Is It A Risky Time To Do Multi-Family Fix And Flips?
In Tucson, you can buy multi-families for around 6% cap rate, which is typical in this area.
You can fix them, raise rents, then flip them for a nice profit, and I may buy my first such property this month.
My question: Is now a risky time to do this? I am reasoning that since multi-families are an investment property, the market is different from SFRs. Even if the general market declines, I think investment properties are valued differently, and they will not drop as much.
Please let me know your thoughts on employing the fix/flip strategy at a relatively uncertain time in the RE markets.
In time when savings and money market accounts pay 5% (yield), multifamily fixer at 6 CAP doesn’t sound like a great deal.
Every deal is different though and some may work out fine if you can control your remodeling cost then increase the rent enough to significantly improve your post fixer CAP rate. If you can come with an actual scenario that spells out the terms, your purchase prices, pre and post fixing projected NOI, amount of money necessary to complete turnover (remodeling) with length of time to complete a deal, you’ll receive more specific input.
In my opinion, a capitalization rate should be a reflection of (inflation+safe rate+risk+upside-depreciation) with respect to the mortgage interest rate that you are able to get and your equity yield requirement.
Don’t forget to add your remodeling cost to your cost base!
The On Target 3.01 Real Estate Investment Software calculates the Cap Rate for an income producing property as you enter the property data. You can run "what if" scenarios, changing the sales price, rental income, vacancy rate and the operating expense amounts and the cap rate is automatically recalculated. Or you can simply do the same in excel spreadsheet.
How much are the current Tucson, AZ rents; how much can you raise the rents (%) when you fix up the property? What kind of work do you have to do to achieve the end result?
[ Edited by REOCON on Date 07/20/2006 ]