Duplexes, Triplexes, and Quads are NOT Multifamily!!

Duplexes, Triplexes, and Quads are NOT Multifamily!!

Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes

Hi this is Swanny,

Please realize that single family, duplexes, triplexes and quads are valued based on Comparative Values or commonly known as Comps. You are at the mercy of comps when you buy, sell, or refinance these products. NOI and Cap rates have nothing to do with the valuation when you buy or sell either.

Now if you have a true apartment complex with 5 units or more, that is Multifamily. NOI, Cap Rates, etc... are ALL important when buying, selling or refinancing these products.

Hopefully, that helps a little for newbies that are asking these questions.  It is like comparing apples to oranges.  There is a world of difference between the two.

There is no comparison between the loan product on a 4 unit or less, fixed 30 year loan and 5 units or more Apartment loan 5+5 20 year amortization commercial loan and other variations.

On true Multifamily, every year, your lender needs to see your operating statement, tax returns, and demand you keep that DCR at 1.25 or higher and if not, need a plan to fix this problem. The bank's credit analyst watches carefully every year about tax time. Be very careful!!

Single family, on the other hand,  4 units or less is much less complicated, but you are at the TOTAL mercy of comps.  That is great when 4 units or less are rising across America like they are now.  However, when prices plummet, you are also at the mercy of comps too.  It is a double edged sword with single family.

There is a world of difference between single family (4units or less) and Multifamily (5 units or more). There are soooooooooo many many more differences, much more to list.  Maybe the rest of you that have apartment complexes (5 units or more) can add to my list.

If you don't know what you are doing, you can lose your you know what with true Multifamily. There are many land mines the u informed or inexperience could step on.  Although, the rewards on Apartment complexes are exponential if you know what you are doing!!!!

Swanny

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Rental Property Investor · Miami, FL · Member since 2015 · 179 posts · 292 votes
8y
Actually, anything at 2 units or more is a multifamily. It can’t be a single family home if you have 2 to 4 families living in separate apartments on the same building. If the idea is to clarify things for new investors I think we should not confuse things then. That being said, anything at 4 units or less is consider residential and anything at 5 units or more is considered commercial. Residential properties are valued according to comparables and commercial properties valued on NOI and CAP Rates. I agree with you on everything else. I just wanted to leave it clear and not cause confusion to new investors by calling a 4-plex a Single Family Property.
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  • Houston, TX · Member since 2018 · 37 posts · 8 votes
    8y
    So glad to come across this post. I recently posted on this topic and got an answer essentially saying that as long as you buy low enough for either a large or small MFH you should be ok. And so For small mfh you can offset enough of the risk of poor surrounding comps in a down market. It sounds like you feel the large mfh adds an added layer of protection in that you have more control over noi. Are you also saying you prefer them because if this reason?
  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Account Closed

    Thank you for your opinion and not including any factual information to back up that opinion.  I have 6 apartment complexes in a close proximity to each other and am raising the rents consistently.  Rents started at $600.00 18 months - 2 years ago and now those rents for new tenants looking for laces to rent pay $700.00 or higher.

    Swanny

  • Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
    8y
    Originally posted by @Michael Swan:

    Hi @Account Closed

    Thank you for your opinion and not including any factual information to back up that opinion.  I have 6 apartment complexes in a close proximity to each other and am raising the rents consistently.  Rents started at $600.00 18 months - 2 years ago and now those rents for new tenants looking for laces to rent pay $700.00 or higher.

    Swanny

    The market is the market.  Its dictated by housing supply/demand / economic indicators that all get into a wonderful stew to make the market.  Your rent levels are a component of the market but surely you are not controlling the market rents within your quoted area.  Do you think if the area got hit with massive layoffs, job loss etc, the market would have any consideration what you are wanting to charge? 

    I understand raising rents and value but think its foolish to think that you are controlling market rents.  Its not a big point but you look like your an experienced investor so the only reason i comment is because a lot of newer people read on here and this boldly stands out to me as being incorrect. 

  • Rental Property Investor · Bath, ME · Member since 2014 · 220 posts · 288 votes
    8y

    Hi @Michael Swan - You're certainly correct that there are important distinctions between a 1-4 unit residential property and a 5+ unit commercial property, especially in terms of financing and ownership structure.

    I think an important nuance though is that, while banks will look at comps when underwriting 2-4 unit properties, a lot of times these properties are being purchased by investors who, if they're doing it right, are looking at cash flow and the opportunity to increase it by reducing expenses and increasing rents - essentially the same value-add strategies you take to a 5+ building.  And while you may not be able to utilize a market cap rate to determine value added to a 1-4 unit building, I guarantee you that if you can increase cash flow, investors will pay more for it and appraisers will find the comps.

    You mention being at the mercy of comps with 1-4 unit properties.  A counter could be that 5+ is at the mercy of cap rates, which can go up just as fast as they've gone down if interest rates revert to the historical mean.  

    With respect to the newbies you reference, a 1-4 unit property could be a very good place to get their feet wet without having to take on interest rate risk.

    Mike

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    8y

    Good info. I used to tell peeps cap rates don't apply in the formal sense to less than 5 units. You can still calculate for it, it just has little purpose or not the best metric for predicting future profits. As Swanny said these are solely based on comps unless packaged from what I have seen. There is always exceptions and generally speaking. 

    As far as the market controls rents, yeah that is correct. Even if you owned every unit on the block, peeps will only pay what that location dictates or your vacancies would sky rocket if you went way above for example. 

    Good luck!

