Unlike running a rental house a multifamily building is more akin to running a business especially when you have more then one or when the total unit count starts to rise.
it sounds very simple to invest in a multifamily property.   You buy, you manage, or delegate, wait and spend the profits.
There are a lot of people who have created great wealth or continuing stream of passive income but its not as easy as it seems but is also not as difficult. 

Like mentioned above, managing a multifamily property is a business, so it’s wise to consider some of the things mentioned below.

The Location is of vital importance, not matter if its a very low income apartment or a class A property, if you want to achieve results then the location is crucial.  Even placement withing a neighborhood or community can make your building one of high occupancy or vacancy. 

As any business you want to have a location which is convenient for the tenant.  That means shopping, transportation routes and lots of jobs near-by.  But from the stand point of an owner its easier to lease properties that are not in large groupings.

Cost and Inflation.  Each year weather you want it or not your cost will increase even though the rents may stay flat or fall.  Make sure you have resources to cover those down times.  Even a short spurt of 50% vacancy from turnover can create a big expense and a huge set back if you don’t have the funds to prep the units for releasing. 

Of course you can lease a run-down apartment but you’ll be reducing the value of your property and don’t expect tenants to respect your property if you don’t or can’t.  Multi-family buildings have other costs, including hazard insurance, liability insurance, grounds keeping, landscaping, trash removal, snow removal, advertising, property taxes and maintenance. The rent you charge should cover all of these, plus utilities.

Management:  This is crucial.  Bad management can make the best initial investment a total disaster no matter if you are the manager or you have a management company.  Consider this carefully when deciding to purchase an investment property, a multi-family property or single family home for the matter. 

Management will be in charge of a very large assess.  Handing over your property to a management company is like giving the reigns of your business over into the hands of a manager a non-owner.  Rarely will you find a management company that cares about your expenses and income as much as you do, so choose carefully. 

I know quite a few stories of management gone bad.  In, fact some of these prime properties can be purchased at a reduced price because either a property is run down or the tenants are paying below market lease rates.  If you’re going to be the manager make sure you get paid for your time. 

Repairs: If a property is lacking repairs then you will lose tenants, or at least good tenants.  It’s very common for tenants to move because an owner or a management company fails to make necessary repairs.   A good solution would be to make it a guarantee that you’ll fix something within a period of time.  If you do this do it carefully though.

I don’t want to scare you off from investing in multi-family properties.  They are a great way to create a continuing stream of  passive income but it’s still a business which needs nurturing and care.  It won’t run itself.  It’s also not as difficult as it seems but you need to put together a good team to help you.

For those of you more interested in investing in single family home investing,  we just posted an in-depth spreadsheet of rental rates by city in Greater Phoenix.  This includes per square foot rates, total inventory, units leased and more.  Plus we added a bit of commentary about the current investment rental market.  You can see this data at Phoenix Market Trends, a sister blogsite to this one. 

Greater Phoenix Investment Rental Market | Single Family Home Rental Rates and Supply

Diversifying your real estate portfolio is a smart way lower risk against changing markets.  Multifamily and homes flow along each other but also away from each other depending on what the real estate cycle is. 

Just as investing in homes an investor should consider location, demographics and financing in making their decision.  Part of your due diligence is  solid inspection.  As important as inspections are in homes, they are even more important when purchasing a multifamily property. 

The fact is that multifamily properties for the most part are not as well taken care of as houses.  Here is a list of items to pay particular attention to.

The location. 

The location is important for different reasons then a house.  A multifamily building is more like a business and your analysis should take into account if this property will attract tenants.  What are the amenities, like shopping, schools and so on.  Communication is very important so make sure there is good access to freeways and public transportation.  Also pay attention to activity in the area, visit in the evening as see how it is.  Survey your competition.  How will your potential purchase compete against other apartments vying for the same tenant.

Acoustics and Noise. 

A common concern for tenants is noise in neighborhoods as well as from other tenants.  Be aware of the types of walls the flooring of the apartments.  You don’t want to be hassled by tenants who constantly complain about jumpy neighbors upstairs, or music next door.  If you plan on remodeling you can add acoustic dampening but factor that cost in. 

Leases. 

