Posted by Bill K. (AZ) on May 23, 1999 at 13:05:49:
Dave,
I won’t talk to the cap rate issue, but on the cash flow side of things, your “ex-lender” is wrong. Cash flow is cash flow whether it is generated from single-family, multi-family, or commercial properties.
I have several friends who are making $100-$300/month positive cash flow on their single-family home holdings. Now, if you were to own 20 single-family homes generating, on average, $200/mo cash flow, you’d be making $4,000/month. If I wasn’t already “laid off”, I could comfortably quit my job with that kind of monthly income. Of course, I wouldn’t stop there, but I wouldn’t have to work for an “employer” again.
Look to the numbers. They will tell the story of what can/cannot be done in any deal.
I would appreciate any feedback on what a good cap rate for a multi-family building runs (or should run). I have my eyes on a couple of duplexes with a cap rate of around 10% or a little better. Is this a decent cap rate in today’s real estate market? When comparing these duplexes to same priced apartment buildings in my area, the cap rates are actually better than that of the apartment buildings. My objective is to buy and hold enough properties to generate sufficient income to quit my job the quickest way possible. I’m about one third the way there with the duplexes I currently own.
I have been told that there is no way to generate enough cash flow to run a good rental business unless you buy apartments and that single family houses won’t cut it (including duplexes). At least this is what an ex-lender is telling me. What am I missing? I know people make it with single family homes, duplexes and apartments and so on. I know that there has been a lot of debate as far as single family homes and if cap rates can be used on them. This is not my concern. This post has turned into a twofold question but my biggest concern is that I purchase properties with a good cap rate so I can see cashflow. Thanks in advance.
Dave H.
In the past, cap rate discussions on here have sparked some big controversies, normally cap rates are used to analyze larger apartment buildings and commercial properties. However, if you want to view a duplex in those terms, 10% is pretty decent. The higher the cap rate, the higher the rate of return (potentially), and the riskier the investment, and vice versa.
As for the comment your ex-lender friend made about the single family homes, what he/she probably meant was, it will take you longer to achieve your goal of retirement. For instance, if I were to buy a 20 unit apartment building and each unit cash flowed $200 per month, my monthly cash flow would be $4,000.
If I were to use the same analogy with single family homes, I would have to buy 20 homes in order to achieve the same results. So here’s the bottom line, find (1) motivated seller with a 20 unit building, or find (20) motivated sellers with single family homes.
Realistically speaking, most new or mildy seasoned investors should start out with smaller properties until they gain the financial resources, and proeprty management experience needed to start looking at the larger properties.