All Forum Posts by: Zach Schwarzmiller

Welcome to BP Christopher!

I advise my clients looking to purchase/sell 2-4 unit properties to not focus on cap rates. While yes, near core Seattle cap rates have been typically trading between 4.5-5%, I would suggest you rather, or at least in conjunction with cap rates focus on the gross rent multiplier. Expenses are going to vary dramatically on residential (2-4 unit properties). On commercial multifamily (5+ units, I would generally start at 6+ units for my personal underwriting) cap rates tend to make more sense in my analysis as your able to achieve economies of scale.

Example (let’s use North Seattle):

1. Four-Plex A: 4 identical 500SF units rented at $1,000 a month ($2/SF). Typically you will see a much higher $/SF in smaller units. Annual Rent: $48,000. Expenses are $3,000/Unit/Year. Annual Expenses $12,000. NOI: $36,000 @ 4% CAP = $900,000 "market value". This would translate to an 18.75 GRM when realistically the GRM should probably be around 15 which would represent a value of $720,000.

2. Four Plex B: 2 1,200SF units rented at $1,350 ($1.23/SF) and 2 1,300SF units rented at $1,400 ($1.08/SF). Annual Rent: $66,000. Expenses are $3,500/Unit/Year. Annual Expenses $14,000. NOI: $52,000 @ 4% CAP = $1,300,000 "market value". This would translate to a 19.7 GRM when realistically the GRM should probably be around 15 which would represent a value of $990,000.

Nonetheless, if you’re buying in Seattle some would say you’re buying at the peak of the market. We still have a lot of new units which are due to come on the market soon which will likely show more concessions and slower rental growth in the coming future. Wish I had a crystal ball!

Sounds like you understand IRR and cash-on-cash return, which is overall more important in your analysis than anything. You may want to consider purchasing in South Snohomish County or South King County / North Pierce County. These areas have not seen the levels of new development core Seattle has and still are showing low vacancy and strong rent growth. My personal rule of thumb is keep your investments within 2 hours drive and make sure there is a growing micro-economy within the area.

On a triplex I am closing on in Snohomish will yield me a 12.4% IRR on equity as it is currently operated (I used a 10 year hold, $ allocation for capital improvements and factored in my actual mortgage payment). If I were to get all units to where 1 of the units is rented, and then see a 2%+ Y/Y in rent it would yield me a
16.5% equity IRR.

This is easier for me to explain face-to-face, hopefully it makes some sense. Everyone has a little different underwriting style. If you’re interested in grabbing a coffee sometime I am happy to meet up.

Kevin,

I am not far from you and strictly focus on helping investors buy and sell multifamily within Washington (broker). I have a decent understanding of most all sub-markets in Washington State. Just sold a building in Spokane, closing on Aberdeen in 2 weeks, Lakewood this week and of course do a lot in my home County, Snohomish County.

I also own and develop multifamily myself.

If you'd like to grab a coffee I can speak with you about underwriting investments and what to expect in different sub-markets around our area.

I think your doing everything correct by joining groups and being part of communities like BP. REAPS Is another good one that's on the east side, you can go check out a meeting for free. Sometimes the presentations are not worthwhile but the mix of people and knowledge who attends adds a lot of value. Vestus will save you a good amount of time not digging through trustee sales as they provide all the "digging" information upfront.

Welcome Linda! Interesting profession! Our laws and regulations are not always connected with sound logic! Best of luck to you.

In WA state there is Broker, Managing Broker and Designated Broker.

If you call the DOL they are actually pretty helpful, and it's useful as there are laws within Washington state that don't quite make sense, such as our property management laws. You can learn a lot from the phone calls and questions.

If you want access to MLS and experience to sometime open your own brokerage shop just start with brokers license get the experience then you can start on your own. Without working for a shop for a while you can't really acquire the experience, I don't believe. They may be a way around this, but there are a lot of legalities that may make being in a shop useful for a while.

I really just call the DOL with questions though, cheaper than hiring a lawyer to do so for you.

Welcome Inderpal!

I mean'to add Lakewood (just south of Tacoma as I didn't run Tacoma report) Sept 2012 had an overall market vacancy of 6.8% while in March 2013 it was decreased to 5.1% overall market vacancy (on units surveyed).

Brian O'Connor writes a really good apartment market report: http://ocgp.com/ - very core focused, but gives you an idea to where rent demand is shifting as Seattle is potentially being overbuilt with all the units coming online and in the pipeline.

I believe Tacoma has a lower vacancy than Olympia or Sheldon, recent figures had Lakewood at 5.1% from a Dupree & Scott report I pulled yesterday. You could run one for each area if really interested. Tacoma has some interesting things going on and a more diverse employment base, in my opinion. 8.6% Cap, 8 GRM sounds okay. I would guess there is some room to hit 10-12 GRM with 3bed/2.5bath units in Tacoma perhaps that is your upside. Is there a lot of deferred maintenance? Perhaps consider working this out t see what your return is over a 5-10 year hold including vacancy for upgrades and capital improvements over that time and then disposition. That is what I do anyways just to try and understand my future exit plan and return. It's not as important on small properties but I compare Equity IRR on 10 year holds when comparing properties just to see how the numbers work.

One thing I don't see in your expenses is any sort of management fee, if your living in California I assume your not managing these yourself? May want to give yourself a little repair and maintenance allowance as well. Maybe the 50% rule takes that into account? I am not sure what the 50% rule is.

Either way looks exciting!

In doing online research I think I may have. I am going to speak with them and will let you know. What unit size are you referring too? The company I work for manages 30+ units, if your in that range I would encourage you to contact them.

Anyone have a good recommendation for a property manager on small (1-20 unit) properties in Snohomish, Washington? Any recommendations greatly appreciated. Thank You.

A good skip tracer is my best friend in these situations.