Your minimum numbers per door? just curious....

21 Replies

Hello All, 

I am currently in the process of learning more about investing in multifamily properties, i currently have 5 single families, so i have no experience in them. I have been running the numbers locally on whats been on the market for sale this year and im just not seeing numbers that make sense. Currently i have been looking for a property that puts $200/door in my pocket, since that is what my single families net me currently and after running the numbers, im just not finding these prices... ive made 41 offers on multifamiles this year so far in 2018 with no luck yet, am i just asking for to unrealistic of a profit from these?

Example:

Duplex, listed recently for $249,000, 2 bed/2 bath/ 1 car garage

The property was in decent shape with 1 side already rented about $75 below market and one side vacant. The property was very clean, but extremely outdated except for the roof. The A/C on both sides were pre-2000 units, the inside had stick down vinyl square flooring, overall it was clean enough to rent out, just very dated. I figured at least a coat of paint at min to make rentable, or about 20k to bring both sides up to date partially... 

So i made an offer of $225k, because that put my cashflow at $408/month or $204/door... turned down..

So i made an offer of $230k, immediately was turned down.... property sat on market for 21 more days...

So on day 22, i made an offer of 235k, immediately was turned down... property sat on market for 4 more days before the agent called me asked me if i would go 244k, i told them i was firm at 235k, because that placed me at $140/door... next day the property went pending sale.... 

I am just a little confused how are people buying these properties and making any decent money out of the properties overpaying, i did my homework and the rent on the properties in the area was below this one already, because this was the only duplex in the area with a garage on each side, so justified it was worth a little more for the garage.....

@William Huston   The FL market as a whole is hot spot. it is only normal that in this Phase of the cycle it is hard to find good returns.

good on you for making 41 Offers! 

Most deals today don't do $200 net per door per month from day one. 

You also don't mention how long you owned these SFR, If you purchased them 5 years ago, and as you say, they bring you $200 today then your expectations don't make sense because you had time on your side to grow rents and reduce debt etc . maybe.

you will do good to get $80 at purchase and $100-$150 once reposition after 2- 3 years. 

Can I ask, how did you source the 41 deals you offered on? 

are they through On Market deals or what??

I woud expect a duplex to be priced to the market and comps, not based on cash flow or income. Is this an outlier or does it match comparable properties? 

$200 per door on a MF at least in my neck of the woods is far reaching. On the lower end (duplex and triplex) sales price is based on sales comps. The higher the number of units the more you are going to pay based on cap rate. On large MF you're paying for volume. You won't make as much per door as SFH but there are other positives.

@William Huston when you say $200 per door, is that assuming 25% down payment or something less? Just curious because down payment affects the cash flow.

I think most markets are experiencing compressed returns. Some investors have money and are looking to make strategic purchases, knowing values and rents will increase over time. 

It is great you have made so many offers, but that is a lot of offers to be turned down. It tells me you may be unicorn hunting. If you are serious about buying you need to either change our approach or change your expectations. Approach may be as simple as direct marketing or looking for off market deals. Expectations would be making your offers more in-line with current market.

The deal you gave in the example, you were willing to go to $235K and seller would do it at $244K, so $9K difference. You have made 41 offers this year, so lets divide the $9K by 41 and we get $219 per offer. What I am trying to demonstrate is the value of your time. There is lost opportunity cost, not only in your time but also time owning a property. 

I would rather overpay a little bit for a nice property in a great location, then hunt for some super deal on a so-so property. Over time I know the good location will work out better.

As a final thought, what is wrong with single family properties? More doors (more tenants) isn't the best solution for everyone.

Hi William,

I recommended revising your return goals from a cash flow per door to a ROI. Because $200 per door doesn't take into account how much money you are investing into the deal. For example, if you are cash flowing $400 on a $225,000 purchase, assuming a 25% down payment, the ROI is $4800 / $56,250 = 8.5%, which is realistic.

Also, I would consider creating a budget that is longer than 1 year and determine the average ROI.

@William Huston $200/door seems like an arbitrary #. Is there a reason behind this? Furthermore, for the properties you are mentioning, they are all going to be valued off comps and not income. In fact, most MFs are valued off comps regardless of how good or bad the income is. 

