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Real Estate 4 plex question

Discussion in 'Real Estate Investing' started by yveskleinsky, Sep 22, 2007.

  1. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    I understand the benefits of multifamily (rarely 100% vacant, headaches under one roof, residential financing for 4 units or less). However, I am confused on how to increase their value. ...Can the value be "forced" like with 5+units? Meaning, are they valued off of a cap rate? (if I increase gross annual rents by $9k, and the cap rate is 10, then the realized gain in value is $90k.) Or is the value dependent on the market like with residential SFR?
     
  2. snowbank
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    snowbank Platinum Contributor Speedway Pass

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    Commercial(5+ units) should be based on income.
     
  3. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    right....but how are multi's valued? Is there a way to increase value at such a delicious rate like in commercial? Or is it a combo of sweat equity in cleaning up the property and modestly raising rents, only to have a small gain?
     
  4. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    The problem with 4-plex or less units is that they usually sit on areas where there are many other identical four-plexes around. Many banks will take the appraised value depending on comps (recent sales of properties with the same number of units and sp.ft) instead of using the income approach. I know of successful investors making big money in small multi's but most of the value was created by macroeconomics (i.e. the area was improving) rather than by merit of their management/improvements. Maybe SteveO can add more info on this as I remember he posted somewhere about his first property being a 4-plex. Anybody else has owned 4-plexes?
     
  5. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    Andviv-

    Aren't you into multis? ...I agree with your analysis, so with that being said, because of the difference in valuation between 4 plex (residential) and 5 plex (commercial) wouldn't it then be of much greater financial benefit to go with 5? ...I know the downside would be less attractive financing terms and rates, but it seems the upside really makes up for that.
     
  6. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    I am into multi's, I'm just not into small properties. I'm following Vollucci's approach of partnering to go into bigger properties in the right areas.
     
  7. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    Are you saying smaller apartments?
     
  8. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    correct, I meant properties with few units. Part of the decision of going for multi's was the effect that 'small' improvements have in the value. These effects are mind-blowing when you have more units. I posted an example in another post you started, so I decided to go for bigger properties instead of starting small.
     
  9. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    Andviv-
    When you made the jump, did you go straight into 20 units or ramp up to that? ...What kind of agreements do you have with your partners? I think I now have clarity. I should go for commercial level units, but still stay small enough to learn. Does this course of action sound prudent, or would you recommend that I go larger than 5 to start?
     
  10. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Have you read Vollucci's book yet?

    The biggest part of the success of this strategy is to find the right area to invest. If you don't live in an area that is going to improve (that happens to me, Washington DC area is doing great in the apartment buildings market) then you have to look outside your area. This requires a big change for many of us that want to control as much as possible.
    If you are in an area that is improving and current owners of apartment buildings are 'motivated' to sell soon then you have a better chance of be the hands-on partner for the whole process.

    About the agreements you put in place, I suggest you read chapter 13 in that book. That explains one very good way to do it.

    Like I said, I prefer to go for the best/biggest property available.

    PS: This is 'my' way of thinking. It seems that you have clarity now on what you want to do. That is very good in my opinion. Your course of action does sound prudent.
     
    Last edited: Sep 23, 2007
  11. tbsells
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    tbsells Contributor

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    I agree with Andviv. 4 families are valued more like SFR's because they are usually sitting in a subdivision type environment with like kind properties. In some ways the building next door has as much effect on your value as your cashflow. Improvements to management and cash flow will obviously benefit you, but probably not as much as they would in a larger property. Unless, you could buy the whole neighborhood at a discounted price and improve it all.:smx9:
     
  12. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    I am still working on Vollucci's book. Not easy reading for sure! I am also reading Berges book on buying and selling apts.

    My area is set to grow to 1 million people in the next 5 years. Also, our housing prices have really gone up. The biggest market is mid-level places. Like $450-$900/month that are well-kept.
     
  13. terrancefoster
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    terrancefoster PARKED

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    if i am correct you are asking how to increase the value of the building and collect more rent one way is to remodle kitchen, bathroom hardwood floors ect well at least that kinda how it works here in chicago
     
  14. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    Improving the property is one way, I was looking at increasing rents thereby increasing the total value of the property. (Ex. Increased annual rents by $10k, cap is 10% added value is now $100k.) ...If I understand this value play correctly.
     
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    terrancefoster PARKED

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    ok then even if you want to add more for the rent there are thing that you can do

    i will only give you some of my ideas so don't tell anyone Lol

    you can remodle
    add more security to you property
    security Camera
    Washing machines/ dryers in the building


    you have to give people a reason to pay you more
     
  16. JesseO
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    JesseO Contributor

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    Yves, in a 4-plex you want to increase the aesthetic value so that you can get higher rents, which I think is what you were alluding to. It is a lot like commercial, except that it's based on a more "homey" feel. Same principal, different results.
     
  17. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    Whoops- I was referring to 5+ units when talking about increasing rents=increased building value- not a 4 plex. ...Where it doesn't work that way.
     

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