Where is your favorite area to buy a cash-flowing 3-4 units?

19 Replies

Hello BP - 

I'm doing a 1031 exchange where I'm going to sell my under-performing properties in Chicago and Ogden to trade for a better cash flowing properties. These properties have appreciated, but are not cash flowing at the moment.  

Where is your favorite place to buy a cash-flowing 3-4 unit properties for $500-$600k range?  I'm going to be putting down about $250K so the loan will be $250-$350k  and P&I will be between $1270~$1773 at 4.5% 30YF.  

I've been looking at a couple different areas - Denver, Salt Lake City, and Provo because they have low taxes, growth in population and jobs, and somewhat business friendly laws.  It was not easy to find properties that had close to 1% price-to-rent ratio.  For $500K property, I'd like to see gross monthly rent of about $5,000.  

With the current state of the market, is it really hard to find properties with monthly rent that is 1% of the PP?

What city do you think I have the best chance of finding these properties(that's not in class D/F neighborhood)?  

Thanks in advance!

@Ki Lee You're a unicorn If you have any debt and you're hitting 1% in Provo - 1% in Provo is not a realistic expectation - SFR or multi. Even back in the early 2010's, if you were getting 1% you were the exception - there are people who are doing it, but the majority of those owners have no debt and/or have owned the property for decades. We're an appreciation market right now (been that way for a very long time) and even janky old dumps are getting premium prices.

Ki,

Just finding a 4-plex in Denver for $150,000/door is going to be a tough time. Right now in Denver, investors are getting much higher prices for smaller multi-family properties. Rents are growing, but we are pretty much at peak market here. 

Ki,

Check out Chattanooga, TN. Amazon has a presence here, and Volkswagen is investing heavily in the area as well. Investors are finding that Chattanooga cash flows, but the 3/4 unit MFH might be hard to come by without building one from the ground up or converting something. 

Originally posted by @Ki Lee :

Hello BP - 

I'm doing a 1031 exchange where I'm going to sell my under-performing properties in Chicago and Ogden to trade for a better cash flowing properties. These properties have appreciated, but are not cash flowing at the moment.  

Where is your favorite place to buy a cash-flowing 3-4 unit properties for $500-$600k range?  I'm going to be putting down about $250K so the loan will be $250-$350k  and P&I will be between $1270~$1773 at 4.5% 30YF.  

I've been looking at a couple different areas - Denver, Salt Lake City, and Provo because they have low taxes, growth in population and jobs, and somewhat business friendly laws.  It was not easy to find properties that had close to 1% price-to-rent ratio.  For $500K property, I'd like to see gross monthly rent of about $5,000.  

With the current state of the market, is it really hard to find properties with monthly rent that is 1% of the PP?

What city do you think I have the best chance of finding these properties(that's not in class D/F neighborhood)?  

Thanks in advance!

 Ki, if you’re putting that much down, you should target larger multifamily. Same amount of work, but more cash flow! 

Originally posted by @Ki Lee :

Thanks you for the responses.

@Justin Hammond @Jeremy Miller @Blair Poelman what is your current strategy for buy-and-hold then with all the property prices inflated?  Is it to look in other markets? If so, where? Or Settle for less rent than what will cashflow? Look for other avenues besides 3-4 plex?  

 I'm a multi-family broker in Denver, so we see off market listings to take advantage of, but that is in very specific potential neighborhoods. Colorado Springs and Greeley still have room to move for rents and value add options. Out of the state I've tracked properties in Phoenix and Albuquerque. Cheers. 

@Ki Lee There are a few properties in North West Florida where Hurricane Michael hit that could meet the 1% rule. A few of them are less than what you want to spend. As far as the neighborhood goes- the area is in transition. There is a serious need for affordable housing and many of the folks that were living in run-down areas have left town because they were renting and their homes were damaged. Property taxes are low, insurance is still less than it would be in CA (presumably) and the need is extreme. The airforce base that was damaged is being rebuilt but there is little information about the timeline for that project. 

Farther to the west it is difficult to find properties that meet the 1%. 

Overall- having insight into the local economy is key. 

@Ki Lee if you trade your Chicago/Ogden properties for others in CO and UT, you're just going to be trading non cash flowing properties for other non cash flowing properties. 

 During the peak of a cycle, usually major markets with known population/job growth etc... are highly overpriced, don't cash flow, and tend to depreciate heavily during a crash and appreciate well during upswings. I don't like to buy in markets like this at the peak, I like to buy these assets at the bottom. 

If cash on cash return is a big priority, shift towards high yield assets in less volatile markets. I'm also a CA investor who does a lot of out of state work, and my absolute favorite market now is right under your nose- the portion of Indiana nearest to the Chicago & the IL border. High rents, low prices, extremely low taxes and owner paid utilities, & actually has high rental demand due to its proximity to a major city. 

Feel free to shoot me a message if you'd ever like to talk shop! 

