In part one we covered Purchasing while part two covered Financing. 

In part 3 below we discuss the ever important Cash Flow.

Cash Flow: A big advantage of a multi-unit complex is that you will get payments from multiple tenants each month, that is if you manage it right or you have a strong management team, making both vacancy and turnover easier to absorb. If a single-family home is empty, vacancy is instantly 100 percent and cash flow plummets to zero. This is a big risk to take, especially in a competitive environment where many homes are for for lease due to the soft market.  In a building with four units, if one or two of the apartments are empty there is still income flowing to help pay the bills, at lease part of them.  If you buy right you could be in the black even with a constant vacancy. Compare that with a single-family house where just a few months without rent can quickly put a landlord in a cash flow trouble.

Because multi-family property values to cash flow and net income than single-family units, they tend to be less prone to speculative swings in value during both rising and falling markets. Although the previous wave of price upsurges did take income properties with it along with houses and apartments, as well, are seeing less demand and price corrections even though their pricing is more stable. These values are often stated in the form of a “cap rate”, which is the ratio between the net income and capital cost. For example, a building purchased for $500,000 that generates $50,000 in net operating income has a cap rate of 10 percent. When valuing properties, it is useful to think of the cap rate the same way you would look at a rate of return for any other investment. The higher the cap rate, the higher the rate of return on the investment. A fully leased apartment complex in a rapidly developing area will command a lower cap rate than an older building in a questionable part of town which is perceived to be a higher risk proposition. This is so, because appreciation also plays a role in market price.  Thus a seller commanding a lower cap rate because of future appreciation is taking advantage and monetarizing future potential gain from appreciation other then pure income.  Cap rates in less desirable areas tend to be higher because the growth in value of rents and land is less likely thus the value has to be lower and cap rate higher to compensate and compete.

Have more questions about investing in Phoenix income properties?  Give us a call.

Part 4 covers Maintenance.