Rookie First Deal: Apartment or Single Family Residential?

Question

I'm looking to have my first deal as a rookie investor this year here in Toledo, OH. I will have $16k of money borrowed from relatives and I intend not to use personal money. Maybe up to $5k personal money if really needed.

From the $16k, I intend to allow $12-16k for 20%DP and $4k-5k for rehab/renovation costs. This is the reason why I'm only looking at houses/apartments which I can deal with for $60k-80k which is very, very limited. Then use a traditional loan for 30 years.

As an aspiring first-time investor, I'm torn between getting either a house or an apartment.

If I get a house, I may not have enough capital for rehab purposes to make it attractive for tenants and force higher-than-usual appreciation. Not even enough to do the "B" in BRRRR at this time. I will enjoy not paying HOAs but I have to manage the property myself.

If I get an apartment, there is the advantage of having property management available, but I need to pay HOA which kills my cash flow. The apartment units I saw are also in good condition and only require minor rehab/repair like painting which I can do. However, a lot of simulations I did with apartments give me <$100/month cash flow at ~$900/month rent. CoC is 3-7%.

I have a lot of rookie questions but here are my main ones:

1) I cannot recognize if I am being very restrictive and careful to myself. Every time I run a rental evaluation simulation, I would get lucky to have at least $100/month cash flow. I used the following assumptions: Tax, Insurances from Zillow; Rent value of ~$900/month from BP Rent Estimator; Repair 8%; Capex 5%; Management fee 10% for a house and 0% for an apartment; Vacancy 5%.

2) Returning the $12k borrowed money may be a challenge--maybe I'll just offer my relatives a percentage in equity rather than returning the $12k money, or hopefully a refi will help me return the 12k two to three years from now.

3) I'm sure the first deal will not be perfect but I definitely want to learn from the experience--hence, the question is would it be best to start with a house or an apartment? Or am I even asking the right question?

Eventually, I want to have and grow my portfolio and will be doing this for 4 more decades.

I do not have any network yet, except for a trustworthy realtor that I worked with 2 years ago when I bought my current home and an insurance agent. -- I will definitely have to work hard in this area.

Maybe I'm looking in the wrong direction or asking the wrong questions?

Any advice is greatly appreciated. Thank you.

Christopher Abele · Answer

Hi!

Fellow Toledo investor here.$12-$16k is not enough to get started and have enough to protect yourself when a furnace goes out, roof needs repair, etc.

At a price point of 64k for a duplex, you’re looking at class D neighborhoods. They might be cheap, but you’re potentially going to struggle to collect rent.

I would definitely recommend joining Toledo PIN, and spending some time learning more so that, when the capital is available, you’re ready to make the right move.

Christopher Abele · Answer

Account ClosedYou’re looking right in my wheel house.

What you’re calling “apartments” are condos / townhouses. Most people talking about “apartments” are referring to purchasing a multi-family building. Condos & Townhouses are going to be tricky to rent, as you also have the HOA fees & the additional “needs a roof” or “needs painted” charges. You lose a lot of control doing that.

If you’re finding SFHs in 43614 for $50-$60k make sure you know the streets and neighborhoods.

North of Glendale, home values and rent rates drop dramatically. I’ve considered the UT area but, again, you have pockets of high crime and then pockets of nicer neighborhoods.

Have you walked any of these $50k properties with a realtor yet? I can tell you firsthand - we missed opening up the electric panel on my most recent purchase. That was a $4,500 mistake after seeing what we’re actually dealing with. Furnace goes out? You might be looking at $5k. It’s important to have reserves to cover this kind of stuff early on, so that if you have something go wrong you can recover.

Nathan Grabau · Answer

I am not a Toledo investor, but I would assume that it will be very hard to get appreciation in a sub 100k median sale market. I did a quick search for median home values over time in Toledo and realtor.com has data about different markets. From April 2019 to Feb 2022 the media sale price went from 97,7000 to 99,000. For some comparison data, I put Longmont, Colorado in, a pretty average Colorado city and it has gone from 415k to 565k in the same time period. Nevada, Iowa, where I am getting MF at under 200k, with 10% CoC, has gone from 139k to 198k. If you want appreciation, you are probably looking in the wrong market.

One of the best ways I have found to understand whether a market is going to appreciate is by looking at the population percent change. All major towns on Wikipedia have a demographics section where they have a historic population by decade. In doing this search on Toledo for example, I found that the population has decreased by at least 5% every decade since the 1970s. Less people living somewhere is going to negatively impact housing values. This is why you get "rewarded" with better cashflow in these areas, because since people are leaving, home prices are decreasing relative to the market and driving up relative cashflow.

Christopher Abele · Answer

I agree with @Nathan Grabau.

One of the bigger “aha” moments I’ve had from BP is that a lot of people invest to build wealth through appreciation. The Toledo market does not appreciate like other parts of the country. Our local politicians are not business-friendly and instead seem to cater to a union mindset. Moreover, cities like Chicago have a master plan for the city to attract businesses; Toledo has a slogan (that they dug up from around the 1930s and reused.)

Thus, populations have been declining. We have our “Eds & Meds.” (I forget what book I read that referenced this concept.) Two major State Universities, Promedica, and the Medical College. Owens Corning is also headquartered here. Until the pandemic, appreciation was occurring but at a much slower rate than other parts of the country.