As @Theo Hicks has pointed out - focus on ROI and not on a $ amount. That normalizes your #s across various investing opportunities and gives you a true picture of how you're performing.

I have never once wasted time thinking of how much money I need to make per door. I have certain COC returns and overall ROI that get me excited to buy (no I am not elaborating). If I can't make the property work and fit those numbers I move on.

Originally posted by @Alvin Sylvain :
@Omar Khan So what do you expect a good ROI should be? If anyone would care to elaborate.

We're targeting low to mid-teens all in IRR (5 year holding period). Some richer folks I know are happy with high single digits. Everyone has different expectations and needs from their investments.

@William Huston , that was my hesitation to getting into Multifamily. My SFR are averaging $300 a door, so shouldn't my multifamily do the same?

Well they don't. Making $100 a door is good. It is true, like @Joe splitrock and @Theo Hicks the real words in Multifamily are Cash on cash, ROI, and IRR.

Our first deal was in Ohio, 101 units, $11,000,000 purchase price. B- in an A neighborhood. We needed more outside investors than we personally had for the syndication. Our piece of the deal is very small. We will be happy to make on our portion $19 a door, year 1. Total for deal is probably $150 a door, which is good.

When I changed my focus, I was able to move forward with my business partner. Here's how I look at it now (very simplistic).

If I own 1 SF rental that nets $300 a month, that's $3,600 a year.

If I own 1 MF rental of 5 doors that nets me $500 a month, that's $6,000 a year.

It really is a matter of scale. Both are 1 building, 1 roof, 1 management company.

Hope that helps.

@Alvin Sylvain I'm a new investor and only have one rental but for my future purchases I'm looking for at least 10% cash on cash return. I decided on 10% because buy and hold index fund investing in the US market you can expect about 7%. Figure I'm taking more risk buying property so I want a higher return. Of course I want a much higher return than that but if I can't get a minimum of 10% cash on cash return while leveraged then I won't even consider it.
Originally posted by @Stephen Brown :

@William Huston, that was my hesitation to getting into Multifamily. My SFR are averaging $300 a door, so shouldn't my multifamily do the same?

Well they don't. Making $100 a door is good. It is true, like @Joe splitrock and @Theo Hicks the real words in Multifamily are Cash on cash, ROI, and IRR.

Our first deal was in Ohio, 101 units, $11,000,000 purchase price. B- in an A neighborhood. We needed more outside investors than we personally had for the syndication. Our piece of the deal is very small. We will be happy to make on our portion $19 a door, year 1. Total for deal is probably $150 a door, which is good.

When I changed my focus, I was able to move forward with my business partner. Here's how I look at it now (very simplistic).

If I own 1 SF rental that nets $300 a month, that's $3,600 a year.

If I own 1 MF rental of 5 doors that nets me $500 a month, that's $6,000 a year.

It really is a matter of scale. Both are 1 building, 1 roof, 1 management company.

Hope that helps.

Thanks for sharing that, i was not thinking of it that way honestly, just was trying to figure out how people are switching to multifamilies and able to make more money on rentals... just was not making sense....

I guess i am expecting to much out of my rentals, just trying to buy into good deals for rentals.. not just buy into anything.. 

My question is this.. If you can buy SFH netting you $250/door cashflow for 200k, but most duplexs are around $100-125/door for 250-300k, why would i invest in the duplex over the SFH?

Originally posted by @William Huston :

Hello All, 

I am currently in the process of learning more about investing in multifamily properties, i currently have 5 single families, so i have no experience in them. I have been running the numbers locally on whats been on the market for sale this year and im just not seeing numbers that make sense. Currently i have been looking for a property that puts $200/door in my pocket, since that is what my single families net me currently and after running the numbers, im just not finding these prices... ive made 41 offers on multifamiles this year so far in 2018 with no luck yet, am i just asking for to unrealistic of a profit from these?

Example:

Duplex, listed recently for $249,000, 2 bed/2 bath/ 1 car garage

The property was in decent shape with 1 side already rented about $75 below market and one side vacant. The property was very clean, but extremely outdated except for the roof. The A/C on both sides were pre-2000 units, the inside had stick down vinyl square flooring, overall it was clean enough to rent out, just very dated. I figured at least a coat of paint at min to make rentable, or about 20k to bring both sides up to date partially... 

