Multi-family properties are the best investments.
June 01,2022 | Posted By Flavia Brown in Real Estate
A few notes on buying multi-family properties:
+ Small and mid-size apartment buildings are rarely bought by hedge funds. Therefore, it is “open season” for absentee owner investors to invest in duplexes, triplexes, quadruplexes, and up to 30 units. Multi-family properties are HOT. Hedge funds invest in large apartment buildings (100+ units) and blocks of SFRs. Multi-units provide long-term passive income and value appreciation.
+ Los Angeles County has an endless supply of renters because most people can’t afford to buy a home. The demand is high and is expected to grow for years, and rent rates are expected to continue increasing.
+ The perfect real estate investment has five attributes: passive income, depreciation (a “paper loss” that the IRS allows to be deducted from active income which you pay tax on), equity, appreciation, and leverage.
+ Apartment building values are based on the financials (profit and loss statements and rent rolls) and cap rates. The higher the net operating income (NOI) the more the property is worth. Income properties are valued based on NOI per year (revenue minus expenses).
+ Cash flow = NOI minus debt service payments (mortgage payments). Note: Since the value of a property increases as the NOI increases, you can force the value up by raising rents and occupancy. This is called Forced Appreciation. + Quick note on cash flow (the difference between the NOI and the debt service payments, or mortgage payments). Here are three formulas:
Yearly cash flow = NOI minus debt service payments.
Cash in the deal = down payment + closing costs + rehab costs.
Cash-on-cash (%) = cash flow divided by cash in the deal.
Cash in the deal includes down payment, closing costs, and any rehab capital needed to address deferred maintenance and other repairs.
+ One popular way to avoid tax liability is to do a 1031 Exchange. To accomplish this correctly the owner needs to consult with a 1031 Exchange Intermediary and a tax specialist.
+ The Dodd-Frank Law is not applicable to duplexes and larger buildings as long as they aren’t owner-occupied.
+ “Free” management fee? Very possible. If the right property management company is hired, and the owner has a rider under the management company’s master insurance policy, the savings from reduced insurance premiums can be greater than the management fees.
+ Multi-family properties (5+ units) valuations are based on the numbers, specifically their net operating income (NOI) and cap rate. NOI formula: NOI per year = revenue minus expenses. Cap rate formula: Cap rate (%)NOI divided by price. The higher the cap rate the better. A related formula: Value of property = NOI divided by market cap rate. A good deal is when the cap rate at which you are buying the property is greater than the market cap rate. Ideally, the purchase cap rate will be greater than the market cap rate. The higher the cap the lower the price.
+++ Interested in selling your investment property? My strong and effective marketing program is designed to attract the most potential buyers and real estate agents, and the more buyers the higher the selling price will be. I know how to generate multiple offers.
+++ Interested in buying an investment property? I know how to find or create good deals. When is a good time to buy a property? “The best time to buy is yesterday; the second best time is today.”
+++ + I can find or create good deals for my buyers – off-market and long time on the MLS. Many multi-units have been listed on the MLS for months, and those owners are eager to negotiate prices. Those properties are ripe for low offers. Also, there are ways to make offers with no upfront money (earnest money deposit, or EMD) and no proof of funds until an offer is accepted. I can send details and photos of any kind of property for sale. No cost or obligation, of course.
Best regards and to your success,
Flavia Brown, Realtor (17 years, 253 closed escrows, no complaints, perfect record with the California DRE).