Conversely Toledo is a pretty decent place to live. We have great Metroparks, a world class zoo, minor league hockey & baseball, etc. In the new economy, Toledo has potential to grow due to the low cost of living and amenities. If people don’t need to live where they work, their dollar goes a lot further in Toledo than other parts of the country. There are things happening here slowly; time will tell how they pan out.

All this requires a strategy change. I honestly believe that no one sets out to become a slumlord, but that it is the logical result of misunderstanding our market. If you’re banking on appreciation that doesn’t occur at the rate you were hoping for, the next best return is cash flow, and in business every dollar of cost equals a dollar of lost profit.

My investment strategy and mindset is often misunderstood by OOS investors. I choose to leave a lot more cash in deals and you’ll often catch me saying “appreciation is speculation.” I do this because it increases the cash flow on the investment so that the rent income will cover a major expense like a furnace or a roof. It might wipe my profit for the year, but the tenants are at least taken care of. It’s a very conservative approach that also results in very slow scaling. Should appreciation happen at a rapid pace it will be a welcome surprise. Until then, my investment strategies are built around business fundamentals.

Nathan Grabau · Answer

So my experience is someone does not sell a cash flow focused property because it has been easy for them or they have just replaced everything on it. So I am 3/3, even with inspections, of properties I have had to put 10k+ into. I bought all of them as "turn key" with no reno budget. Luckily I had the cash to handle the cost.

The way I would think about it, is I would not sell a 90k duplex, after I just spent 8k on 2 furnaces, 2k on 2 hot water heaters, and 7k on 2 A/C systems. These items will cost $17,000 in cash, but will not increase a 90k property in value to 107k. So instead, when I think these items are about to go out, I am better off selling the property.

The flip side of this is that if you plan for it, you can ask for credits to cover these costs. On a 6-plex I bought, the inspector identified that 2 furnaces were about to go out, and I was able to negotiate the seller to pay for one of them. But then, a few other A/C's and one other furnaces went out on the property, costing more than 10k above what I planned for it to cost.

Another way to think about this is that this is how you become a slum lord/ B class neighborhoods decline to D class neighborhoods. When you only have $100 a month in cash flow, and you are banking on cash flow instead of appreciation to make money and lets say a sink has a minor leak, you chose not to pay someone to go fix it and just put a bucket under the sink and forget about it. 12 months later, you have a major water problem that has gone from a $150 issue to a 4k issue, that you still do not have the money to fix. Things like this build up and it turns into a death spiral of worse tenants and the property condition being further eroded, until you give up and sell the property to someone who does not know the nightmare you are buying. Based on some of the other comments above, it seems likely that this is the kind of property you will be able to get for 80k and I would encourage you to read the Investing With No And Low Money Down book to get get an idea of how you could use your cash to get a larger property. House hacking with a 3.5% FHA loan could be one great idea that could allow you to buy up to 4 units and a 400k+ property with your down payment. In that price range, you can suddenly become much more selective.

Account Closed · Answer

@Christopher Abele, sounds like I need to increase my initial funds. I found SFH and apartment units within the $60-$80k range in the Southwyck and Airport Hwy areas, and near UT main campus areas. I used 5% vacancy in my calculations which I also assume includes non-payment of rent. Do I have to increase this value, or is it better to simply find a better home location with a higher asking price?

@Michael P., will definitely do.

@Nathan Grabau, kinda difficult to find homes with new HVAC, roofs, etc., in this market--or maybe I am not searching enough. I will keep this in mind so I do not get surprised by unforeseen replacements. In your experience, among all the properties you bought, how many of them required you to use your $5-$10k capex budget?

I truly appreciate your advice and feedback. Great help!

Nathan Grabau · Answer

Emmanuel,

I would encourage you to include in your budget 5-10k of capital expenses when you buy a property in this range. I have had to put more than 10k into all of the properties I have bought, mainly for unforeseen HVAC related costs. While you do not need to included this in your plan, I would make sure you are financially capable of personally handling a 10k expense. If you are not going to I would make sure things like hot water heaters, roofs, and HVAC systems are under 5 years old.

The meet-up that someone posted in this thread would probably be super helpful too! Good luck in your property search!

Michael P. · Answer

Talk to some local investors about strategy:

https://www.biggerpockets.com/...

Stephen Brown · Answer

Account Closed I would say that you need to build up a bit more in reserves before firing away at multifamilies especially here in Toledo. A lot of out of state investors are going the single family route here as the prices and rehab needed make much more sense. Either way I would not use all of my capital for this first purchase. When we meet up we can talk about analysis, using online tools isn't always the best way to go.

Account Closed · Answer

I really truly appreciate the time spent in helping me reach my goals.

~~

@Nathan Grabau, thank you for this information. Indeed it shows that the Toledo market is not as good as some other places. I'll take good note of this. Maybe as I progress further, I would decide to invest in markets outside Toledo.

@Christopher Abele, I hope I can find the best strategy for my risk appetite...which means I should well understand the market. I understand your investment strategy and will take note of it too. Right now, cash flow seems to be my bigger motivator compared to appreciation, but of course, it would be nice to have an investment that is good in both.

@Jackelyn Lee, people I've talked to here in Toledo who would agree with what you've said--have higher starting funds and explore other estimators above and beyond BP. I will definitely reach out to you to learn more.

@Crystal Smith, thank you for sharing this potential risk on HOAs. Something new I learned today.

Rookie First Deal: Apartment or Single Family Residential?

Most Popular Reply