cash-on-cash return (duplex vs apartment bldg)

Real Estate Investor · Goshen, IN · Member since 2014 · 18 posts · 3 votes

I have several small multi-family properties, and the cash on cash % return in my area (Northern Indiana) hovers around 20%. I'm thinking of taking the plunge into larger (50+ unit) apartment buildings/complexes. As a general rule, is the cash on cash % return higher or lower for a 50+ apartment complex than a duplex?

I know that every property is different, but I have found the 20% cash on cash % return figure to be a pretty good indicator of a good duplex. Apartment buildings seem to be all over the place...even in the same market.

Thoughts?

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

12y

Hi Todd,

What determines the cash on cash going in is LTV on the loan, cap rate, interest rate, amortization schedule, payment interest only or principal and interest.

The duplexes are more based on comparable sales approach where the 5+ units is the income approach.

With the smaller complexes you have to work for that extra yield. This is something I have to explain to investors when they make the jump to larger multifamily, commercial etc. You have a factor of cap rate compression and increasing income that adds layers to the cash on cash metric.

Apartments will vary based on location for larger buildings. The buyers will be different for various quality of locations and age of the buildings with the tenant mix. Again it goes back to that working for yield thing. Investors in the beginning will take on more headache for higher COC. As the cash flow gets larger they will go for more quality to offset headache.

The larger apartment buildings of 5+ units will not have the financing you are used to on duplexes. You will find short term loans of 3 to 7 years and amort. of 20 to 25 etc. with local banks and recourse.

Go loans in the 2 million range or higher you get away from local banks into much better loans. So it just makes sense if you are going to go big then go for more units. Better PM with lower fees and a full time repair person can be built in to operations of the building.

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Hi Todd,
What determines the cash on cash going in is LTV on the loan, cap rate, interest rate, amortization schedule, payment interest only or principal and interest.
The duplexes are more based on comparable sales approach where the 5+ units is the income approach.
With the smaller complexes you have to work for that extra yield. This is something I have to explain to investors when they make the jump to larger multifamily, commercial etc. You have a factor of cap rate compression and increasing income that adds layers to the cash on cash metric.
Apartments will vary based on location for larger buildings. The buyers will be different for various quality of locations and age of the buildings with the tenant mix. Again it goes back to that working for yield thing. Investors in the beginning will take on more headache for higher COC. As the cash flow gets larger they will go for more quality to offset headache.
The larger apartment buildings of 5+ units will not have the financing you are used to on duplexes. You will find short term loans of 3 to 7 years and amort. of 20 to 25 etc. with local banks and recourse.
Go loans in the 2 million range or higher you get away from local banks into much better loans. So it just makes sense if you are going to go big then go for more units. Better PM with lower fees and a full time repair person can be built in to operations of the building.
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
12y
Todd,
Joel has it right here. I would assume you are currently managing your duplexes. Are you planning to manage the new larger units? If so, you should still calculate in a 3-4% management fee as you should get paid for this work.
On the lending side, when you get above 2 million on the loan, you will see non-recourse loans available. I see terms from 5-30 years on apartment deals with rates adjusting according to length of term.
Where are you buying in Northern Indiana? I grew up in Chicago and you can find properties with high cap rates, but are sometimes in less desirable areas which is why the cap rate is higher going in.
Mark
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Todd Norris
OP
Real Estate Investor · Goshen, IN · Member since 2014 · 18 posts · 3 votes
12y
Thanks to both of you for the responses. We use a property management company for our properties (actually a mix of duplexes, mobile home park, and 12-unit multifamily). We invest in the South Bend, Fort Wayne, Warsaw triangle b/c I live in the middle, and I like to stay close to my rentals. I'm used to a commercial loan on a 30-year amortization with an every-5-year percentage adjustment. I did not know about the non-recourse loans. that certainly has some appeal! Thanks for that tidbit!
I heard Ken McElroy say you need 1 maintenance and 1 manager for every 100 units. I'd really love to aim at something of that size. I just need to make sure the rate of return makes sense before I sink the bulk of my money into it!
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
12y
Todd,
I have looked at a few manufactured home parks for loans in the last 12 months. I have seen non-recourse loans on 4 star properties with a minimum of 5 million on the loan. Not sure what else would be available. Is there still a manufactured home manufacturer in your neck of the woods. There used to be one in Elkhart but not sure if they survived the last recession.
Mark
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Todd Norris
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Real Estate Investor · Goshen, IN · Member since 2014 · 18 posts · 3 votes
12y
@Mark Creason - yep, still a couple manufacturers up here. Skyline, Sherlock, and Redman come to mind. I own one mobile home park in Rochester, IN. We'll be replacing a few units soon. I was thinking of buying used instead of new. Do you buy new?
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
12y
Todd,
I work in the lending profession now. I was a manufactured dealer in California between 2000-2004 and bought new. I would buy a manufactured home and install on private land which was a pretty good business back then. In California, it made sense to buy new, but in Indiana it might not. What is your exit strategy for the park?
Mark
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Joe Fairless
Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
12y
@todd norris
@Todd Norris congrats on getting the solid return on your duplexes. To answer your question, I'm not sure there is a general rule of if the cash-on-cash return is better or worse for larger multifamily. I think it depends on the deal, market and operator. However, I will say that the larger you go the more wealth that's created when do make those 20% returns.
Re: the 1 manager and 1 maintenance person per 100 units, I've heard that too and think it's pretty accurate but I've found it depends on the property. You might need more people than that if it's a re-position and are looking to change the culture of the property.
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Todd Norris
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Real Estate Investor · Goshen, IN · Member since 2014 · 18 posts · 3 votes
12y
@Mark Creason - exit strategy is death and a will :) I'm a buy & hold guy, so I'm planning to keep it long term. I suppose I could choose to sell that park in order to buy some other buy & hold property. at a minimum, i'll do the necessary improvements and keep it a couple years to demonstrate improved income potential.
@Joe Fairless - thanks for your perspective. No doubt that I'd love a 20% return on a bigger investment. that's exactly why I'm in the market for a bigger facility :)
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
HI Todd,
There are a lot of dynamics that go into buying a larger apartment building. Feel free to ask away with questions.
If you did 100 unit apartment building at say 50,000 a door is 5,000,000.
5,000,000 X .25 down payment is = 1,250,000
Commercial lenders generally like to see 10% liquidity for reserves after down payment so in this case 375,000. Liquidity can be in the form of stocks, mutual funds, savings, checking, IRA, 401K, cash value of a life insurance policy, etc. Property with equity applies to net worth but is generally not liquid as buyers overinflate property values and what they could pull out on a refi, LOC, heloc, etc.
Net worth they would like close to the loan amount after down payment but liquidity is more important.
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