Should I buy this 3-Unit Multi-Family?

Question

Hi everyone,

I'm on the fence about purchasing an investment property and hoping I could get some advice.  It's a 3 Unit (2x 3 BR, 1x 4 BR) Multi-Family listed for $185k (2970 sf).  I used J Scott's analysis spreadsheet and came up with a Cash ROI of 11.9% and ~$6400 annual cashflow but I'm not sure if that is good.  How do investors determine what ROI is worth the investment?

I appreciate any feedback.

Thanks!Monica

Fred T. · Answer

Questions to ask ones' self:

1) Are similar units valued at $61,666/unit

2) What are conditions of time limited items (Roof, Mechanicals, etc.)

3) What is the Market Vacancy Rate for similar units within a 1 mile radius

4) Are there any "Value Add" opportunities available on this asset

5) I mention Cash Flow...what does my NOI tell me it's worth

6) Could I make than $533/mth if I invested my Capital somewhere else

7) What are the Local Market Conditions telling me to do - Will I be able to exit from this property in the future for a loss or gain based on my homework

8) Is my Capital "safe" in this vehicle - Risk Assessment Acceptable to me

9) Did I account for all of the expenses, projected expenses and can the building live out my projected hold term without any major capital improvements and if not did I account for them in my projections

10) Since I know this is a Business Decision and not an emotional decision...does this acquisition make Business Sense to be in my Portfolio (Core Model)

If you can answer these questions and determine that this is a good fit for you, and you're happy with your return, then it could be a good deal...to you and that's all that matters until you go to sell it.

If you can't answer these questions with conviction to your satisfaction, then maybe the universe is telling you something.

There is no One Size Fits All - ROI or CAP Rate.../

Happy Investing!

Monica Kovalsky · Answer

Michael - thanks to you too for your input! I have considered those other factors as well.  Although I certainly still consider myself a beginner I do have 2 other similar properties in the same area.  The first one was a fantastic deal that I don't think I will find again, at least not anytime soon.  The second was probably not a great deal but the first one went so well I was excited to jump at another without much analysis (my mistake for sure). So I really want to be smart about this one and have done a bunch of analysis but just not sure how the number stack up to other good deals and I don't think either of my prior two purchases are appropriate for comparison as they are on two ends of the spectrum.  Thanks again! -Monica

Monica Kovalsky · Answer

James - thanks for your input! Although I thought the answer was likely going to be "it's all relative" I guess I was hoping for something more concrete but that makes sense.  Comparing to stock market returns helps put it into perspective.  I would think it must be x% more than stock market returns for people to want to invest in real estate versus stocks due to the extra work and risk.  I understand that is something I need to figure out for myself as I'm sure it varies person to person but just wondering what other people use.  Thanks again! -Monica

Michael Noto · Answer

@Monica McLaurin  Other than the raw numbers, when I see 3 bedroom and 4 bedroom units some things come to mind.

• That is a lot of people living in one house.  How is the area?  If it is a lower income area it can be tough managing as a beginner with 4-5 people per unit
• How is the parking situation?  Things can get hairy with multiple vehicles per apartment if there isn't ample parking.

James Tran · Answer

Hi Monica,

Welcome to Bigger Pockets! It is all relative.  Whether a particular ROI is worth the investment will vary from investor to investor depending on what other alternatives investment vehicles are available, how management intensive the investment may be, and perceived risk.

11.9% ROI for a real estate investment (in general) is fairly decent considering stock market returns generally average 8% to 10%.  Now if you're wondering if 11.9% is a good return relative to other multi-family properties, you should consider characteristics such as location (how likely is the property going to appreciate compared to your other alternative properties), tenant quality (are the tenants going to be troublesome or pay on time), how far is the property from you (I like to be able to drive by once in awhile), how marketable are the units for your area (general risk to your income stream, 3-bedrooms and 4-bedrooms generally take longer to fill compared to 2-bedrooms during turnover; hopefully you're in a family-oriented area), etc.

I hope this gives you a better idea of how to determine if the ROI is satisfactory enough to pull the trigger.

-James