The Phoenix Business Journal (9/26/08) has an overview of the apartment building vacancy rates.  I’ll add my thoughts to this relating to smaller multifamily buildings.

Reasonably when the market for homes goes down in sales and demand there is increased demand for rentals, both homes and apartments, "We were initially surprised to discover that what was bad for single family housing was not good for multifamily housing either."

"Hendricks’ researchers estimate that there are 8,500 private homes, including condos, listed for rent in the Valley. There are an estimated 22,000 empty apartments as well."

Take a look at our data for demand and supply of single family rent homes.  This includes months of supply and the median sales price for comparison.

It’s quite clear by all the for rent signs both broker and private, that many home owners and investors are trying to lease out properties.  Often this is because it’s because they cannot sell or it’s not the right time to sell. The surge in single family home rentals has a shadow effect on all rental, home and apartments.

"Experts in the multifamily market believe some people are so pressed financially that they are moving in with friends and family members."

We have noticed this trend directly with out own properties and the properties that we manage both single family homes and multi-family apartments: it’s either friends moving in together or a mother moving in with her son and so on.  Often this is a consolidation of two apartments into one or two homes into one.  I’ve seen cased where a home owner moves in with family and rents out their primary home to help during this economic change. 

"Vacancy rates on average are creeping up to 12 percent.  That’s more than double the 5 percent vacancy rate that is considered healthy for a metro market.", "…vacancies in west Phoenix stand at 13.2 percent.

So both physical and economic vacancy is higher because besides having less units occupied many of the complexes large and small are offering incentives to move in.  Smaller properties tend to do better if they are properly managed.  The central Phoenix areas and east Phoenix tend to have lower vacancy rates due to the central location, while apartments in less desirable areas, even in certain pockets in central phoenix, tend to do worse.  Despite the central location it’s everywhere that owners need to put in more work or more advertising to keep units rented.

Vacancy rates are:

• Average for the valley  12%

• West Phoenix  13.2%

• Scottsdale 9.1%
  

• Paradise Valley 9.9%

• Ahwatukee 8.4%

• Chandler 8.7%

The value of separate meters on a property cannot be underestimated.  Most multifamily properties have one meter for water and maybe separate meters for electricity: in small multifamily properties is normal to have individual electric meters but it’s uncommon to have the same with water: that’s probably why its often missed.

Below we’ll compare two similar properties: one with separate water meters and one with a master water meter and the affects on income and the property value using a cap rate for evaluation.  This is just a simple evaluation to make a point. 

The properties are very similar: the rents collected from the tenants are the within 5 dollars of each other on average so we’ll just use the same rents for the sake of being clear.  Also, since other expenses vary like taxes, insurance, maintenance and landscaping we’ll reduce the analysis to the water, sewer and trash expenses since the other expenses have no bearing on our topic.

Property One:  4 plex with total rental income of $2,808.00 per month.  The units have washers and dryers in each unit and one master water meter.

Property Two: fourplex with total rental income of $2,808.00 per month.  Similar to the property above the units have a washer and dryer.  In this case the builder put in individual water meters for each units.  There is an additional expense to do this when the property was built: in fact its quite a substantial expense but its of great value to the former and current owners.

what does that mean to the bottom line in the pocket money?

On a monthly basis the owner gains $305.00 additional dollars of income and $3,660.00 yearly.  While this is not a lot of money in itself if you compare the total potential income of the property it translates to 11%. 

What does it mean for the property values?

At current cap rate of 7.75 it’s $47,222 in additional value: and at a conservative cap rate of 9.25 it’s $39,567 in additional value.

So, if you see two very similar properties priced, each at $310,000 which is better?  Of course the property with separate water meters because your buying for the same price but the value is greater as is the income.  

Even if the property with separate water meters were to cost $25,000 more it’s of greater value then the master metered property.  In fact that $25,000 turns into a 15% return on that money and with positive leverage the return would increase.

So when looking at properties look carefully at how they are metered and consider the true value it reflects on your return, because often its substantial.

But there is actually more to it.  Separate water meters have additional benefits to the owner.  Besides the increase in income and value there are no bills to pay, it’s much easier to control expenses, and things like unreported water leaks in the toilet will not affect your wallet but the tenants.  This is important in units that have their own washers and dryers: a washer can use up a lot of water that the owner will not have to pay for.

For savvy investors this can provide a way to increase the return on the money invested at the point of purchase and/or at time of sale.

originally posted at PMT

The location of this fourplex is one of the best possible.  Arcadia is a very in demand neighborhood in East Phoenix.  It’s in between major entertainment and employment centers.  The demand for housing is strong from both home buyers and tenants. 

