2-4 Unit multifamily properties are a rare breed. Technically considered residential, but can also be financed as commercial. Valued as commercial based on income, and at the same time valued as residential based on comps. Purchase prices can be limited by sales comps, but then comps can also be waived by commercial investors basing their value on cash-flows. If it all sounds a little complicated, it’s because it is. We eat, sleep, and breathe these small multifamily and commercial properties in D.C., and we analyze thousands of opportunities every single year. Here are some reasons why we believe it’s in your best interest to work with a real estate team who’s highly experienced in this special asset class:
- 2-4 Unit Properties are Often mis-priced by Residential Realtors – We analyze thousands of small multifamily opportunities every year, and purchase, sell, and refinance these properties every year as owner operators. Unlike the single family home market served by residential focused Realtors, where there is readily available sales data, the 2-4 unit market sees drastically less on-market activity. In fact, the majority of the 2-4 unit transactions occur either off-market, or involve financing. What this boils down to is that unless your Agent/Broker is laser focused on this asset class, they will be missing important transaction data that’s necessary to accurately price your 2-4 Unit property, and they will likely be missing the experience to know where/when/how/why to look for this data and interpret what it means re: what the market will be willing to pay for your 2-4 Unit property. We routinely see single family home focused realtors under price 2-4 Unit property by as much as 20%. You read that right… UP TO 20% OF THE ACTUAL VALUE! Our clients are often amazed by the data that we find to substantiate our offer price, and single family home focused realtors have become agitated to the point of harsh words in loud tones over our pricing, but at the end of the day it’s your 2-4 Unit property, and it’s not about what we think it should be worth, it’s what the market will bare. The only way to know the accurate value is to be constantly active and proficient in the DC 2-4 Unit asset class as passionate and active participants and as owner / operators. On the flip-side of this coin, sometimes single family home focused Realtors will price a 2-4 Unit property at 20% or more in excess of what a property is actually worth. Now, we’re all for pushing the sales price envelope, and in fact we consistently set sales price records on 2-4 Unit properties in DC that last for years, however, there is a line in the sand between pushing the envelope, and insulting the intelligence of buyers and their agents. What typically happens in this scenario is that a real estate agent is being told by an owner to list at a certain price, and the agent doesn’t understanding the actual values based on harder to access data, and the property will go on and off the market for many many months (or in some cases many many years!) at an unrealistic price that no-one is willing to pay. We won’t waste your time trying to sell a 2-4 Unit property at a price that’s unrealistically high, but we will advise you on how long you may have to wait to achieve said price, and in some cases there are better alternatives than selling to help you achieve your financial goals through real estate that we will explore with you (SEE – Reinvestment Options Tab).
- Residential Realtors aren’t well-suited to Understand Commercial Real Estate Investing Options – As 5th generation DC owners & operators of income property, we have experienced a lot – from the tiny apartment building with lively tenants, to the uptown commercial building with Fortune 1000 tenants. We find that the typical 2-4 Unit property owner doesn’t fully understand how they may be able to lever their way out of a 2-4 Unit property that they’ve owned for a while, into a much steadier, much less labor intensive, commercial investment property. Navigating these waters takes a lot of time, know how, and a big experienced team. Many times this involves a tax deferred 1031 exchange, so that your proceeds from the sale can be transferred into your new investment property without capital gains tax. All of this can get complicated and be daunting to someone who’s never thought of this of an option or executed this strategy, however, we have the team and the colleagues in the right arenas to get you through the process as painlessly as possible. How would you like to trade your 2-4 Unit property into a commercial property with a 5-50 year lease, with no maintenance or property condition responsibility, where the tenants are paying your property insurance and property taxes?! Many of our clients, especially our clients looking to retire, or those just looking to take a breather or a permanent vacation from the day to day stresses of residential land-lording (not that those stresses haven’t been well worth it in the long run), find understanding these options very enlightening and rewarding.
- Owning & Operating DC 2-4 Unit Multifamily & Commercial Property is Highly Nuanced with a Large Learning Curve with Real Implications for not knowing the Rules – Many people don’t know that it can take up to 4 government inspections to get a 2-4 Unit licensed and ready to rent. People are also sometimes not aware that many properties advertised (typically by Realtors who aren’t familiar with this asset class) as 2-4 Unit Properties, aren’t really 2-4 Unit Properties at all, a hang-up that if purchased, could lead to major legal & financial implications down the road. Same goes for the myriad of other areas of rental compliance, from business licenses, to rent control, to housing standards, to zoning violations, and the list goes on. While disclosures are encouraged, many times in this asset class the buyers and sellers, and even many of the agents, simply don’t know the rules, which can lead to buying someone else’s costly mistakes or negligence. That’s why the friendly neighborhood single family home real estate agent, or that brother/cousin/uncle realtor, may not be the best idea in this nuanced asset class. There are many many moving parts to making a 2-4 Unit Property function as it should in DC, and our clients have found that a trusted and experienced adviser who can give them an end to end system, who has seen it before, and who will be there with an immediate and successful solution when they see the inevitable curve-ball – can make all the difference in the world. What we’ve found is that many real estate agents who aren’t thoroughly familiarized with 2-4 Unit property as owner operators themselves, may make underestimated claims with regards to repairs, lease-up expenses, operating expenses, compliance processes, etc., etc., which can greatly over emphasize potential income on any given property. We share this with trepidation as we know it may scare off some potential clients, however, that’s not our intent. Our intent is to emphasize that while complex, once broken down and done 100 times, these processes do become less complex, and buying these properties is a great long-term financial boon to our clients who have purchased them, as long as they’re purchased and operated correctly with the appropriate amount of care and due-diligence.