Study the leases carefully.  You don’t want to be stuck with a 4 year lease with no provisions for an increase.  Sometimes lease may be false, so the tenant may thing he/she is paying one rate while you were told another, most likely higher rate.  A good way to protect yourself is to insist on an estoppel agreement.  These are signed by the tenants and spell our any obligations to the owner, even promised obligations should be noted.

Plumbing. 

In many older units there are old galvanized pipes.  If these have not been causing problems  then they will.  Be careful as somethings copper pipes are seen on the outside but behind the walls they still may be galvanized.  Check to see if there are any invasive trees around the property or the neighbors.  Some of these trees take over water and sewer pipes.

Electrical. 

Older properties tend to have old wiring.  Some of the electrical boxes have been recalled as well but they are still on these properties.  Tenants these days have microwaves or electric water kettles which require a lot of power.  Some lines are not meant for these, and may be a hazard.

Exterior Appearance.

How do the buildings look on the outside?  Look at the details, will you need to paint or refinish the fascia? Are there cracks in the walls.  What about landscaping.  Some buildings have no landscaping and others have unkept or outdated landscaping which will scare away better prospects.

Parking. 

Seems like everyone has a car and often this causes parking problems if there is a lack of spaces for all tenants.  Be aware of how many spaces are available for each unit and if it is enough.

Interior appearance. 

A good indicator of bad, is sloppy work done by people who don’t know what they are doing; crooked grout lines, bad patching jobs will need to be fixed at some point. Prospective tenants do notice these things.

Mold. 

Though not as big a factor as in other parts of the country, we do have mold in Greater Phoenix and its more common in apartments where tenants don’t often tell landlords about leaky pipes under the sink or owners are simply not aware because they don’t inspect the property enough.  Look carefully where ever there is water for leaks, even a slow small drip  over time can be mold forming.

Security

Security is a big factor for tenants.  You don’t want to advertise that you provide a secure dwelling because it opens you up to responsibility, you do want to check the overall security of the property during your due diligence.

Laundry facilities.

Many properties have laundry facilities either in each unit or a shared laundry either owner owned or with leased equipment from a third party.  When purchasing a property make sure you know who owns what and if its a third party get a copy of the contract.  I have seen obnoxiously long 5-10 year lease with absolutely no out for the owner and little in therms of compensation.  These laundry facilities are more often for tenant convenience then profit but you want as much your cost to be covered as possible.

Roof.

Oh yeah the roof.  Be very wary of flat roofs.  On older properties these flat roofs are more like ponds holding tons of water after a rain, relying only on the sun to dry them off.  While there may not be any leaks, these roofs with water wear out quicker, shortening the life of a very expensive thing to repair.

These are just a few of the issues that need more attention but check everything and most of all, hire an inspector.  If you don’t buy a property because of an inspection you’ll think of the money you lost for the inspection but imagine if you didn’t do an inspection and purchase a property which drained your pocketbook and profit.  Its well worth the cost.

In a future article we will jump into the next part of your due diligence, namely the income and expenses and financing.

from: PMT

Residential multifamily refers to 2-4 units properties or multifamily properties financed by residential financing like Fannie Mae. 

In July 12 such properties, duplexes, triplexes and fourplexes sold.  See an analysis just for fourplexes in Greater Phoenix. 

There are 44 pending properties or properties that have found a prospective buyer.  Since the buying process of a small income property is a bit different than a home some of these properties will come back on the maket, more so as a percentage than single family homes. 

In all 738 such properties are active, so investors do have a very high selection of properties even if most of them are low quality. 

What’s ahead.  

There is a lot of interest in multifamily properties.  They can be purchased for as low as $22,500 per unit and its easy to make them cash flow but the big hurdle is still financing.  Unless an investor is putting down a lot of money or buying for cash its more difficult to obtain financing.   It is easier to get financing for larger commercial sized multifamily properties  of 5+ units and especially once you finance over $1,000.000.

We’ll probably continue to see low sales but prices cannot go too much lower.  In so may of these cases the prices are well below replacement cost and often just the land is worth more then the total purchase price.

Unlike the sales of single family homes in Greater Phoenix small income properties have not experienced that same surge.  This is mainly due to the financing requirements.  A home can be purchased for 0 down-payment or 3% but an income property will require 20-25% minimum down-payment unless you’re purchasing it owner occupied which is rare.

