10-24 unit multifamily in Houston. Are 2% rents possible?

16 Replies

Fairly new investor here with some capital, coming from Houston. I'm interested in doing a deal for a multi-family property with up to $500,000 down. I listen to the BP Podcasts and it seems most on there are targeting high yield properties with 2%+ monthly rents. My question is, do deals like that exist in/around Houston? 

Where does one good for high yield plays in Houston?

@Mika Mayz

Hi Mika, James here, I personally feel like the 2

Percent rule is a bit overrated for the multifamily space. Multi family is all about increasing income and decreasing expenses as this directly influences property value.

Where this is not the case in traditional SFH. I wouldn't mind answering any other questions you have in regards to Houston.

Best

Hi @Mika Mayz

The multifamily game is a little bit more complex with the underwriting so looking for a 2% or 1% rule really doesn't apply.  I would recommend spending a few months reading and getting educated on multifamily.  

Browse around the forums here, as there are many great threads on the multifamily investing topics.  I would also recommend Joe Fairless's book Best Ever Apartment Syndication Book, as well as Dave Lindahl's books Multifamily Millions and Emerging Markets.

Feel free to DM me if you have any questions or just want to chat!

Originally posted by @Chase Louderback :

Hi @Mika Mayz

Browse around the forums here, as there are many great threads on the multifamily investing topics.  I would also recommend Joe Fairless's book Best Ever Apartment Syndication Book, as well as Dave Lindahl's books Multifamily Millions and Emerging Markets.

Thanks Chase, that's super helpful. I'll grab those books.

@Mika Mayz I would definitely get away from the 2% lens and start looking at things from a cap rate perspective. If you can find a 20 unit building in any non-war zone market that has a feasible management/stabilization plan and floats between a 13-15 cap go for it fast. lol.

@Mika Mayz 2% rule applies to residential investment. I means that if you are purchasing a property for $100K the monthly rent on it would be 2% ($2,000). 

Commercial properties compared by CAP rates. CAP rate is NOI / SalePrice. NOI is the income property produces after all the expenses taken out.

Originally posted by @Elliott Elkhoury :

@Mika Mayz I would definitely get away from the 2% lens and start looking at things from a cap rate perspective. If you can find a 20 unit building in any non-war zone market that has a feasible management/stabilization plan and floats between a 13-15 cap go for it fast. lol.

Thanks - what do you mean by war-zone. As in highly competitive markets? Curious if you consider major cities (Houston, Austin are examples) as too competitive to find deals in?

Originally posted by @Michael Dang :

Tons of capital searching for deals in Houston.  High yields are difficult to come by, but not saying it's impossible to find those value-add deals.  

Thanks - could you explain what do you mean by ‘value-add’ deals? 

@Mika Mayz I would seriously consider learning more about multi family investing if you have that sort of money to put to work. You'd be well served to invest passively in someone else's deal or pay for education before tackling a 24 unit. There are absolutely deals in the major cities of Texas and still are multi family deals but it's a different game than a SFH. Shoot me a pm if you have any questions.

Hi @Mika Mayz , I'm a newbie in this space as well but have spent probably >100 hours researching, reading, listening to BP, following the discussions boards and as mentioned by those more tenured many of those 2%, 50% etc. rules are not applicable in the MF space. You will need to be more granular in your due diligence. I'm reading Dave Lindahls books; Mulit-Family Millions and Emerging Markets. Finished MF Millions last week and now working on EM this week.  Always looking to trade thoughts, feel free to reach out. 

Originally posted by @Mika Mayz :
Originally posted by @Michael Dang:

Tons of capital searching for deals in Houston.  High yields are difficult to come by, but not saying it's impossible to find those value-add deals.  

Thanks - could you explain what do you mean by ‘value-add’ deals? 

Hey man, no offence meant but if you don't know the term 'value add' or 'war zone' or know what a CAP rate is, I would **NOT** suggest buying a property.


And this is coming from someone that normally tells people to just close their eyes and jump in.  Hell, I just dove in head first and it worked out. 

One thing I'll disagree with some of the others is it's totally fine to use some type of rule of thumb to quickly look at a properties performance vs another in the same submarket / class. I use the "x% rule" all the time. i.e., I'll never pay more than 100x rent (or 1% rule). Ever. It won't cash flow. And I never buy on CAP as you can make CAP look however you want. Also my CAP won't be your CAP anyway (what do you pay for insurance vs. me? Maybe I own cash and have none. What about property managment? I have a girl that manages a property along with 10 others so the cost is near zero. You might pay 10%).

IGNORE CAP!!!

2% is hard to find due to how much capital is chasing deals.  I've bought some but only because they were not doing well when I bought them.  i.e., I bought a $6m property that brought in about $90k/month (call it "1.5%").  A year later and I bring in $120k/month on the low end ("2%" now).

So yeah, it's possible.  But you have to know the market, know the brokers, now the owners.  That doesn't come easy.  You get that by calling and meeting people who are actually doing deals.  Getting yourself in front of them.  Showing / PROVING you're legit.  i.e., actually close on something.  Put together a "resume" of sorts to show why a broker should show you a listing.  Seems odd but that's what it takes.  There are 100000 buyers out there.  And brokers get called by tire kickers and wanna bes alll day long.  If you've never bought, and can't prove you ever will, they won't waste their time.

I have a 36 unit with about $23k rent roll (if full) in EaDo that I'd sell for $1.6m.  I could even seller finance it.   That's pretty close to 1.5x which is crazy inside the loop and in EaDo.  I can't share the address here as it's not the place, but it shows you the deals are out there.


Good luck!

@Mika Mayz There's good deals in every market. Whether you have access to those deals is a totally different question. Educate yourself on how to value a multifamily building because it won't be the same as a sfh. You can't use the BP calculators to work on this, it needs to be professionally underwritten to make sure you're not missing something. 

Let me know if you need any direction, always happy to help.

@Cody L. Rules of thumb, like you said, are great for a quick look. But if @Mika Mayz is going to really consider buying a property then understanding how to analyze a deal is pretty important. You definitely don't want to use the seller's cap, you want to collect their income and expense information + run your own pro-forma and cap rate analysis based on that info.

If you're buying commercial property (and Mika, yes 5+ units residential MFR is considered a commercial property) and will be using a commercial lender you better understand how the lender runs their numbers and calculates debt coverage ratio to qualify deals (or else you won't know what kind of property would even meet their criteria)

War Zones are neighborhoods that are so rough that crime/demographics influence your ability to collect income & operate within reasonable turnover/expenses limits (everyone has a different definition of this.) 

Cody's right, you've got a lot to learn before you could safely pull the trigger. I would surround yourself with some investors/brokers/property managers/contractors in the market you like, who focus on the type of asset you're targeting and learn the ropes from them.