Multi-family 101

Thinking of upgrading rental properties, perhaps moving from single-family homes to multi-family buildings? Have no fear. While managing these complexes, whether they have six apartments or 60, can sometimes feel more like running a business than managing a real estate investment, many of the tax, landlord and general real estate investing rules that apply to single-family housing also apply to multi-family investments.

Purchasing: Obviously, the overall cost of a multi-family building or apartment complex is much higher than a single unit. Small buildings with say, six units can range anywhere from several hundred thousand on up into the millions of dollars depending on the market, so you’ll probably need to have more cash available up front than if you’re buying a single-family home. The cost “per door” varies widely from market to market but is typically lower in larger properties, a result of various economies of scale.

An ideal building has a good mix of two-and three-bedroom apartments, the larger of which provides an opportunity to rent to families.  Complexes with all one-bedroom or studio units tend to stay empty longer since they significantly narrow the pool of tenants they can attract. Of course, this all depends on the location of the property. A building near a college campus, for instance, might very well find plenty of tenants looking for one-bedroom apartments. In most scenarios, though, buildings with a good mix of unit sizes will outperform those packed with studios or one-bedrooms.

Location matters, so if you can, choose a property near the bus lines, local shopping centers, recreation facilities and other local attractions. Well located buildings command better sale prices and higher rents because they will be more desired and sought out by landlords and tenants alike.

Financing: Generally, a residential loan is all that is needed for buildings with one to four units, while a commercial loan is necessary for buildings with five or more units. Typical financing for one to four units will require 20 percent cash down, and loan fees vary, but usually average around 3.5 percent of the purchase price. In order to add larger properties to your portfolio you need to apply for a commercial loan, which has different underwriting and approval processes. For smaller residential loans, the banks generally look at the investment potential of the real estate and then fall back on the borrower’s personal financial and credit history. That’s not strictly the case with commercial loans where lenders are much more interested in profit and loss histories for the project itself. That can make convincing your bank to give you the money based on forward-looking projections more difficult. If possible, you should provide at least a three-year (five is optimum) historical report of income and expense data with your application package.

You may also run into trouble finding a bank that wants a commercial loan for less than $500,000. That means you’ll either have to think bigger and spend more upfront or shop around until you find a bank willing to finance smaller deals. Overall, lenders tend to look at all cash flow considerations including the amount of money you have in reserve to cover unforeseen expenses. They’ll also look at other costs you’ll incur besides the mortgage; these will include taxes, regular maintenance management fees and vacancy rates. Remember, banks need to see an ability to make repayments on a monthly basis in order to approve a loan. Many banks will have a set income to debt ratio, called debt service coverage ratio or DSCR that you will be required to maintain. A DSCR of 1.0 means for ever dollar of income there is a dollar of debt repayment. Expect most lending institutions to require a DSCR of at least 1.25 — one dollar and twenty five cents net income for each dollar of debt repayment — before they consider a loan viable.

Cash Flow: One big advantage of a multi-unit complex is that you will get payments from multiple tenants each month, making both vacancy rate hiccups and deadbeat tenants easier to absorb. If a single-family home is empty, vacancy is instantly 100 percent and cash flow plummets to zero. In a building with six units, if one or two of the apartments are empty there is still income flowing to help pay the bills. Compare that with a single-family house where just a few months without rent can quickly put a landlord in a cash flow crunch.

Because valuations of multi-family properties are tied more to cash flow and net income than single-family units, they tend to be less prone to wild speculative swings in value during both rising and falling markets. These values are often stated in the form of a “cap rate”, which is the ratio between the net income and capital cost. For example, a building purchased for $1 million that generates $100,000 in net operating income has a cap rate of 10 percent. When valuing properties, it is useful to think of the cap rate the same way you would look at a rate of return for any other investment. The higher the cap rate, the higher the rate of return on the investment, but also the higher the perceived risk. Cap rates vary depending on the location, size and history of the property. A fully tenanted apartment complex in a rapidly developing area will command a lower cap rate than an older building in a questionable part of town which is perceived to be a higher risk proposition.

