There are two important aspects to investing in real estate – speculating on future values, and the cash return from renting to tenants.
For years, investors were willing to accept small cash returns in exchange for the prospect of future appreciation; nowadays, investors are looking much harder at the balance sheet.
And the balance sheet for 2-to-4-unit properties is, surprisingly good.
We’ve done a survey of small multi-family sales in Seattle proper since 2008, and found that the combination of lower prices and higher rents are resulting in higher returns for investors.
1H 2008 4.3%
2H 2008 4.4%
1H 2009 4.8%
2H 2009 5.1%
1H 2010 5.1%
2H 2010 5.5%
The % figure is Cap Rate, which is calculated by dividing the net income of a property by the purchase price – a typical small multi-family purchased in the first half of 2008 would return 4.3% annually, one purchased in the second half of 2010 would return 5.5%.
We’ve calculated “net income” by taking the reported rents, deducting 25% for expenses – vacancy, maintenance, management, taxes, insurance, and utilities. The actual expense vary by property, but 25% is an accepted industry standard for simplifying analysis.
Typically, these properties “break even” from a cash-flow standpoint with about 30% down, meanwhile, your tenants are paying off your mortgage for you.
Even with the volatility in the residential real estate market, rents have remained remarkably stable over the past few years; long-term holders of rental property have been enjoying significant cash-flow during the recent downturn.
Data was compiled by Cynthia & Mack, and the NWMLS is not responsible for our use (or misuse) of their data!