Is this a good time to buy a 25 unit building?

Question

I am at point in my real estate career where I can start looking at properties in the 1.5M range, and want to know if it would be better to wait or if there are good deals to be had. I work in residential RE and the market is hot and most of my clients are paying full price or close to full price, what does the larger multi family market look like? I am looking in Michigan and Florida primarily. I could be willing to wait but would like to purchase now while commercial rates are so good! Any insight would be appreciated!

Erik W. · Answer

Let's hear how it cash flows.

I'd also maybe set my sights just a tad higher if that is possible.  When you start to get into $1.6+ million, that's where non-recourse, institutional financing comes into play which sweetens the pot considerably compared to the traditional 20-year, floating rate commercial loan on a $1.5 million property.

Another thought: 25 units sounds like a lot, but it's not enough to hire out full time management and maintenance.  Are you using this as a stair step to trade up into something larger, or is this going to sit in your portfolio 10+ years?

Also, what's the lifespan?  If it's around 15 years, keep your eyes open for Cap-Ex costs.  HVACs and roofs start dying around that time.

Marlen Weber · Answer

If it's the right time for YOU, then yes, this is a good time to buy any size property. Don't miss out on a good opportunity out of fear. I know these times bring uncertainty but if it's a good deal and the numbers look good, and most importantly, you are ready, then it is the right time.

Justin Elliott · Answer

@Jonathan Mueller

It’s always a good time if the numbers work. Just make sure to adjust your underwriting according to the times. We are underwriting 15% physical vacancy in markets that have 4%. And 5% bad debt where the standard has been .5%. We are being very conservative on exit cap rates and reserves.

Jonathan Mueller · Answer

@Marlen Weber great insight, thank you, This is a good time for me, BUT I can be patient and see how these things play out.

@Evan Polaski you make a great point about the extra unemployment, one of these apartment deals does rely on middle-lower class tenants and that may be a problem.

The other multi deal is College housing in a college town, while numbers might be down for a few years, I think It could be a winner in the future and a good deal now. Waiting on financials on this one.

Erik W. · Answer

@Jamie Garcia, I don't know if I'm the best person to give you that advice.  For me, it's still all theory as I have yet to purchase anything over 4 units in one location.  But, in looking, digging, offering, and chatting with other investors, I find that there are two basic goals for most single-person investors: buy and flip or hold and portfolio for cash flow.

If your goal is short term (<5 years) as an individual investor, you want something you can sell to another individual investor, which probably means $1.5 million or less.  Anything larger and there's not that many folks walking around with that much loose change to tie up in real estate, so the odds of you being able to totally cash out and/or trade up are smaller.  Expect to get lots of requests for owner financing, which doesn't match your short term goal.

You might find a few investor partners looking for deals in the $1.5-$4.5 million range, but probably those are rare.  More buyers usually = better price.  So, in my market, 25 units would fit around $1.5 - $2 million depending on age, locations, etc.  Personally, I would stick with 20 or fewer units.  That should keep your pool of individual investors fairly deep.Groups of investors will probably want to take down bigger targets in the $5+ million range.  If that's your goal, I can't speak to that since I've never seriously looked at anything bigger than about $3 million.  Okay, I did peek at a $9 million, 127 unit place once, but that was totally pie-in-the-sky and I couldn't get enough folks interested to pool the necessary net worth & down payment.

An investor/friend of mine who has done mobile home parks for 30+ years told me if he were going the apartment route might as well go big or go home.  By that he meant go for a place that will be self-sustaining with a full time manager and maintenance person.  150-200 units minimum.  That's where you buy and keep for about 3-5 years, add value, boost rents, then sell to big money buyers who need a safe place to park a pile of money and don't care if they're only making 5%.  Again, though...this is coffee shop talk.

Greg Dickerson · Answer

You don't want to buy markets you want to buy the deal. Therefore it's always a great time to buy if the deal makes sense. Rates are at all time lows right now but it's all relative as prices of assets have increased as rates have dropped. The inverse will be true as rates increase prices will rise again. The thing to watch out for is rents. We are reaching a point of rent to income ratios that are reaching a ceiling. Incomes are not keeping pace with rents so you want to make sure the deal works as is for the long term without relying on rent increases to make it a great deal. This is for more stabilized assets of course so if you find a distressed asset or assets that are well below market rents you have upside.

Jonathan R McLaughlin · Answer

Good advice above. Deals exist in every market and in every size.

I will say there seems to be a consensus that small commercial MF (under 50 units) is overvalued in general. Its a tricky asset class. Can be great with wonderful potential for value add or it can be the worst of all worlds being too small for lots of pro management and still have heavy capex. So many of the larger complexes have been snapped up by the bigger firms and that puts pressure on the small stuff too. Low interest rates have made people perhaps a little careless in their valuations, at least judging by the stuff I get sent :) On the other hand, LOTS of older mom and pops are tired and sitting on fully depreciated buildings and figuring "hell, why not get out now?"

Evan Polaski · Answer

@Jonathan Mueller, it really depends on your play, timeline, and long term horizon.  If you can be conservative on your underwriting and get a property that meets your risk profile and return objectives today, I would go for it.  The biggest case for waiting is to see if the CARES act expires, or what the renewal looks like.  This is less relevant if you are looking at assets in strong submarkets.  But if you are looking in fringe neighborhoods, with lower rents and incomes, your strong collection rate may fall off a cliff if the $600/wk bonus unemployment dries up.

In general, the multifamily market is just as hot as single family.  There is still a lot more demand than supply.  That doesn't mean deals don't exist, you just have to hunt harder.

Really it comes down to not compromising your underwriting standards and understanding the ins and outs of the project. If you stretch here and there to make numbers work, it only takes one hiccup to throw you off course. If your tenants are all unemployed, there is a lot more risk that needs to be priced in than if you have a lot of professionals with secure incomes.

Greg Dickerson · Answer

You can get non-recourse financing from Fannie and Freddie starting at $750k with up to 30 year terms.

Quinn Konitshek · Answer

@Jonathan Mueller I'd say it's a great time if you're prudent and buying cash flowing assets. There will be some buying opportunities from now through the end of the year, and multi-family hasn't been hit as hard as other asset classes during Covid.

I would suggest looking at Florida from a landlord friendly state perspective, in case you do have tenant trouble from a continued downturn. It's also an excellent state from a supply, demand, and future market condition standpoint.

Interest rates are very low, and lending has been picking back up after a slight pause during Q1.

Is this a good time to buy a 25 unit building?

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