Buy and Hold Investor · Cincinnati, OH · Member since 2014 · 69 posts · 10 votes
Does anyone have experience in expensive multi's. I was wondering if the 1-2% rule of thumb can still apply. I'm not concerned on number of units as I am the initial cost. If the purchase price was $1,000,000 (no renovation needed) is it realistic to still demand at least 1% of purchase price to equal one months gross rents? Maybe a million dollar building isn't enough of a difference and could still get 1%, but what about a $10,000,000 building. I feel that all tasks could be delegated out easily with the money coming in, and that the ease of owning it would increase greatly therefore driving demand up and your return down. I know all this applies to the area and many other factors I am just asking about a rule of thumb and your personal experiences.
I would agree with @Chi Cheung whereas CAP rate is probably more viable when looking and analyzing apartment buildings. The 2% rule is where the rent is two percent of the purchase price, but when looking at apartment buildings, as Chi said, expenses tend to outweigh and have a major role in analysis.
I would look at the CAP rate in the area to see the norms and then analyze the CAP rate of the projected property. Then, you can go from there and determine whether or not the expenses are normal, abnormal, rents too high or low, etc. So many factors can play a role in the calculations of apartment buildings and whether or not you see it as a good investment or not.
Expenses will vary wildly for apartments at the same price point. Especially if you have a different number of units.
A $5 million building with 20 units will have very different expenses that one with 100 units. And it won't necessarily be that the bigger building has higher expenses. If they are small apartments with few amenities, the expenses could actually be lower than if you have a luxury building that demands a good amount of staffing and amenities.
Also a big thing to watch for with multi-families is deferred maintenance. Numbers that look great on paper can change dramatically if a bunch of Capital Expenses are required.