Maintenance: This might be the first tangible difference many investors feel after the purchase process is completed. Even if purchasing and financing your first complex was easy, chances are you’ll soon feel pressure from the extra tenants you’ve taken on. Managing your first multi-unit project can feel like a full-time job. Real estate professionals will advise you to be prepared for the worst, and you should plan accordingly. Instead of that one perfect family you rented a house to with little fanfare, you’ll have several tenants with their leaky pipes, noisy neighbors and lost rent checks to deal with at any given time. Also, keep in mind that the same commonsense rental rules apply to apartments as homes. That means the more units you have, the more you will have to repaint, clean and inspect before a new tenant moves in.

However, if you currently manage several single-family units in different locations, buying a single larger complex could provide an advantage for you. Instead of six families living in six separate homes, your tenants will now share a single roof, lawn, and parking lot, leaving you only one area to maintain instead of six.

It may be advantageous to hire a property maintenance company to supervise, maintain and field calls for you. This will cut into your profit, but if you are a serious investor who wants to spend your time vetting new projects, it may well be to your advantage hiring someone else to take care of broken toilets and overgrown lawns on a day to day basis.

The Right Bet

Investing in apartment complexes should be considered a longer-term and possibly deeper commitment than owning and renting out single-family homes. It takes longer to sell a building or large complex than a home and it may take some time to get the hang of managing such a large property. However, if it’s done right, owning a multifamily complex can provide a constant source of income for years to come with considerable upside along the way. Any investment is a balance of risk, work and reward, but if you’re ready to take on a bigger challenge and move to the next level of investing, then a multifamily project might be the right bet.

LOVE HOUSE KIDS PROGRAM  JULY UPDATE

First of all a huge “Thank You” to the Great Escape Lounge for making us the beneficiaries to their golf tournament. They raised 1400 dollars for our cause and also sold our Love House Kids Sponsor bracelets to everybody . It is just amazing, the patrons, the staff they are all into our kids and we are treated like family.  They have been there when we need them the most and Carole and Andy continue to do just that. If you want to visit a true neighborhood bar in Phoenix drop in and see them at 4228 E Indian School and tell them thanks for helping our kids.

Our annual fund raiser is coming up September 15^th 4 PM- 10PM at the Moose Lodge at

and Peoria . The Moose lodge held this event for us last year too and what a job they did. Don and Denise Green with all the staff are just there for the kids. We have our “Tribute to Tom Petty Band” performing again this year-they are awesome! Scott who owns Blackwell Business Services (  tops in copier and computer services) and Eric owner of Strictly Business ( a computer and computer networking  garu)  not only do they  perform for our event but they sell Love House Kids Sponsor bracelets all year  through their business and their other shows.   “Into Wishin” will be there again this year and they too never say no to us. Joyce Guyett also organizes the whole entertainment venue for our event , is an awesome Realtor and on the board for the Love House Kids Program.  We have an added act this year. Jeremy Scott – comedian has given us a Yes   thanks to Danny O Donnell from O Donnell Appraisals. Danny has made us a beneficiary for his Christmas benefit and still gives us Jeremy. Isn’t it amazing how people that give just keep giving?  We are entering a rough time right now since most of our network of supporters is involved in the Real Estate industry and that market has not been kind, however we are trying to reach out to other businesses to get support. Any ideas any of you have or if you can contribute, it would be most welcomed. As tough as the industry has been in this past year Jeff Miklus from Budget Brothers Pest Control is still with us- Jeff ’s group have sold 20 tickets 2 years in a row and he is aiming for that again. The title company that has picked up the cost of the meat in the past just can’t see their way clear to do it this year. Kevin Host from Countrywide Home loans and Gary Kirkpatrick from Global Electronics Inc have picked up the cost of the meat for the event and once more 2-10 Home Buyers Warranty have picked up the cost of the sides. That means all the money from the tickets goes directly to the kids program which is 100% to the kids. The tickets are 25.00 and for that you get a steak/chicken meal, live entertainment, silent auction,   raffle prizes and the opportunity to do something great for abused neglected kids. If you can’t attend but would like to help you can donate thru our web site at www.lovehousekidsprogram.org  or call me at 602 971 3331. Now the trick is to get the tickets sold. Our fund raiser proceeds need to cover our Therapy program that has a cost of $35,000, school supplies for 400 kids, clothing for 200 kids, sponsorship for special needs and projects in 5 group homes, a shelter for moms with kids, 2 outreaches for the very poor kids and Christmas for 400 kids. These lists are without the emergency calls that we have never had to say “No” to and are in no mood to start now. One ticket, one dollar- when we start there, we can make it- we don’t have to have huge commitments but we do promise that we will be responsible with that one dollar you give and it is appreciated. We need your help to make this year’s fund raiser a success.

