Should I purchase 6 Multi Unit in great area versus 30+ unit bldg in not so great area with almost the same investment?

6 Replies

Dear BP Members,

 

I am looking at adding a new  new multi unit property in 2015 to my portfolio, however I am confused and looking for some advice from members who own multi unit buildings and large buildings with more than 30 units.

 

Here is the current situation with my new purchase

 

Option 1 – Buy a 6 unit building in a great area with high rentals.

 

Option 2 – Get a 32 unit building in a not so good area (Low rental  about $700 but 90% occupied – I think majority is section 8) –

 

 

I own few other multi-unit buildings (3 units) , apartments and a SFH and they are all in very good area. I don't have a property manager on these as I manage these myself in my spare time, however I do have a good handy man and a good real-estate agent.

 

The price of the 6 unit is close to the price of the 32 unit building ( price is because of the neighborhood), however the 32 unit building is giving about 15% return versus 8% return on the 6 unit building.

 

Should I persue the  6 unit building in the good neighborhood and settle for the less profit which will also come with less headache. I have never owned a 32 unit building and don’t know everything that’s involved. I also have  a  job and travel extensively so I would need to get a property management company to handle the 32 units. I don’t have experience and am confused, at one hand I would like to make the additional profit of 15% but I don’t know if the headache is worth it.

 

Your input/advice is greatly appreciated.

 

Thanks,

ZH. 

@Zulf H.

 I think this is entirely depends on what your long term goals are and what your definition of a not so good neighborhood.  Would the 32 unit be be C or D neighborhood? If it is D I would pass. Other things to consider is the condition of the property and make sure you account for more expenses in the 32 unit compared to 6 unit.

If it was me I would choose the 6 unit.  We like to invest in A/B areas though return is lower in this area.  We do not want the headaches of not good neighborhoods. Good luck.

You probably need to re-evaluate the "WHY" you are investing at all. Yes, you have described your current situation today. But projecting into the short term (1-2 years?), the mid term(3-5 years) and the long term (5+ years). Which investment gets you closer to where you want to be in the future? And do you need to learn to delegate some of the work you doing, so that you can focus more on finding deals? You could lose 10-15 % of your profit to property management, but the extra time could help you find more profitable deals in the future? 

I don't think we can answer those questions for you. I think you need to find answers to those questions yourself and those answers will help you make the right decision.

Good luck.

Personally I would go with the 8 cap in the better area.

It really does depend on your goals of an investor. Typically, a smaller 6 unit building in a good location (ie coastal, good neighborhood, high density downtown, etc) has a better bet on appreciating over the years since the land is so valuable. However, your ROI and cash flow will certainly be lower. If you are in a stage of being conservative and are looking for a safe place to place your money with steady returns, this is a great route.

As far as the 32 unit building, you have to assess the neighborhood and the volatility of values in that market.  If it is in C or D markets or an older building, make sure you do your homework on the demographics, household incomes, and historical values (especially when the market dropped).  It will certainly give you more cash flow but keep in mind that the area might have some challenges (raising rents, evictions, etc).  Larger buildings have larger expenses.  However, the upside is that equity and rent growth can be exponential.  Let's assume the following:

Scenario 1 (6 unit building in good area)

1. If you raise rents $150 per unit across the board a month, you are making $900 more dollars a month ($10,800 a year).

Scenario 2 (32 units in a challenging area)

1. If you raise rents at $150 per unit a month, you are netting $4,800 a month ($57,600 a year).

2. Even if you raise rents at a moderate rate of $50 per unit a month (assuming it is a lower income area), you are netting $1,600 per month ($19,200 per year).  

Both have their pro's and cons but it really does depend on where you are in your investment cycle and how much risk you are willing to take on.  Keep in mind that, since you will be hiring a property manager, many of the day-to-day "headaches" or duties will go to the property manager.  I've dealt with some clients who actually say that moving into more units is less of a headache since they are delegating the responsibilities to a Property Manager. This is just my take and I hope it helps.

Feel free to reach out if you have any questions

-Jordan

@Radhika M. 

Thanks for your input. I am also leaning towards the 6 unit, even though its quite expensive I think it would be less headache. My goal is to get a certain monthly income from all my properties, however I could focus on the A/B neighborhoods as these will be less headache and the rent will be higher. I think in long run this will be better. Thanks.

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