What attracts people here is the unique established atmoshphere: the lush greenery, the beautiful surrounding mountains, the old and new homes from starter to luxury homes.  There are unique complexes like Three Fountains or the superb local grocery and restaurant Le Grande Orange, Postinos and Radio Milano all of which are within walking distance.

The location commends a premium rent and since it is an established neighborhood in the floodway of the urban living trend there is lower risk of both economic and physical vacancy.  In fact this neighborhood provides many opportunities for savvy investors.  The current status as long term residential apartment rentals can be changed to increase total income.  There are a few creative things that can be done which the location affords that could not be done as successfully elsewhere.

This is also a great property for an owner occupant or as a vacation home.  There’s enough room to create private yards and the covered carport in the back could be expanded to add parking. 

Snow bird can leaves one unit for theselves to remain vacant  while generating income from the other units or the owners unit can function as a short term furnished corporate rental when not in use by the owners. 

Location:  3637 E. Glenrosa Ave. Phoenix, AZ 85018.

This is the western end of the Arcadia neighborhood.  Read more about the Phoenix Arcadia neighborhood.

The property is priced at $399,000.  There are two identical fourplexes side by side.  Each is priced at $399,000  Both together have a lot size of just over half an acre (22,401 Sf). 

4 units.

3 one bedroom units     

1 two bedroom unit.

The income and expenses as noted above put the CAP rate at 6%.  That is lower then the market in general but it good for a premium property that with some good management and a little bit of creative work can generate much more income or be multi-functional property, one that replaces a condo for instance.

If your have some interest in this property please don’t hesitate to call us with any questions or for a financial analysis or some of the ideas regarding its use.

Question:  Should I be investing in single-family or multifamily properties in the future?

What is your goal?  Is it cash flow: appreciation: a combination of the two?  Then of course, what type of investor are you? Short term speculator or long term passive income investor?  

When the market was rapidly appreciating or even if it was appreciating at a steady pace then single family homes may be a better investment.  In such a scenario you’re giving up cash flow completely and often adding to the property on a monthly basis because in an appreciation market you will rarely get any sort of cash flow: people are buying homes and the home rental market is usually not as good.  You hope to make your money by realizing the gain in appreciation. 

While this can work an investor has to be on top of the market trends because a change in the cycle can quickly diminish the return or make a home more difficult to sell. 

In a stale market like we are in now an investor can purchase a home, lease it and realize a small cash flow but you’re still hoping for some king of appreciation to realize a solid return.

Small multifamily properties follow different market rules and serve a different purpose but any building up to 4 units does take on some of the characteristics of a single family home.  Small multifamily properties, in general, do not change hands as often as homes because there is a smaller pool of buyers for them and they are usually purchased for long term cash flow rather then short term price speculation.  It’s rare that a family will buy a multifamily property to occupy. 

Where a single family home and multifamily property up to 4 units are similar is in financing.  Financing for both is in general similar or was similar.  In both cases a buyer can receive conventional residential financing with very similar interest rates.

But to get to the point.  If your goal is to create a stream of passive income then your more likely to achieve such a goal with a multifamily property then a house.  A multi-family’s purpose as an investment is cash flow and not appreciation.  Of course appreciation is expected but it often depends on the rental rates because this is a business: as the business generates more revenue the value grows and vice-versa.

In the current market more people are renting because financing is difficult to obtain in it will be even more difficult in the next few years as the financing markets readjust.  Multifamily property prices have corrected as well.  they are down from the speculative heights. 

What is it that your are after in real estate: if it’s cash flow then you’re more likely to get it with a multifamily property. 

Other things to consider:

A single family home and multifamily are still different beasts.  In a fourplex you have more people to deal with, 4 kitchen vs. 1, at least double the amount of bathrooms and 4 heat-pumps, 4 water heater, more pipes and just more of everything so the risk increases.  Management is different as well.  A multifamily property is truly a business, much more so then a single family home.  

There is no easy answer to the question first posed.  It can only be answered through a thorough discussion of your goals and tolerances.  One of the better solutions is to have both types of properties. 

Call us if you would like to discuss your options.  We have direct and indirect experience with both types of investments over 10 years and we’ll be glad to share what we learned.

posted from PMT

Sales of residential multifamily properties, 2-4 units with residential financing, have been on the rise since the beginning of the year along with the sales of single family homes.  In August 31 properties sold. 

There are currently 710, 2-4 unit properties active in Greater Phoenix.  38 are pending.   Just as with all multifamily properties very few are actually worth a look.

Just 4plexes.

