How much should an investor pay for multifamily?

Question

Hi everyone,

Newbie here, I recently figured out that I'm gonna niche on Rental Property to get my feet wet on investing because I'm after the cash flow.  I know it's all gonna depend Property Tax, CMA's and other outside factors but I just want to know when comes to analyzing deals how much should the sales price be, taxes, interest rate etc. for a multi-family (2 or more) units if you want to get a 6-12% cap rate, at least $100/door.  Please give me a ball park here assuming that you are gonna use the 50% rule.  I'm trying to get one on a decent neighborhood here in Chicago and Chicagoland Areas and a lot of apartment buildings are real expensive. Truly Appreciated!

Paul Timmins · Answer

@Lawrence Mangalindan

My BP PM does NOT work you need to email me to connect see my profile

Paul

Paul Timmins · Answer

@Lawrence Mangalindan

I work for Dave Lindahl we look for a Cash on Cash return 12%+, CAP of 8%+ and debt coverage ratio of 1.6%+ I have an emerging market walk across the country EMAIL me if you want a copy my BP PM does NOT work see my profile.

Paul

Robert Seltzer · Answer

I agree that your question is rather open ended.   Multi-family is all about the cash flow you can generate from the property.   Typically the CAP rate and cash flow are lower with A/B vs. C level properties.  The trade off is that with a class C property you will typically need to investment your cash flow back into the property itself as they tend to be older buildings.   My advice is that the mechanics of of doing the calculations are rather straight forward.  More importantly is understand your investing goals.

David Thompson · Answer

Lawrence,

What books on MF investing have you read?  There are some great books out there.  Your question if very open ended and depends on so many factors.  These discussion forums are great for specific questions but thinking some of these books might help if you are new to this area:  Go to Amazon and check on:  Steve Bergen (the complete guide to buying and selling apts); Dave Lindahl has two books on MF investing and emerging markets.  That will get you started.  Then come back w/some questions we can help you with.

Arpan Patel · Answer

That is kind of a broad question. CMA's won't really do you any good. Finding the market cap rate and using the NOI to determine the price is the way to go for commercial. Also the differences in cap rate is an indicator to the neighborhood and/or asset in question. For instance, rougher areas tend to have a higher cap rate because less people are willing to go in those area due to risk of asset damages. There are multifamily deals to be had in Chicago and the surroudning area but really you need to ask yourself:

1) How rough of an area would I go into? A,B,C, or D

2) What cash on cash do you expect?

3) What kind of financing can you get?

4) Are you going to manage it yourself?

5) How much capital do you have to put down?

6) Many commercial lenders want the signer for the loan to have at least be worth the amount of the loan or more. For example, if you are looking to borrow 500k then they want to see that you are worth 500k

I'd start there and then figure out an area that works for me, then find out the market cap rates. You'll know then what the property is worth when you get financials.

All of the above is applicable to 5 or more units. Under 5, it looks like a residential deal. Comps, Residential lenders, banks care more about you then the asset, etc.

Hope that helps!

Stephen Franco · Answer

for me...CMA is partially irrelevant.  Cash flow and cap rate win. Often in my Market that's 40k for every 1k in rent.. Or 20-30k per finished unit for a 15% net net net cap rate after mgmt maint vacancy pads

Andrew Wydra · Answer

Lawrence,

You have a lot of moving variables in that question. The change in sales price from a 6% to a 12% cap rate could be hundreds of thousands in dollars.

I would reverse engineer it. Ask yourself first, what type of return/cash flow do you want from an investment. Then, you'll need to figure out what price point you can purchase at. Discuss with lenders/capital partners. Say you determine you can purchase up to a $500k bldg and your financial threshold is a 10% cash on cash. Now you can start searching for buildings to consider.

If you have questions, please feel free to message me. I'm more than happy to share some of the basics that I use.