In July 7 fourplexes (quads) sold.  That’s not alot but it you look at the chart below the pricing trend is holding steady.  

One other reason why sale are low is that while total supply of fourplexes is high the good quality stuff is not on the open market or for sale at all.  Except for a few exeptions the curent stock of fourplexes is a very low quality.  This means that an investor can purchase a property for as low as $25,000 per units but that property will require a lot of repair and then management input to make it a vaiable and sustainable business.

Looking for a fourplex in Greater Phoenix?  Take a look at our map based Phoenix fourplex search.  Simply select the "Advanced" followed by multi-family.

There are many ways to analyze a real estate investment purchase;  besides investigating location, demographics and timing an investor will also come across the Gross Rent Multiplier, the Cap rate and Cash on Cash, as indicators of investment performance.  Many brochures from sellers and agents will contain these numbers.  Below is an overview of what these are and their pros and cons.

GRM (Gross Rent Multiplier)

This method calculates the value of the property using gross rents that are expected in the investment or projected rental income (PRI)
GRM x Forecast 1st year PRI = Value

For instance:  A property that has a forecasted first year income of $40,000 and the investors desired GRM is 9 then the value is $360,000.  Similarly if a property is on the market at $250,000 and it has a PRI of $19,000 then the GRM is 13.

 
Pros and Cons of the GRM.
The main advantage of the gross rent multiplier is its simplicity.  This simplicity is also its fault.  The GRM does not consider vacancy or credit losses, operating expenses, financing and tax consequences.  In addition, it only looks at one year of income when determining value

CAP Rate (Direct Capitalization)

The cap rate uses the income stream to determine value.

The cap rate is calculated by dividing the Net operating income(NOI) by the price.
NOI/Price=Cap Rate.

Similarly if you have a desired cap rate or you know what the market cap rate is you can divide the NOI by the cap rate to arrive at the price.  So if a property has $30,000 NOI and the market cap rate is 10 then $30,000/.10 or 10% = $300,000. 

What’s your desired cap rate?

Pros and Cons of Cap Rate:
The cap rate brings operating expenses into establishing the value.  Its simple to calculate. 

It does not allow for investment factors such as appreciation or depreciation, financial leverage and amortization, income taxes, nor risk.

 
Cash on Cash

Cash on cash is another method to determine performance.  It’s calculated using the first year cash flow before taxes, using only the investors initial outlay or investment. 

Calculate cash on cash by dividing the first-year cash flow before taxes by the initial investment (down payment) to arrive at cash on cash or yield.

Cash on cash is often used to calculate the length of time required to return the initial investment to the investor.  Cash on Cash can be compared to the dividend on a stock, the interest payment on a bond.

Pros and Cons of Cash on Cash:
It’s easy to use, many investors are cash oriented.  It takes into account credit losses, operating expenses and financing.  It does not allow for other relevant investment factors such as appreciation, income taxes, mortgage amortization or risk. Its also difficult to use it to meaningfully measure performance between investments.

Each of these three quick analysis methods, the GRM, CAP Rate, and Cash on Cash are a good start as a preview for further analysis; investors should be careful not to overly put too much weight into these measures to either accept or disregard an investment property. 

In a future post we will cover more in depth measures such as the IRR (Internal rate of return) and Capital Accumulation.  Both of these will give an investor a more in depth view of their investment.

originally posted

South Arcadia has an area with a cluster of small multifamily buildings; triplexes, four-plexes and unique duplexes make up a large part of a neighborhood North of Indian School and East of 32nd St.

 
This is an ideal location for a multifamily investment with great access to several major freeways,  its right in the middle between downtown Phoenix and downtown Scottsdale.

The East side of Phoenix has rapidly developed and become more in demand.  Hip restaurants, shopping, clubs all make this part of Phoenix the place to be.  Much of the older home stock is being remodeled while others are torn down for new homes, condo developments or for upscale contemporary town-homes.

In this cluster of multifamily homes you can find a mix of duplexes, triplexes and 4-plexes.   Many are owner occupied.  In fact this would be one of the best places for savvy first time home buyers or for a vacation home.  

Unlike other parts of the city, most of these apartments are well taken care of, clean and very attractive.  Some are very good examples of mid century modern architecture.