So i made an offer of $225k, because that put my cashflow at $408/month or $204/door... turned down..

So i made an offer of $230k, immediately was turned down.... property sat on market for 21 more days...

So on day 22, i made an offer of 235k, immediately was turned down... property sat on market for 4 more days before the agent called me asked me if i would go 244k, i told them i was firm at 235k, because that placed me at $140/door... next day the property went pending sale.... 

I am just a little confused how are people buying these properties and making any decent money out of the properties overpaying, i did my homework and the rent on the properties in the area was below this one already, because this was the only duplex in the area with a garage on each side, so justified it was worth a little more for the garage.....

 Duplexes are sold on emotion, not cash flow. Many people today are just looking to buy a duplex with 5% down or less, live in a unit and collect rent for the other side. 

@William Huston wow.. 41 offers, I believe you are a realtor so you draft and submit your own offers? what do you recommend for non-realtor investors to go about sending offers in different markets they target? is it wise to engage the listing agent directly to draft offers? (like done in SFRs)

@Stephen Brown 1 SF rental that nets $3,600 a year only requires $50k down payment on $200k value, whereas 1 MF rental of 5 doors that nets $6000 a year will require $150k down payment on $600k value. 

So, 3,600/50,000 = 7.2% vs 6,000/150,000 = 4% COC ... with such examples, why would one invest in the 5plex vs SFR?

@William Huston

Welcome to BP. 

SFR - Fourplexes are based bought and sold soley based upon market approach while 5 units and above are based upon income approach. Some investors disregard these rules and buy and sell using market conditions.

To be more specific as to your thread, Duplexes and even Triplexes don't generally genereate enough cash flow and I'd stay away from them. Start with Fourplexes at a minimum. That is what I did and it has worked for me. 

I have shared what I have learnt and experienced. 

Hope it helps.

@Hardik Patel @William Huston Not to sound like a politician, but I really didn't run the numbers out. I was just trying to explain why $100-$150 door is OK in a multifamily. The fact is my single family rentals cost me more per unit to manage than a multi. Plus when the single family has a vacancy, I am 100% vacant, when the multi has a vacancy it is partially vacant (5plex, 20%); so paying the mortgage is a bit easier. I currently own 10 SFR and plan on adding to that, but I do like multi's for their scale.

Also @William Huston, in your duplex example, I would buy the single family, though you still have a problem for management and vacancy.

I am usually dealing with 75 units and above, so I didn't take time to carefully calculate my numbers. Had I truly underwritten it I probably would have passed, unless there was a killer value add year 2. I like 8%-10% year one and 10%-14% COC year 2 through 5, with a 15-18% IRR.

I hope my initial recommendation on Multi Family has confused anyone.

Thats the issue im finding here local, im trying to buy within 1 hour from my home, so i can possibly self manage it, but im throwing in management numbers in the calculations to assure i have the room for it if i so choose. Most of the MF in my area lately have been selling with single digit CoC returns, just a little hard pressed to settle for such low returns. I could pay down one of my higher interest mortgage loans and nearly make equivalent returns...

I get the fact that when a SF goes vacant, that its 100% vacant, but the last 5 years the longest ive had a rental vacant for is 5 days, most of my properties i have a contract for a new renter the next day after they move out. 

Minimum cash flow targeted generally relates to what the bank (small commercial bank) has for debt service coverage ratio requirements. I do aim for about a 10% cash on cash but with the market so tight and evaluating over a ten year hold I typically focus on an IRR of 20%. I do have some leeway here typically too though as the buying agent, investor, and property management company owner, but also always like each deal to stand on its own for resale purposes.

With arbitrary numbers and also less evaluation on how rents change over time you are probably missing some deals. In theory you could call some of my recent purchases value adds but it’s much more buying under rented properties then properties requiring extensive rehab

@William Huston Monthly cash flow per door is a good rule of thumb but it’s not the end all. As pointed out by others there are other more important metrics such as COC return. One thing that stood out from your example is that when going from $225K offer to $235K your cash flow went from $408 to $280. That seems strange. If you put down 20% you only finance 8K more. At 5.5% for 15 years the payment would be $65.