Buying Multi-Unit Rentals?
I have more experience in buying multi-unit rentals than most agents and will help you see which properties are profitable, which are not, why and by how much. The first few years are often the most difficult. Usually rents continue to rise through the years greatly adding to the profits.
Local MLS. Many listings of Multi Unit properties may be found here.
If you are having difficulty navigating these searches…
have any questions about a property…
simply want help looking for rental property,
call or e-mail me
DUPLEXES through FOURPLEXES
Escalated rents have pushed the cost of 2 to 4 unit properties up significantly but their financial return keeps these properties a good investment. Just be careful and smart when you buy. This is where I can help you. I’ve done this many times and will walk you through the process. Call me 707 332-8301
ADVANTAGES of 2, 3, and 4 plex (unit) properties are:
- They offer a HIGHER percentage of rental income compared to a single family home of comparable cost.
- The rent collected from 2, 3 and 4 unit properties is considered when qualifying for the loan. This means you’ll qualify for a more expensive property.
- If you intend to live in one of the units, then FHA guidelines could apply. This allows buyers to purchase with the least down payment, as little as 3.5% of the purchase price. There are even loans (called FHA 203K) that allow the purchase of homes that need extensive work.
- Since you can buy a more expensive property, when values go up you’ll make a larger profit. When rents go up you’ll make more profit due to having multiple tenants/rents.
- If a tenant stops paying rent you will still have the other tenants to collect rent from while dealing with the issue. In the case of fourplexes this is referred to as “standing on four legs”.
- Due to higher rental income you can afford to have a professional property management company manage the property for you.
ADVANTAGES OF PROPERTIES GREATER THAN 4 UNITS
These properties are typically only purchased by professional investors which means the competition will rarely bid the purchase price high. They are typically sold at a cap rate above the current mortgage interest rate for commercial properties. This offers a good return on investment. ROI
DISADVANTAGES OF PROPERTIES GREATER THAN 4 UNITS
Loans to purchase these properties are harder to qualify for. There are often government restrictions on how quickly the rent can be raised. This is important if the rents are below market value when you purchase the property. At 15 or more units there must be an on-site property manager.
An investment property’s value is, in large part, due to how profitable it is. How profitable a property is, relevant to its cost, is called the “capitalization rate” or the CAP rate.
CAP rates are the net annual profit a property yields using the following formula:
Collected monthly rents X 12 months
Minus all (and I mean ALL) expenses for the year: vacancy, management, maintenance, taxes, insurance, utilities, legal services, advertisements, etc.
Divide that number by the total cost to purchase and set up the property. (purchase price + closing costs + rehabilitation costs)
The end result of that equation is your net annual profit / CAP rate.
CAP rate EXAMPLE: Given a triplex that cost $700,000 + $5,000 in closing costs and $20,000 in needed repairs (a total cost of $725,000) and rents of $1,500 monthly per unit (x 3 units) $4,500 monthly rent x 12 months per year = $54,000
$54,000 “annual gross rent”. Now subtract from that…
-$2,700 (5% for vacancy, a reasonable expectation)
-$3,105 (6% management fee on collected rents)
-$2,250 leasing fee (1 month’s rent every 2 years per unit is a reasonable estimate)
-$5,400 maintenance +/- depending on the age and condition of the property & quality of tenant
–$8,750 estimated annual property taxes
-$1,400 estimated annual insurance (this will vary with the age and upgrades of the building)
-$3,500 annual utilities (this can vary depending on what you do or don’t pay vs. what tenants pay)
-$1,500 legal, advertising, miscellaneous +/-
-(28,605) subtracted from the annual gross rent =
=$25,395 net profit Now divide that by the total purchase cost of $725,000 = .035 or 3.5% annual return or in industry terms, a 3.5% CAP rate.
If you manage the property yourself you would save the management and leasing fees of $3,105 and $2,250 ($5,355 total) giving you a $33,960 net profit for a 4.7% annual return, called a 4.7% CAP rate.
Bank loan costs and payments are not part of a CAP rate calculation but are critically important. If you have a CAP rate higher than the bank’s interest rate on the mortgage, you will make a profit on that spread. If the bank’s interest rate on the mortgage is higher than the calculated CAP rate, you will take a loss on that spread and should pass on buying that property or pay cash.
In the above scenario, if you can get a loan below 4.7% – OK. If not, you should pay cash for such a property. Better still, let me help you find you a property that makes a higher profit!
I am an expert on such properties and can offer you my experience to guide you to higher profits and fewer headaches. You can search for 2, 3, & 4 unit properties in my Property Search. Call or e-mail me and I’ll help you.
The following are just a few of the numerous referrals from my clients.
To Whom It May Concern:
In our business dealings, he has served as selling agent for two of my investment properties. Both of these transactions were completed in an expedient and professional manner and in both instances he was proactive in ensuring a received maximum value on the sale. His contributions on these deals spanned the full sales cycle, from presenting the properties in their best light, to advising during contract negotiations, to working with the various inspectors, agents, lenders and title companies.I continue to work with Alex on prospective real estate investments. His knowledge of Northern California regional cities provides a solid basis for identifying value. His proven record in generating gains on residential and commercial investment property is based on pragmatic and logical analysis. In this, his approach is comparable to my own and forms the basis of solid working relationship. I highly recommend him as both a listing and buying agent. Best regards,
“Alex helped us execute our personal investment strategy to create great cash flow and a huge future upside. He has keen awareness of the local market and can help you pick a winner. These opportunities come around once in a lifetime.”
“Alex helped us buy this home for 25% of its previous value. I soon rented it for $1,475 a month. His helpfulness, insight and integrity are great.”
“Very knowledgeable, top of his game!”
“I would gladly recommend Alex Schauffert to anyone who needs the services of a realtor; he will exceed your expectations!”
“You were very helpful and patient with us. You make things happen even when others give up.”
Matt & Dana Carroll
“If you’re seeking representation of the highest caliber and character, Alex is your man.”
or e-mail me Alex@NEWSTANDARDREALTY.com