1st Multi Family Purchase

5 Replies

Hi guys i just got Approved for 530,000 to purchase my 1st Multi Fam in the Phoenix AZ area. I'll be using the FHA loan to get it done. My lender covers Appraisal and Closing Costs. Im meeting with my Realtor who specializes in Multi Fam full time to go check some Apt out. Question, should i chase Cash Flow or Cap Gains if i had to choose? Would it be better to maximize on the opportunity for 4 units as opposed to the 2 or 3 if i'm just starting out? Do i require a CPA to thoroughly look over the financial numbers before i buy? And anything outside of a general property inspection that i should check?...... My own thoughts are; max out on 4, must cash flow cap gains are speculations not concrete like cash flow. (i don't have a lot of money to hope for cap gains i feel) Property inspection, of-course inspect the place myself. Use my agent and CPA for backup.

@Larry Fullard  location aside cash flow is King. Equity and appreciation will not pay the debt service. 

NOI determines values and increasing the NOI is how you increase values so you are correct in focusing on income and cash flow.

You should have your attorney draft the contract or at least review it. If you are using a PM have them help you with due diligence items. You want to have a professional Do the inspection of the property, you need to audit all of the existing financials including tax returns and P&L, you need to audit all the leases and you should get a survey especially if there are any fences or potential encroachments.

Running the numbers is pretty straightforward especially on a small property it’s gross income minus all expenses. If you feel unsure in that area then it never hurts to have your CPA look over your numbers. 

@Larry Fullard

Congrats on getting pre-qualified, very important step to start REI.

In regards to the discussion of Cashflow vs Appreciation, the real answer is that having both is the key to success. That rings even more true when your dealing with <5 units given the valuation determinants used by your lender. 

Cashflow is incredibly important to pay the bills. You want to find a deal that throws off enough $$ to cover your debt, insurance, taxes, repairs, management. This is important because you want the property to pay for its self and also net you a return on your investment. When you underwrite you'll probably apply some conservative %s to account for these expenses and come out with what you estimate will be your monthly cashflow. In reality your monthly expenses may fluctuate considerably (especially if you find a good value-add deal) and your returns will not be a smooth as predicted, especially for the first few years.

This is why finding a deal with appreciation prospects is important as well. Cashflow pays the bills and is a prerequisite with REI, but appreciation is what will make you wealthy. In the small multifamily space (1-4 units) this is even more important because the ideal loan package with the lowest interest rates and longest terms will be a simple residential loan. The valuation on the underlying property for these loan packages are based solely on comps with little consideration for the cashflow the property is earning. If you plan to refinance or sell the property you are subject to the economics of your location at the time. So you'll want to find a deal that will increase your equity during the time you own it.

Regarding inspections, definitely insist on an inspection clause in the contract to buy the property.

Regarding underwriting, not sure how much your CPA will charge you to underwrite the deal on your behalf, but you are better off learning this skill on your own for two reasons:

1. As an investor, you have to be confident in knowing what is or isn't a good deal for you. The best way to gain that confidence is learning how and practicing underwriting as many deals as you can. 

2. Even though your CPA is paid to have your best interests in mind, it's still you that has to sign the loan and manage the deal, so you should take the reigns on underwriting responsibilities.

I would suggest reading some of the many books out there that teach you how to underwrite, many of which are published by BP

@greg 

@Greg Dickerson If the property isn't cash flowing while i'm living in one unit, but immediately give me cash flow after i move out, is it fair to say it's a good deal? Considering i'm in a B class neighborhood, there is a lot of growth still happening, and there is upside with slight renovations to make more on NOI?

Originally posted by @Larry Fullard :

@greg 

@Greg Dickerson If the property isn't cash flowing while i'm living in one unit, but immediately give me cash flow after i move out, is it fair to say it's a good deal? Considering i'm in a B class neighborhood, there is a lot of growth still happening, and there is upside with slight renovations to make more on NOI?

It all depends on your return requirements. If you are happy with the deal that’s all that matters.