All Forum Posts by: Ryan D.

I own several residential multi-family properties, and I'm interested in moving into the world of commercial multi-family. My problem is that when I am analyzing properties, the ROI seems very low compared to the residential buildings I'm seeing. I was expecting economies of scale to make commercial more profitable, but that doesn't seem to be the case? For example, I've been finding that I'm better off (higher ROI) buying two 4-plex buildings vs buying one 8-unit building, which is really not what I had expected!

Everyone knows about the 1% rule for residential multi-family. BUT the 1% rule just doesn't work for commercial multi-family, presumably b/c the mortgage terms are different (higher interest rate, shorter amortization, etc - I can't identify any other reason for this)??? 

What is a good method for your initial screening of a commercial multi-family building?

Start searching for properties who's monthly rent exceeds 1% of the purchase price. Look for areas with low crime & good employment diversification. Make a spread sheet of all the income & expenses for the property (don't forget to include maintenance and vacancies) and see what you calculate is your rate of return for the money you will need to invest. Roughly speaking, you'll analyse 100 properties, to find 10 worth putting offers on, and end up buying 1. Manage the first one yourself, so you get a feel for what it takes, then once you're comfortable, turn it over to a management company. Repeat.

Try up in antelope valley - Palmdale, Lancaster.

Could also depend upon the state. In California the property tax is based upon the purchase price, so lowering the PP will permanently decrease you annual expenses (thus will increase your cash flow permanently).

When I've done this for Ca property into a Ca LLC I used grant deeds, & yes the procedure is relatively simple. The county recorders office should be able to walk you through it.

7 months cash up front, covering the full term of the lease, sounds fine to me. Worst outcome here, daughter doesn't have a job in 7 months and then you don't renew the lease. At that time, market rents have increased, and it in the middle of the easiest time to place a tenant.

You can have up to 10 conforming mortgages before you have to go to a portfolio lender.

Get copies of all leases for 24 unit building for the last three years. That will give you the rents, and a reasonably accurate number for vacancy.

Cap rate, really simple: it's the return on investment you would make if you bought a property all-cash & didn't put a mortgage on it. I.e. It's the fully CAPitalised RATE of return.

Mortgage interest deduction on investment RE is a BUSINESS expense, not a personal expense. Its treated just like borrowing money to buy any other capital equipment for a business, & would still be deductible.