There are 377 fourplexes active in the Greater Phoenix market.  That is a lot of properites but most of them are truly either tear downs or in need of a lot of capital improvments and the prices don’t reflect it.  It seems that most sellers with good properties don’t have a need to sell so they are holding on to them.  A limited number of very good fourplexes are for sale on the market: that number is very small compared to the whole.

Currently 19 are pending.  From the properites that did sell the prices ranged from $103,000 to $307,500 for fourplexes.

We put together a short-list of small multifamily properties from amongst the 400+ listing that are of some interest.  They are selected by location, condition and most importantly profit potential but without failure of considering what it will take to run them.

So the selection includes some very low priced apartments that will need fix up and still provide a good cash flow but also a few that need very little fix up but better management.

Click here to view the selected 2-4 plexes for sale in Phoenix, Scottsdale, Glendale.  See them on a map with full details and in some cases Google street view.

This will become a regular feature which we’ll expand to include more information. 

Unlike running a rental house a multifamily building is more akin to running a business especially when you have more then one or when the total unit count starts to rise.
it sounds very simple to invest in a multifamily property.   You buy, you manage, or delegate, wait and spend the profits.
There are a lot of people who have created great wealth or continuing stream of passive income but its not as easy as it seems but is also not as difficult. 

Like mentioned above, managing a multifamily property is a business, so it’s wise to consider some of the things mentioned below.

The Location is of vital importance, not matter if its a very low income apartment or a class A property, if you want to achieve results then the location is crucial.  Even placement withing a neighborhood or community can make your building one of high occupancy or vacancy. 

As any business you want to have a location which is convenient for the tenant.  That means shopping, transportation routes and lots of jobs near-by.  But from the stand point of an owner its easier to lease properties that are not in large groupings.

Cost and Inflation.  Each year weather you want it or not your cost will increase even though the rents may stay flat or fall.  Make sure you have resources to cover those down times.  Even a short spurt of 50% vacancy from turnover can create a big expense and a huge set back if you don’t have the funds to prep the units for releasing. 

Of course you can lease a run-down apartment but you’ll be reducing the value of your property and don’t expect tenants to respect your property if you don’t or can’t.  Multi-family buildings have other costs, including hazard insurance, liability insurance, grounds keeping, landscaping, trash removal, snow removal, advertising, property taxes and maintenance. The rent you charge should cover all of these, plus utilities.

Management:  This is crucial.  Bad management can make the best initial investment a total disaster no matter if you are the manager or you have a management company.  Consider this carefully when deciding to purchase an investment property, a multi-family property or single family home for the matter. 

Management will be in charge of a very large assess.  Handing over your property to a management company is like giving the reigns of your business over into the hands of a manager a non-owner.  Rarely will you find a management company that cares about your expenses and income as much as you do, so choose carefully. 

I know quite a few stories of management gone bad.  In, fact some of these prime properties can be purchased at a reduced price because either a property is run down or the tenants are paying below market lease rates.  If you’re going to be the manager make sure you get paid for your time. 

Repairs: If a property is lacking repairs then you will lose tenants, or at least good tenants.  It’s very common for tenants to move because an owner or a management company fails to make necessary repairs.   A good solution would be to make it a guarantee that you’ll fix something within a period of time.  If you do this do it carefully though.

I don’t want to scare you off from investing in multi-family properties.  They are a great way to create a continuing stream of  passive income but it’s still a business which needs nurturing and care.  It won’t run itself.  It’s also not as difficult as it seems but you need to put together a good team to help you.

For those of you more interested in investing in single family home investing,  we just posted an in-depth spreadsheet of rental rates by city in Greater Phoenix.  This includes per square foot rates, total inventory, units leased and more.  Plus we added a bit of commentary about the current investment rental market.  You can see this data at Phoenix Market Trends, a sister blogsite to this one. 

Greater Phoenix Investment Rental Market | Single Family Home Rental Rates and Supply

Diversifying your real estate portfolio is a smart way lower risk against changing markets.  Multifamily and homes flow along each other but also away from each other depending on what the real estate cycle is. 

Just as investing in homes an investor should consider location, demographics and financing in making their decision.  Part of your due diligence is  solid inspection.  As important as inspections are in homes, they are even more important when purchasing a multifamily property. 

The fact is that multifamily properties for the most part are not as well taken care of as houses.  Here is a list of items to pay particular attention to.

The location. 

The location is important for different reasons then a house.  A multifamily building is more like a business and your analysis should take into account if this property will attract tenants.  What are the amenities, like shopping, schools and so on.  Communication is very important so make sure there is good access to freeways and public transportation.  Also pay attention to activity in the area, visit in the evening as see how it is.  Survey your competition.  How will your potential purchase compete against other apartments vying for the same tenant.