  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y

    Whoa- quite the thread this has turned into.  Swanny strikes again :)

    I would like to see new folks differentiate between a small plex and a commercial apt building when they ask about financing and whether to establish an LLC or not. Saying 'multifamily' or MFR is practically worthless, although most are asking about the small plex space.

    Save us from needing to outline every dumb scenario as we guess which one it is.  Small plex or commercial multifamily people????   Cheers!

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Account Closed,

    What about when commercial brokers are promoting a deal and listing market rents in a 6 block to 1 mile radius and they see my rents in those areas.  How about when the lender on my 34 unit deal sees the comp rents in the 6 block to one mile radius and sees my rents.  How about when a potential resident wants to move into this nice area and sees all my rents in that 6 blocks to one mile radius?   If they don't like my rents, they can check in 6 block to one mile radius and see the same thing, since I own 6 of those apartment complexes where they want to live.  What if the appraiser on this new deal wants to also check recent sales in that same area, in 2016 I am the sales and I paid $8,000 more per unit.  They will see that secondary valuation method of Comps, being my own comps.

    I am controlling a lot.  Plus, having complexes so close really helps with economies of scale too for landscaping, my PM etc...

    Swanny

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Steve Vaughan

    This thread has really morphed.   That was my original point.  Yes. You also explained it more clearly than I originally posted.  

    Go BP Nation!!

    Swanny

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi Mike,

    I open up my phone line every Mon, Thurs and Friday from 3:15-6:15 pm. Pacific Standard time.  I live in San Diego,  I have been availing myself  to any BP members that want to talk shop and I have been doing this every week since August when the BP podcast aired with me as a guest.  Most of the time after talking on the phone, figuring out their individual financial circumstances the advice has been to get some 1-4 unit properties under their belt and get that cash flow coming in.

    Don't get me wrong, 1-4 units residential is the path for most of us as we begin.

    I love this stuff!!

    Swanny

  • Rental Property Investor · Bath, ME · Member since 2014 · 220 posts · 288 votes
    8y

    That's awesome, and very generous!
  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Mike Roy,

    That offer is available to anyone on BP.  All I ask in return is for people to pay it forward and educate all they meet to become financially free!!!  What a great feeling for me to coach PE in my day job in San Diego and know that I don't need the job.  I just love teaching Softball and Parachute games for the little ones at my school.  You get an entirely different perspective when you go to work at your JOB and you don't have to do so!!!

    BP Nation Rules!!!

    Swanny

  • Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y

    @Michael Swan

    I agree with your points, but I tend to think anything more than a single family is a multifamily. If it fits multiple families (in separate units) it is a multifamily building..no?

  • Philadelphia, PA · Member since 2018 · 39 posts · 11 votes
    8y

    Loan Amounts $100k - $20 Million Example Rate rate ranges, LTV, DSCR, Term and Amortization

    Owner-User Properties: 4.5% - 8.875% 90% 1.25 3, 5, 7, 10, 15, 25 15, 20, 25 

    Apartment / Multifamily: 3.25% - 7.5% 85% 1.15 3, 5, 7, 10, 15, 35 25, 30, 35 

    Healthcare / Senior Housing: 3.75% - 7.76% 85% 1.20 5, 7, 10 , 35 20, 25, 30, 35 

    Condominium Conversions: 6.25% - 9.74% 80% 1.25 3, 5, 7, 10 % Only, 30 

    Retail: Anchored: 4.75% - 7.5% 80% 1.25 3, 5, 7, 10 20, 25, 30 

    Retail: Unanchored: 5.0% - 8.0% 75% 1.30 3, 5, 7, 10 20, 25, 30 

    Mobile Home Park: 5.0% - 8.5% 80% 1.20 3, 5, 7, 10 20, 25, 30 

    Office / Medical Bldg.: 4.5% - 8.25% 80% 1.30 3, 5, 7, 10 20, 25, 30 

    Industrial / Warehouse: 4.25% - 8.5% 80% 1.25 3, 5, 7, 10 20, 25, 30 

    Self - Storage: 4.5% - 7.50% 80% 1.30 3, 5, 7, 10 20, 25, 30 

    Gas Station / C-Store: 5.25% - 8.75% 80% 1.45 3, 5, 7, 10 20, 25 

    Mixed-Used / Special Purpose: 5.5% - 8.5% 80% 1.35 3, 5, 7, 10 10, 15, 20 

    Single Tenant,"NNN" 4.5% - 7.5% 80% 1.25 3, 5, 7, 10, 15, 25 10, 15, 20

    Hotel / Motel (full & limited): 5.15% - 8.75% 75% 1.40 3, 5, 7, 10, 15, 25 20, 25 

    Golf Course / Resort / Gaming: 5.5% - 9.5% 70% 1.40 3, 5, 7, 10, 15, 25 20, 25 

    Outlet Mall (Indoor & Outdoor): 5.15% - 7.5% 75% 1.40 3, 5, 7, 10, 15, 25 20, 25 

    Church / Synagogue: 5.92% - 8.5% 75% 1.25 3, 5, 7, 10, 15, 25 15 , 20 

    Land - Raw & Improved: 8.50% - 15.00% 65% N/A 1, 2, 3 % 

    Only Fix & Flip / Rehab (1-4) 9.00%-14.00% 65% ARV N/A 1-1.5 % 

    Only Construction 4.65% - 11.5% Adj. 90% N/A 2, 3, % 

    Only Bridge/Mezzanine Loans 6% - 12.5% Adj. 80% 1.10 1, 2, 3, 5 % 

    The range of pricing is subject to the relationship between DSCR, LTV, quality of real estate, & credit strength of the transaction. Rates and & terms are subject to change without notice.

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