Because these multifamily properties are in such a good location and most are in good shape, they commend a higher price then other parts of the valley.  That is the trade off in this case.  You give up some return but gain in vacancy stability and the possibility of appreciation or even an opportunity for re-positioning.

 
Some recent sales  include.

Duplex = all 2br/2ba $560,000
Duplex = 3br/2ba  2br/1ba  $380,000
Triplex = all 2br/1ba  $345,000
Fourplex = all 2br/1ba $450,000

Interested in investing in apartment buildings or even buying one to live in?  Take a look at these Phoenix apartments for sale.

The Census Bureau indicates 18.6 million homes sitting vacant nationwide
The second quarter was a new record for vacant home.  This includes foreclosed homes, rentals and homes undergoing improvements. 

Of that amount above 4 million are rentals.  The amount of vacant foreclosures increased but many are selling.  41% of the home sold in Maricopa County in June 2008 were foreclosure homes.

The report goes on the indicate that these numbers are up 6.9% over last year.

This shadow market and vacant home market is having an affect on rental rates in Greater Phoenix.  The pressure on pricing is high but the demand is quite strong keeping rental rates steady if not increasing.

When we plan to buy a commercial property we must keep in mind that there are significant differences between the most common transaction on the market – single family residence, and multi family building, or a commercial site.

Generally we can distinguish two kinds of commercial property.

First type is income producing, and the other is an owner occupied property. 

An income property produces rental revenue, which is called a rent.  Usually the rent is a source of a mortgage loan repayment.  In the order to qualify for a loan, the rent income must support a loan amount.  The borrower is usually considered a secondary source of repayment.  What lenders consider as primary factors in assessing the quality of the property are the net operating income and the debt coverage ratio.

The other important information lenders seek are: how long are the leases, who are the tenants, what is condition of the property.  Especially in today’s market conditions banks are looking for a high quality deal.

The owner occupied property is a place where the borrower conducts his business.  In such case owner’s enterprise must bring enough income revenue to qualify for a mortgage.  The information the lenders look for in this case is a little bit different.

The most important factors are the quality of the property and quality of the business conducted by the borrower.  Bank has to have a guarantee that the owner has an ability to repay the debt.  The business must be well established, and has to document a sufficient historical cash flow.

In assessing a quality of the property a physical quality is only one of the factors taken into consideration.  The risk of the enterprise is also important issue.  The banks like multi family and industrial buildings because they offer stable income with very little risk.  The other common property types we should have no problems to qualify are office condos, flex spaces, retail strip centers, mini storage facilities.  But there are other types that pose a greater risk to the lender.  Those difficult to lend property types might be a gas station – poses environmental risk; a hotel, a motel or an assisted living facility – single purpose property.  Even restaurants and bars are included in to this property type.  In the last case a cash flow is difficult to prove, and there is no collateral. Usually the lenders require a significant down payment in that type of transaction. 

Another important facet of commercial property transaction is an appraisal.  The inspection must be ordered by the bank. But the worst thing is the fact it is very expensive. The usual fee is $1,500 - $5,000, and must be paid up front.  Naturally there are much more issues to the commercial property transaction, but these will be covered in the future.

If you have additional questions about financing call.  Ralf Sztorc, 623.388.3798

Multifamily or Muli-unit properties are regaining popularity not only amongst investment real estate buyers but buyers who want to purchase such properties for owner occupancy. 

This is trend which will probably grow and it presents an opportunity for builders and current owners to build and update existing properties to cater to this new clientel.

This type of property, in certain areas, can have multiple functions:

1. For investment.   Though prices of homes have fallen on the outskirts of Phoenix the prices in the urban areas are still high and they will not fall to such levels as to allow many people to buy them.  The increasing density and popularity of urbanism means that rents will increase.

2. For and extended family.  More so then in years past we are receiveing a lot of interest from buyers wanting to purchase a mulifamily property such as a duplex, triplex or fourplex to live together with an extended family, each occupying a unit and renting out any remaining units.  This may be a good economic strategy vs. buying several homes in an area.

3. For a vacation rental.  Instead of buying a condo or house some snow birds are buying a small multifamily properties and leaving one unit vacant to serve as their vacation home.  There are many very nice areas in Phoenix and Scottsdale close to shopping, businesses and transportation that are perfect candidates for such a venture.  While not in use the property produces income, often enough to cover the cost of the vacant unit.