When we talk about multi-family properties, we’re covering a pretty broad topic, aren’t we?
After all – a duplex is a multi-family, and it only has 2 units!
However, when you’re looking at multi-family apartments, it’s important to make a distinction between a multi-unit house and what qualifies as a true apartment building/ complex.
Adams Investor Group targets 100 to 400 unit deals and to some that seems a bit overwhelming so let’s start by setting a minimum size of 20 units and up.
Why 20 units?
Here is where the distinction comes into play. With single family homes, duplexes and even quad’s – emotion still plays a part in the sale.
People buy and sell residential property based on what they “feel” it’s worth, and not strictly on the numbers.
I’m not saying that buying a 4-plex is a bad idea, I’m only saying that you won’t be able to base your purchase price solely on its net operating income (NOI).
With 20 units and up, however, this is exactly how it’s done.
A 4-plex with an NOI of $25,000 should be selling for $250,000 with a 10 cap rate.
But is it?
It could be anything – because not everyone needs a 10% return on their money, so it might be selling for $300K, or even $350K.
On the other hand, a 20 unit building with an NOI of $30,000 will be pretty close to $300K at a 10 cap rate.
Now, emotion still does come into play here, and even on larger properties.
However, by and large, apartments are sold by NOI and the cap rate, and not by what somebody thinks they’re worth.
Big or little
Whether you’re buying a 20 unit building or a 400 unit apartment complex, you are essentially dealing in the same asset class.
There are differences, of course. Differences that go beyond the money.
The obvious advantage of buying larger complexes is the security against vacancy.
With 200 units, a 10% vacancy means that 180 of them are still filled and generating income.
With 20 units, for example, it means that 18 are occupied.
But what if vacancy goes up? Or you have a major repair and 3 or 4 of your units need to be emptied?
It is important to note that you as the owner this can be a big hit to your own pocket.
The big advantage of smaller properties is that they’re easier to get into, of course.
You won’t need as much money to close a 20 unit deal versus a 200 unit complex.
It all depends on you.
Of course, at Adams Investor Group, we focus on larger properties by putting together syndications to purchase them.
We feel that at the end of the day, the larger complexes are better investments because they’re more prevalent in the marketplace and are less susceptible to changes in the economy.
Instead of going out with $100,000 in cash and trying to find that 1 small multi-family that meets all of your criteria for a good investment – you can pool that money with others and your opportunities expand geometrically.
In the next article, I’ll go into more detail about syndications and how they work.
If you’d like to learn more now, please feel free to get in touch and we can talk about your options and how you can get into the very lucrative apartment investing game!