Investing in Multifamily Housing
As I discussed in one of my recent housing market forecast, multifamily is currently one of the more attractive investments when you are looking for a stable investment with a good cap rate. However, if you’re looking at spending less than $200K, you may want to consider buying several single family houses. For those with substantial cash reserves that are looking at spending over a few hundred thousand, I have THE play for you.
I’m seeing a number of bank owned and other distressed properties that have poor vacancy rates, a great deal of cosmetic work needed from months of neglect, and very little income coming in. These properties can be bought at substantial discounts. Once purchased, you should plan on spending about 3 months to stabilize the building. Nearly any repairs can be done in thistime frame, and these properties are often filled with deadbeat tenants which the previous owner didn’t have the $480 per pop to evict. The evictions will take 3.5-6 weeks depending on the courts current case load. With multiple units for rent, you can capitalize on scales of economy on both the repairs and advertising. The same one advertisement can be used to fill 20 similar units (more on the strategies of writing rental adds that get noticed in an upcoming article). Once you reach 95% plus occupancy at market rates, the cap rate will have grown exponentially.
You now have a property that can be flipped, perhaps using a 1031 exchange to get you into a bigger property, or can be held now that you are getting at least double the cap rate of a stabilized/optimized investment property that you could have purchased with the same amount of cash in.
Make no mistake; this is not a strategy for the frail of heart. A great deal of expertise and sophistication is needed to execute this strategy from beginning to end. You need to be able to accurately estimate repair cost, market rental and vacancy rates, the cost of clearing out delinquent tenants and quickly filling it with good tenants, and the opportunity and time cost compared to a stabilized investment. Ed says, “Those who are willing to go the furthest out on the limb stand to get the best fruits.”
Reprints permitted as long as they contain the byline, “By Ed DiMarco M.S., M.A., Realtor @ MovePinellas.com”