The Love House Kids Program  is a non profit charity founded by Maureen to help stop the pain of children in need. We take 0 for salaries and adminsitration. We sponsor 35 kids in group homes and do our best to give relief to 150 homeless and extremely poor children. You can found out more about the organization at http;//www.lovehousekidsprogram.org

 January was a busier month than I anticipated with children and turn a rounds and the list goes on, I guess that’s what we do- the crisis doesn’t stop and neither does the abuse. Wouldn’t it be terrific if there was no need for the Love House Kids Program but until then one child at a time. We heard from Catherin that our play therapy tools were doing the job and a request for more (they are already delivered). When you have caring people using their talents to help these kids- there is only one speed to work at and that’s full speed ahead. Thank You Catherin.  We were able to present each girl at the group homes with a new comforter for their own to keep and they got to choose it- that felt good to know that this came together simply because people heard the idea and jumped all over it and made it happen in unbelievable time. We also had a lady come through a Curves employee at
7^th Ave and Union Hills who heard about us and needed our help. With a full grown family of her own and a new born who is a great nephew in a hospital needing a family, she went picked up the child to raise on her own (mom spends a lot of time in jail) Hard working lady that she is- she had nothing and wanted to know what she required to meet our criteria, I told her she had just met it. We were able to get clothes to her, bouncer, crib is on the way and so is a stroller and we will grow with this baby- It’s not over yet! I have attached a picture of our new baby- What a precious gem! We got surprised with 2 other little boys that had nothing as well- That call came from Racquel at Southwest Leadership and when we get a call from her- we listen. There is nothing candy coated about her- she tells it like it is- if she says they have nothing, that’s what she means and she would never ask for something they don’t need. We have really grown with our relationship with Racquel. Amy Sue from the Bridge supplies a picture of the babies in their highchairs and I have attached that as well- just too precious!-What a job she does!Let’s talk about the back bone of every organization, the volunteers. We got a few that are just always there- Peggie Waldell has been hanging out with me for 6 years and still here doing her thing- like shopping for the baby this week on a minutes notice, writing Thank You cards, sorting clothes ( her and I have sorted a million of those). Racquel put out a call; maybe I should say a scream for math tutors for all her girls in all the group homes. Well clients of mine and volunteers that worked like a horse when it came time to change out season wardrobes for 45 kids- stepped up to the plate both math teachers along with other subjects.. Thanks to JoAnn and Eric Paderi.  A client Steph Happ stepped right up to the plate being a math teacher and science teacher .We even had people in other professions now but qualified in the field offer internet, fax and phone assistance. Thanks Lorette. This is the stuff that makes all of this work- people giving and ready to give. This all came out of one email and the responses came in.  I have another a couple of other people that I want to give a special “Thanks to” I have a mother-in law and sister in law  with her two girls in Chicago that are right there for us. My mother in law who is in her late 80’s crochets Afghans for our babies and then ships them to us in Arizona- I always say that she rocks our babies from afar. My sister-in-law along with her two girls have jumped on our love train and they have sent us boxes of books but two weeks ago we received the most adorable towel sets with teddy bears wrapped up inside for our girls as they arrive to spend time at the group homes. Genuinely a real inviting item for them, coupled with their comforters- just make them know we thing they are special. Just an outstanding job by Lora, Hilary and Emily- I wish they were closer but it sometimes feel like all of them right here. At the end of this month, I was introduced to Danny O’Donnell who comes from a family 11 and is also an appraiser along with being a human being that just keeps giving back to community, He and his family have a Christmas Party every year and collect toys from each guest- Their parties can see 300-500 people so I’m told and each year he decides on the recipients of the toys and we at the Love House Kids Program have been chosen as one of the two- What a Blessing! Lets all see what February brings.