Good time for multi-unit properties?

[Ash Housewares]

Everyone on this site is pretty much in agreement that single family home prices in SoCal are in the early stages of a downturn. But what about multi-unit properties?

Multis are valued based on the rent they actually generate, not the more subjective (and vulnerable to fraud) comp method.

Interest rates are still relatively low, and the long-term macro factors point to a weaker dollar/higher inflation in the years ahead. These factors lead me to believe that despite the woes of the SFR market, this is actually a pretty good time to buy multi-unit properties.

I’m not nearly as knowledgeable as others on this site, so I’d appreciate hearing your thoughts on the matter.

[asragov]

With so much condo and single family inventory on the market that can be turned into rentals, I would certainly be cautious about multi-family properties.

As you say, these properties are based on the rents that they can generate, and there is probably a lot of downward potential in rents from this point.

[sdrealtor]

Rents are actually pretty good as is rental demand. Valuations are screwed up on 2 to 4 unit properties, just as much as sfr’s.

[Bugs]

This is a horrible time to buy multi-family units, which is why there are very few sales right now. They’re very overpriced relative to their earnings.

[no_such_reality]

For 2-4 units the first three posters nailed it. They’re completely whacked, I’ve seen so many where the rent won’t covered the payment on a 1% teaser rate loan.

For complexes that have 12 units & up, it isn’t much better, they’ve rocketed on two factors, strong rent growth and appreciation for potential condo conversion.

As the 1st poster said, I’m really concerned looking at investment properties for the two big unknowns, how high is vacancy going to go and how soft will rents become. I’ve been eyeballing Craigslist for a while and the half off/move-in month free offers are steadily increasing. This is all before a lot of the condo market comes back on line.

Meanwhile, reported rents keep going up, but I suspect that is the same as the median going up.

A 1/1 in Nohypeville is probably the same as it was last year, whereas a trendy luxury condo downtown has someone that sold their house and is renting it for 50% more than a regular two bedroom, but 1/2 of what it would cost to own. That’s skewing the rent growth numbers. Plus, like the NAR, it’s kind of the kid watching the cookie jar on reported rents.

[Bugs]

Many of the apartment properties were financed with loans that have a 30yr amortization, but a 5-year call. This means they get refinanced every five years. We’re probably getting close to some of those resets, at which time we’re going to see if their increases in net income are sufficient to refinance.

I don’t necessarily see a huge problem right now unless the commercial mortgage interest rates jump up. A borrower whp’s been paying on a loan for 5 years has a little more equity than they started with. Although there have been rent increases, the expenses have been increasing too so net income hasn’t increased that much. Vacancy rates are relatively stable so that isn’t much of a problem right now, unlike what happened during the ’90s.

One of the reasons we had a lot of problems with apartments in the 1990s was because we had a glut of apartments as a result of the number of projects built during the mid 1980s. This time, they added almost no apartment properties on the lower end of the size ranges and relatively few of the large projects. We don’t have 15% vacancy rates this time.

Of the few sales that are closing it is apparent that we still have some investors who have an unrealistic view of where those rents are going. It doesn’t make any sense to buy a rental property with a annual gross income multiplier of 15 (that’s equal to a GRM of 180) and a 35% expense ratio UNLESS you think that either the rents or the value is going to increase significantly in the short term. And I’m not talking about 3% increases here, either.

[Ash Housewares]

Thanks for the insight. I wasn’t aware of the 5-year refinance that Bugs mentioned. My question wasn’t specifically focusing on the SoCal market, which I should have made clearer in my first post. The macro factors (dollar weakness/inflation–>higher wages–>higher rents–>increased value of Apt bldgs) apply all across the US. I did some preliminary recon in the San Antonio market about three months ago, but decided the hassles involved with being an absentee owner weren’t worth it.

[surveyor]

absentee ownership

I did some preliminary recon in the San Antonio market about three months ago, but decided the hassles involved with being an absentee owner weren’t worth it.

While I do not have any property in San Antonio, my group is doing fairly well there. Most properties there break even but we are seeing about 20% to 30% returns on investment there.

As for whether being an absentee owner is worth it or not (the path to getting rich is not necessarily easy), at least the ability to lower my taxes by a huge degree is worth it to me.

(an absentee owner x3)

[no_such_reality]

Surveyor, you’re not an absentee owner. You’re a principle in a real group that has rental properties in other locations that have principles in them, correct?

[surveyor]

nope

I should specify. When I say “my” group, I actually have no ownership of it whatsoever. I am just a member (lisa vander, our figurehead, calls us her students). I participate in the network, but all of the properties are owned by their respective owners. No one “corporation” holds it. It’s not a real estate investment group where we all pool money together. We all do our own thing.

Nope, I’m a regular person, working a job, and also doing real estate as well.

Also, we just learned about a great real estate tax deduction – apparently it’s called “chattel appraisal depreciation”. Got to research it.

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