Four doors in a town of 4,000 or two doors forty minutes from a job center

Question

A useful comparison for this room: a fourplex in a small town, 4,000 people, one large employer, asking 185k, four units renting 575 to 650, gross around 29k. Against a duplex in a commuter town outside a mid-size metro, 310k, two units at 1,275, gross 30,600. On price per dollar of rent the small town wins easily. Cap rate on the fourplex numbers pencils near eight before the risk sets in, above the range this room usually discusses for small multifamily. The duplex sits closer to six and a half. What the small town has working against it is the single employer. If that plant slows, an owner faces four vacancies at once in a place with no second tenant pool, and a building bought at 185k stops being worth 185k. It is worth being precise about the usual argument that multiple units diversify vacancy risk, because that holds true across tenants and mostly fails across a single-employer town. Four doors on one street sharing one labor market is not four independent bets. The duplex carries a deeper tenant pool and worse cash flow, and every repair runs at the metro price. The honest answer is that the cap spread can be read as compensation for real risk or as a warning sign, and distinguishing the two requires knowing how concentrated that one employer really is.

renee_dubois · Answer

The point about correlated vacancy is the whole thread. Four units in one building are already correlated on the roof, the boiler and the parking lot. Add one employer and there's a fourth correlation stacked on top. That doesn't make it a bad buy, it means the eight cap is paying for something specific and it should be possible to name it. The question worth answering before anything else is what the last downturn did to that town. Not the state, the town. If the plant cut a shift in 2009 or in 2020, someone local remembers what rents did and how long units sat.

nicole_adeyemi · Answer

@renee_dubois is asking the right question and the assessor's site will half answer it. Look at how many parcels changed hands in that town in a bad year and at what direction the assessed values moved. Sale prices aren't public in every state, roughly a dozen don't disclose them, so check whether yours is one before building a story out of thin data.

paulgrant17 · Answer

Different angle. With four units at 575 you're screening four times as often for tenants who have less margin, and in a town of 4,000 your applicant pool for any given vacancy might be two people. I'd want to know how the current owner has been filling them before I got excited about the cap rate.

ryanmck27 · Answer

@laurenkim53, who manages it? You said you've owned in small markets so you probably already know, but a fourplex at 185k generates maybe 2,400 a year of management fee at ten percent, and nobody licensed is driving forty minutes for that. If the answer is you, forever, then the eight cap has your labor priced into it and it isn't really an eight.

Four doors in a town of 4,000 or two doors forty minutes from a job center

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