Considering first multi-family - need advice

Multi-Family and Apartment Investing
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Considering first multi-family - need advice

Michael G.
Member since 2019 · 9 posts · 2 votes

I've been lurking on BiggerPockets for some time, but this is my first post. I have some real estate investment experience (two residential rental condos and one short term vacation rental) and am considering making the leap to multi-family. I have my eyes on a 12-unit townhome complex - all units currently under lease with gross rental income of about $36k/month. The building is relatively new, so I don't expect any significant maintenance expenses during the initial years. The thing I'm struggling with is the cash flow. If I'm able to line up interest-only financing, I think I'll see some modest cashflow (assuming I put 20% down) to the tune of $5k/month. But I can't figure out if that's good, bad, or somewhere in-between. The year 1 cash-on-cash ROI is 4.36% - is that the primary metric I should be looking at to measure the value of this investment? Are there other metrics I should be calculating as well? Thank you in advance - all advice is greatly appreciated.

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  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    @Michael G. that's a pretty low return. You should be looking to get at least 8-10% CoC.

    Also sounds like rents are $3k per unit? That’s pretty expensive and could be a problem to maintain if the market turns. Of course this all depends on the market they are located. 

    What's the purchase price and NOI? How does this compare to your short term rental?

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  • Michael G.
    OP
    Member since 2019 · 9 posts · 2 votes
    6y

    @Greg Dickerson, thank you for the reply. Yes, rents are about $3k/unit - this is in Denver, Colorado where rents (and property values) have increased significantly over the past 10 years. My target purchase price is around $7.0-$7.5M. NOI is around $350k. My condos are in a more suburban area of Denver - I get $2,900/month for one and $2,400/month for the other. I agree with you that my biggest risk is that the market turns bad and can't service the debt...

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  • Tj Hines
    Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    6y

    @Michael G. yes CoC metric is a good metric. The current CoC would be a little low for our standards. We like to be some where between 7-10% CoC return for the avg life of the investment. Is there any improvement for stronger cash flow?

    IRR is another metric and DSCR. The higher the DSCR the better. IRR at minimum we like to see 15%

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  • Michael G.
    OP
    Member since 2019 · 9 posts · 2 votes
    6y

    @Tj Hines Thank you - I think I made a mistake calculating the CoC. If I put 20% down, I think my CoC comes out to 8.3%. If I lower that to 10%, my CoC goes up to 12.8%. I will read more about DSCR as well - appreciate your feedback.

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  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    6y

    Did you calculate property management, capex(even though it's new), vacancy, etc? I've got a decent spreadsheet I can share for you to input your figures, etc.

    There is a 12 unit available now in Denver with better rents around your price range that I just saw on the market. I'd also speak with a lender as you might need more than 20% down. 

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  • Michael G.
    OP
    Member since 2019 · 9 posts · 2 votes
    6y

    @Matt M. - thank you, would be great if you can share your spreadsheet! After speaking with a couple lenders, I realize that there's no way I can swing the downpayment, nor is the NOI high enough to meet the minimum required DSCR given how much I'd need to borrow. I need to go back to the drawing board and look for something priced lower with a higher cap rate...

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