Acoustics and Noise. 

A common concern for tenants is noise in neighborhoods as well as from other tenants.  Be aware of the types of walls the flooring of the apartments.  You don’t want to be hassled by tenants who constantly complain about jumpy neighbors upstairs, or music next door.  If you plan on remodeling you can add acoustic dampening but factor that cost in. 

Leases. 

Study the leases carefully.  You don’t want to be stuck with a 4 year lease with no provisions for an increase.  Sometimes lease may be false, so the tenant may thing he/she is paying one rate while you were told another, most likely higher rate.  A good way to protect yourself is to insist on an estoppel agreement.  These are signed by the tenants and spell our any obligations to the owner, even promised obligations should be noted.

Plumbing. 

In many older units there are old galvanized pipes.  If these have not been causing problems  then they will.  Be careful as somethings copper pipes are seen on the outside but behind the walls they still may be galvanized.  Check to see if there are any invasive trees around the property or the neighbors.  Some of these trees take over water and sewer pipes.

Electrical. 

Older properties tend to have old wiring.  Some of the electrical boxes have been recalled as well but they are still on these properties.  Tenants these days have microwaves or electric water kettles which require a lot of power.  Some lines are not meant for these, and may be a hazard.

Exterior Appearance.

How do the buildings look on the outside?  Look at the details, will you need to paint or refinish the fascia? Are there cracks in the walls.  What about landscaping.  Some buildings have no landscaping and others have unkept or outdated landscaping which will scare away better prospects.

Parking. 

Seems like everyone has a car and often this causes parking problems if there is a lack of spaces for all tenants.  Be aware of how many spaces are available for each unit and if it is enough.

Interior appearance. 

A good indicator of bad, is sloppy work done by people who don’t know what they are doing; crooked grout lines, bad patching jobs will need to be fixed at some point. Prospective tenants do notice these things.

Mold. 

Though not as big a factor as in other parts of the country, we do have mold in Greater Phoenix and its more common in apartments where tenants don’t often tell landlords about leaky pipes under the sink or owners are simply not aware because they don’t inspect the property enough.  Look carefully where ever there is water for leaks, even a slow small drip  over time can be mold forming.

Security

Security is a big factor for tenants.  You don’t want to advertise that you provide a secure dwelling because it opens you up to responsibility, you do want to check the overall security of the property during your due diligence.

Laundry facilities.

Many properties have laundry facilities either in each unit or a shared laundry either owner owned or with leased equipment from a third party.  When purchasing a property make sure you know who owns what and if its a third party get a copy of the contract.  I have seen obnoxiously long 5-10 year lease with absolutely no out for the owner and little in therms of compensation.  These laundry facilities are more often for tenant convenience then profit but you want as much your cost to be covered as possible.

Roof.

Oh yeah the roof.  Be very wary of flat roofs.  On older properties these flat roofs are more like ponds holding tons of water after a rain, relying only on the sun to dry them off.  While there may not be any leaks, these roofs with water wear out quicker, shortening the life of a very expensive thing to repair.

These are just a few of the issues that need more attention but check everything and most of all, hire an inspector.  If you don’t buy a property because of an inspection you’ll think of the money you lost for the inspection but imagine if you didn’t do an inspection and purchase a property which drained your pocketbook and profit.  Its well worth the cost.

In a future article we will jump into the next part of your due diligence, namely the income and expenses and financing.

from: PMT

Residential multifamily refers to 2-4 units properties or multifamily properties financed by residential financing like Fannie Mae. 

In July 12 such properties, duplexes, triplexes and fourplexes sold.  See an analysis just for fourplexes in Greater Phoenix. 

There are 44 pending properties or properties that have found a prospective buyer.  Since the buying process of a small income property is a bit different than a home some of these properties will come back on the maket, more so as a percentage than single family homes. 

In all 738 such properties are active, so investors do have a very high selection of properties even if most of them are low quality. 

What’s ahead.  

There is a lot of interest in multifamily properties.  They can be purchased for as low as $22,500 per unit and its easy to make them cash flow but the big hurdle is still financing.  Unless an investor is putting down a lot of money or buying for cash its more difficult to obtain financing.   It is easier to get financing for larger commercial sized multifamily properties  of 5+ units and especially once you finance over $1,000.000.

We’ll probably continue to see low sales but prices cannot go too much lower.  In so may of these cases the prices are well below replacement cost and often just the land is worth more then the total purchase price.