbers very much but it is a worthwhile read. More of a guru course but an excellent resource is Ray Alcorn's "Dealmakers Guide" That one will set you back about $500 but the material is excellent. the ultimate in evaluating commercial properties is the CCIM designation witch is a series of very in depth courses
.Two terms you should be familiar with for Multi Family buildings are "Cap Rate" and "Gross rent multiplier". Both are crude tools but can be used to screen deals.
Cap rates do not screen deals. Actually GRM's don't screen deals. Neither screen deals. Maybe you are thinking about MAO's.
So are you suggesting he Shouldn't get familiar with the term "cap rates?"
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
> Most of parts of California will give you a negative cash flow.
I'm going to have to disagree with you. Plenty of folks I work with have cash flow positive empires spread throughout the bay area. Potential owner occupants not being able to afford the down payments means they can't purchase and thus stay tenants, driving rents up faster than sales prices in several cities.
I've got one dude that's been living in a rent-controlled apartment in SF for 15 years that has a half dozen rental properties throughout the east bay in cities that do not have rent control, that are all cash flow positive. (Evil Genius status on that rent control v no rent control setup is like 7 out of 10)
Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
10y
Let me assist some of the folks here.
1. Most most local markets in California will give you a 4-6% cap rates, if you are cap rate is less than 8%, it will be very hard to generate any cash flow from the property unless your LTV is over 30%.
2. If GRM is over 8, it will generate negative cash flow. According my research, cities like Los Angeles, San Francisco, San Diego, Orange County, etc has GRM of 10 and above.
San Diego, CA · Member since 2014 · 78 posts · 10 votes
10y
I follow plenty of investors here in southern California who are still able to cash flow with GRM over 8. I'm interested to hear which markets you are able to get below 8?
Ottawa, Ontario · Member since 2015 · 30 posts · 5 votes
10y
I just got another email from my lead that was generated from posting an ad on Kijiji for buying fixer uppers as part of the action steps outlined in a webinar hosted by Brandon. They informed me that he also has an 11 unit building for sale generating 6 figures a year. I too would need guidance and things to be aware of.
It tries to claim that cap rates predict profitability and that "cash flow" is profit. Wrong on both counts! How uninformed to say you are becoming LESS PROFITABLE when your property appreciates several hundred thousand dollars but your NOI remains the same and the selling cap rate would be lower!
@Ned Carey, can you or ANYONE explain how a cap rate can screen properties or predict profitability?
A few things to consider in addition when making an investment purchase. Has your client been pre-qualified yet for a mortgage? Getting pre-qualified first can give you an indication what the mortgage is going to be and then you can compare to the current rents that the property is getting. With real estate in CA you also have to take into consideration, market value, as it seems that for the past several years value has been going up greatly. They are going to have to come up with not only the money for down payment, but also cash reserves for conventional financing, on all property he owns, including 6 months reserves for the subject property. I just wanted to mention that also high cost area financing is only available for primary residence. Every lender has their own guidelines and overlays, but here is just some basic info.
Here is some info on financing as well.
For A Fixed Rate Purchase, Investment properties, Mortgages 1-4;
A SFR requires a LTV of 85%
A MFR requires a LTV of 75%
A minimum credit score of 620
For A Fixed Rate Purchase, Investment properties, Mortgages 5-10;
A SFR requires a LTV of 75%
A MFR requires a LTV of 70%
Minimum credit score of 720
Here are some answers to FAQ as well;
1. For all 1- to 4-unit investment property transactions, cash reserves equal to six (6) months PITI for the subject property are required.
Cash Reserves Required For Other Properties Owned by Investor;
If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home
If the borrower has 5-10 mortgages, An additional six (6) months for every other investment property and second home.
2. Gift funds are not allowed on Investment property transactions.
3. Escrows for taxes and insurance are required unless otherwise approved by the underwriter.
4. Loans for investment properties are not eligible if the transaction includes non-arm’s length and/or at-interest characteristics
5. Investment property transactions cannot close in trust.
6. Maximum 2% sellers concessions is allowed!!
Maximum loan amounts for areas that are not considered high cost are; (high cost area financing applies to primary residence only)
1 unit - $417,000
2 unit - $533,850
3 unit - $645,300
4 unit - $801,950
Fannie Mae/Freddie Mac High Cost area limits are the same as FHA for 2015. VA is the same as FHA for 2015.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Myles Allen I am (and continue) to buy small multis here locally. As someone else mentioned, your question is more of a book topic.
To give you one specific data point that I hope will be helpful, in short, if I was your client and you found me a small multi with a current GRM of 12 (that I could get closer to 10 with some improvements/mgmt), and in a local neighborhood with "will always be a renter" residents, and a few other attributes I favor, I'll buy it, throw off 5% free CoC return, and a 5 year IRR around 15.
There's an insane number of variables that go into me having these specific requirements, but this is the best optimization I've done for my lifestyle, situation, personality, and risk appetite. I'm sure your client will differ in one or more ways.
@Ned Carey, can you or ANYONE explain how a cap rate can screen properties or predict profitability?
I don't need to, the link you provided does it fine.
No one has said that. That scenario also assumes further cap rate compression. Not a good bet long run when we are at historically low cap rates now.
Can you point out where the link describes HOW cap rates predict profitability or screening ability? Or just articulate in your own words. I do not see it anywhere.
As to the other point look at the example for Stephan. Bought for $900,000 and has appreciated to $2,000,000 but he has a less favorable CAP RATE. Boo FN hoo for Stephens $1,100,000 gain. Seriously? Can you comment on that?
Real Estate Broker · Tampa, FL · Member since 2015 · 70 posts · 35 votes
10y
@Ned Carey thanks for recommending DealMakers Guide. It looks like many other people on BP have used it, as well. I went to his site and it looks like it hasn't been updated since 2012-2013. Do you know of any new investors that have used it recently and found it useful? I want to make sure it's up-to-date before I make a purchase.
There are plenty of markets where you could get GRM below 8. For instance, Milwaukee, Wisconsin, South & West Side of Chicago, IL, Indianapolis and the list goes on.
Regarding some of the investors enjoying cash flow, they must have either all cash or much higher than 30% LTV.
In addition, it's good to know that cap rate with financing will give you a different return than cap rate without financing.
It's a better idea to shoot for IRR.
What I have mentioned so far are simple "GUIDELINES". Each must deal must be analyzed.
There are plenty of markets where you could get GRM below 8. For instance, Milwaukee, Wisconsin, South & West Side of Chicago, IL, Indianapolis and the list goes on.
Regarding some of the investors enjoying cash flow, they must have either all cash or much higher than 30% LTV.
In addition, it's good to know that cap rate with financing will give you a different return than cap rate without financing.
It's a better idea to shoot for IRR.
What I have mentioned so far are simple "GUIDELINES". Each must deal must be analyzed.
Hope it helps.
PLEASE show the calculations to get a cap rate WITH financing.