For years, the over inflated residential housing market has made investors nervous. Prices have risen far beyond fundamentals. In most Orange County real estate, break even on cash flow required 50% or more down. With these requirements at today’s prices, it was getting harder and harder to make a property cash flow. Before the market peaked, my firm was slowly moving our clients out of bloated condos and into multifamily homes, especially 4-plexes.
The theory was that we could acquire highly desirable 4-plexes at prices between $650k to $700k. This is nearly half of what some of the pricier Orange County Beach city neighborhoods were asking. And they were located in very desirable high growth areas. Second, with 4 units, we have been able to achieve over $50,000 per year gross income. When you compare this to to around $24,000 for a single family home in Orange County, you can see that the cash flow will inevitably be twice as good. Third, the theory was that when the residential single family home market finally cooled, well qualified former homeowners would still need someplace to live and would flee to apartments while the market cooled. Thus with the increased demand we expected to see increasing rental prices. Which in turn would make the property cash flow better. Since these properties values are usually based on a gross multiples of their rental income, the increase in rental income would lead to the buildings value increasing in the face of decreasing residential single family homes.
So now that the market has changed you might be wondering how these investments are holding up. The answer seems to be very well for now. We have not seen any real softness among rental properties. Sure, once in a while you find an over zealous owner that went too far out on a limb acquiring the property with too little down. In order to accomplish cash flow, they may have financed the property on an artificially low interest rate loan that now has them upside down. But for the most part, most of our planning seems to have paid off. When it comes to multi-family homes ie. 4-plexes, they just don’t make enough of them. Scarcity alone seems to be a factor in the buildings holding their value. If there is any danger in these properties loosing value, we believe it would be from rising interest rates squeezing cash flow. In order to insure stability, we usually recommend buyers finance the home using long term fixed rate loans. When it comes to one to four unit buildings, interest rates are terrific and financing is easy. In many circumstances 4-plex multifamily apartment homes may serve your long term need for both cash flow and appreciation. Visit out investors page for special real estate investment opportunities. We are also promoting special foreclosure opportunities at trustee sales. Please call or write for more details.
Tags: apartment homes, Orange County real estate investments