In Denver, CO, there are currently just two listings that are triplex/quadplex for sale with asking prices below $550K. I have passed on both for now for various reasons, and will not be surprised if both properties sit on the market. I do not believe that I personally could achieve the 1% rule on either property on a monthly basis, but annualized, the rents will likely be 8-9% of the total asking price for the properties. 

Looking back over the past 180 days, four properties (two triplexes, two quadplexes) located within 10 miles of downtown Denver have sold for less than $550K that are in the ballpark of what you are looking for. None, in my my opinion, had a realistic chance of achieving the 1% rule without extensive remodeling, construction, complete turnover of existing tenants and associated rehab/vacancy costs, or improvements. 

Bottom line, I'd look instead for properties that have a .85% rule at the very best. I'm ready to pounce when I see a property of this type come on the market, and will tackle management, remodeling, or moderate CapEx needs that are related to the properties being listed at these price points. I'll take on 1-2 of those problems (capex, management issues, or general remodeling), but won't tackle all three problems because I'm unwilling to put in the time and energy required to operate against solving them, which is why I haven't landed a deal recently...

Originally posted by @Benjamin Gallant :
Originally posted by @Ki Lee:

Hello BP - 

I'm doing a 1031 exchange where I'm going to sell my under-performing properties in Chicago and Ogden to trade for a better cash flowing properties. These properties have appreciated, but are not cash flowing at the moment.  

Where is your favorite place to buy a cash-flowing 3-4 unit properties for $500-$600k range?  I'm going to be putting down about $250K so the loan will be $250-$350k  and P&I will be between $1270~$1773 at 4.5% 30YF.  

I've been looking at a couple different areas - Denver, Salt Lake City, and Provo because they have low taxes, growth in population and jobs, and somewhat business friendly laws.  It was not easy to find properties that had close to 1% price-to-rent ratio.  For $500K property, I'd like to see gross monthly rent of about $5,000.  

With the current state of the market, is it really hard to find properties with monthly rent that is 1% of the PP?

What city do you think I have the best chance of finding these properties(that's not in class D/F neighborhood)?  

Thanks in advance!

 Ki, if you’re putting that much down, you should target larger multifamily. Same amount of work, but more cash flow! 

Ki,

I agree with Benjamin. You might as well buy a MF with more units so you get more cashflow.

But to answer your question - I like Cincinnati, Ohio MSA.

  • Rents are high vs. purchase price
  • Unemployment is low
  • Rents are increasing
  • Government is generally friendly to investors
  • Taxes are still relatively low (compared to Chicago)
  • Government is investing in developing certain areas in the city

I am closing on the purchase of a 42-unit building in Bond Hill in Cincinnati right now for $1.6M with a gross rents of about $25,000/month exceeding the 1% rule.

Your $250K downpayment can buy you a $1M building with rents of $10K/month or more.

@Scott Trench Thank you so much for the insight.  Then what's the bottom line during this hot market where everything has appreciated so much?  Settle for lower or zero cash flow? Or look for less desirable areas with lower prices with higher cash flow potential? If you were to look at an area that has good cash flow for 3-4 unit priced $500-$650K, where would you pick?

I was reading @David Greene book, "Long Distance Real Estate Investing" where he advocates taking profits from properties that went up in an appreciating market and buying in areas that have depreciated.  It sounds easy in theory - but when I tried to look at the least appreciated areas in the past 5-10 years, these are all very undesirable areas with unfavorable population/job trends.  So it seems like pretty much any city with favorable population/job trends appreciated a lot and most cities with lower price history have very unfavorable population/job trends.  So how would you balance between not going to areas of decreasing job/population but still not buying in "hot" areas where the prices appreciated so much that you can't cash flow?  David, where would you look to buy and hold 3-4 unit multi-family property between $500-$650K today?

Thank you in advance.

My bottom line for me is to make sure that I buy a property that will produce positive cash flow and not require me to invest additional capital into the property post acquisition costs and related rehab. If the cushion is so thin that I have a reasonable chance of having to dump additional capital into the property to operate it, that is a nonstarter. If the margin is great enough that I think I can cash flow, pay for all maintenance and future capex out of operating income, and likely distribute dividends periodically, I'm in. Here in Denver.

Every time I buy a property with a long-term outlook in Denver, I feel that I give myself a strong probability of future cash flow in out years, and have great potential to experience the long-term appreciation that I see as likely in Denver. 

Bottom line - most of my real estate investing has been, and will likely continue to be, here in Denver in assets in great locations that can, at minimum, sustain themselves following acquisition. I see this as the best path to building both future passive cash flow and tremendous equity. This philosophy has served me well over the past five years. It remains to be seen how things go if/when the market turns.

@JB Cunningham it's because I bought it no money down back in 2017. Rent is $1015 and PITI is $831 with PMI(which is $59/month and is in the process of getting removed). PM me if you want more details, but I'm not looking to do a quick sale for under market price. I'll likely list it with a listing agent and go for the max price that I can get from the market.

@Alan Lott I’m not sure what you have in mind, but you can PM me.  Note that I’m doing a 1031 exchange, so any kind of creative financing won’t really work. 

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