Does 1% Rule apply to multifamily?

Question

Hey all!!  I am trying to analyze a few apartment complexes all around 24-36 units. My question(s) as you can see from above is "does the 1% rule apply when analyzing apartment buildings???" What are the main numbers you all look at when analyzing an apartment building? I know a lot of you can look at a deal and can tell if it's worth diving in deeper or not within seconds so what numbers are you able to see right away that help you do this?

Nathan Gesner · Answer

I agree with @Oren K. but would take it a step further and say you need to know your market and develop your own rule of thumb.

In my community, a "safe" investment rents for 0.7% of the purchase price. If I find one closer to 1% then I know it's worth diving into. In other markets, 1% may be very common and you want to look for 1.5% or even 2% before looking closer at a property.

You can start with the 1% rule just to get started. As you learn the market, you should adjust to better suit the reality of the market and your personal goals.

Sam Shueh · Answer

Cap Rate, cash flow. Trash these hypothetical dated models.

Seth Borman · Answer

I worked for a couple of guys that didn't want to pay more than $130,000/dr for Los Angeles MF. As a result we showed up to look at a property once and were introduced as "the guys that buy studios."

$/SF is actually a pretty good metric as it will give you some idea of the value add potential.

Seth Borman · Answer

Utilities are pretty consistent. As for rents... you would be crazy not to ask what the current rents are.

Omar Khan · Answer

@Tanya Smith I have to agree with @Oren K. and @Nathan G. (great reply). Rule of thumbs are very important in quickly screening deals (they are not 100% accurate) but understanding your market is essential.

For instance, in the B/C value-add MF space (100+ units) for my preferred markets (San Antonion, JAX and Tampa) I instinctively now know the range in which rents and opex/unit (by line-item) a building should be getting. That is based off my market research and local networking.

The simple rules of thumb are great but not always applicable. You're on the right path if you combine market knowledge and local insight (broker, property managers, lenders, investor).

Bjorn Ahlblad · Answer

The 1% rule is a ‘must have’ for me. It is a great time saver, and a reality check to see if the property will yield enough cash to account for vacancy, expenses, capex, carrying costs, PM etc. I invest strictly within an hours drive, so I have become pretty familiar with the local towns and neighborhoods. I look for is risk factors; neighborhood, vacancy rates, tenant class etc. as well as CF, hence the 1% rule, or above.

Oren K. · Answer

@Seth Borman - Not to be contrarian but rules of thumb (ROT) are a very efficient way of doing business. If it only takes 10 seconds vs 5 minutes you are saving ~97% ;).

More seriously,  I would challenge the 5 minutes assertion. It is not just the 5 minutes of data entry into Excel. In most offerings, the current rents are presented in the flyer / ad / posting. To get the next level of data (e.g. taxes, utilities, etc.) you often need to engage with the seller / agent which takes time; a lot more then 5 minutes.

ROT are used for all kinds of things in life. You will make mistakes at times with a ROT, like missing out on a potential deal, but people continue to use them because the find the trade-off worthwhile before they 'deep dive' on a property. A ROT should NOT be the only, final or even primary buying decision point but I do think it is useful as a starting point.

Happy investing,

Oren

Seth Borman · Answer

Rules of thumb are a very lazy way to do business.You can build a generic pro forma and plug every applicable number in, take five minutes, and come up with a reliable look at your future CoC, CoC including principal repayment, IRR, etc.

Build your pro forma to reflect the base case and then the pro forma case. That way you'll be able to judge the opportunity for value add.

Similarly, saying that 50% or more of your gross rents will go to expenses is simplistic at best. I've never seen higher than 60%, and typically when we did buy it was for properties that stabilized at 25% or so.

An example of this is water bills. Actual water bills ranged from $30 to $208/mo at purchase. Following renovations and work to reduce cost they stabilized at $25/mo, with a year worth of bills from hundreds of units to even out the sample size.

Larry Turowski · Answer

@Tanya Smith No, it does not.  With single families and 2-4 multis, there are just too many deals out there to analyze all of them in any detail--or maybe at all.  These rules of thumb help investors to quickly prioritize.  We are going to take our criteria that will include location, price, etc, to narrow it down first, then there are still too many so we narrow it down or at least prioritize with rules of thumb.  I'm going to look at a deal that rents at 2% purchase price before one that rents at 1%.  But if I have time, I'll eventually get to the one that is the 1% deal.

With apartment complexes, you are probably already going to have other ways to narrow down your list.  Maybe just number of units and location will give narrow it down where you can look at them all.  At that point you'll want to start looking at other things, like cap rates to prioritize which to analyze first.

Brett Goldsmith · Answer

Est. 50-70% of total gross rents collected yearly  vs potential purchase should give you an idea of if it's worth diving deeper into from a cash flow perspective. Also, generally I'm not trying to buy any properties unless if it's below fair market value (FMV) or if there's no value add oppurtuntiy.

Does 1% Rule apply to multifamily?

Most Popular Reply