Is the 1% rule useful in Multi Family analysis?

Question

As an investor looking to obtain my first multi family home, I have a couple questions pertaining to how I would go about analyzing MFH for a proper cash flow. I was recently listening to a podcast and heard that the multi family analysis is too complexed to just use the 1% rule. My question is for the investors of MFH,

How do you analyze you MFH for cash flow?

Do you seek 1%, 1.5%, or 2%?

What other factors do you account for in MFH that you can overlook on a SFR?

Do you find MFR to be harder to manage that SFR?

John Warren · Answer

@Terry Harris I don't think the 1% rule is of use as you scale up because small differences between properties start to add up. Also, multifamily expenses can be very different. For instance, in one building the tenants might pay all utilities, while in another the utilities might be master metered for the owner to pay. Depending on what size of deal you are looking at you can always buy a spread sheet. I find some of the spread sheets to work well if you get much over 10 units as the complexity starts to be there where it makes more sense to spend $100 to not have to recreate the wheel.

Ned Carey · Answer

@Terry Harris the quick answer is NO

I agree with everything @John Warren said. You didn't say what size range you are talking about. I am going to evaluate a two unit property pretty much like I would evaluate a 1 unit property. As you get over 4 units you need to consider not only how you would evaluate the property as an investment but also how a commercial lender will evaluate it.

Things that you might look at that you might not consider on a SFH are cap rate, Debt coverage ratio, various way to calculate ROI, and expense like snow and trash removal that you don't encounter on SFH.

You might want to check out eh commercial forum here to learn more about how to evaluate larger deals.