Debating Proper Strategy for a Beginner

[Luke Ezzo]

Hi all, this is my first post on any forum! I’m a new investor based in Chicago, but willing to relocate to nearly any city in the Midwest. My long-term goal (10-15 years) is to own cash-flowing 20 door+ multifamily properties as a form of (semi) passive income. I know that to get there I need 1) more experience and 2) more capital. I also understand that the real money will be made on the 3rd, 4th, 5th+ deals, so my primary concern is getting started, getting experience, and making a little cash on my first investment.

My initial strategy was to purchase a light value-add dup/tri/quad that is selling at a discount per key to FMV ideally with rents below market. Hold it for 1-3 years, fix it up, raise rents, and sell at a profit. For the last ~month, I've been building manual comps (both income and expense) for dup/tri/quads in a single market in the Midwest to underwrite my own deals. That said, through conversations with brokers in the area (and evidenced in the comps I've created) I've learned that this strategy may be slightly outdated as most properties are currently at market rents given the current rental environment, expenses aren't a realistic lever to rely on to add value, and there is a real risk I get priced out of the market by buyers with cash, 1031 exchanges, and with longer term hold strategies willing to pay an extra $10-20k per key.

When I explained my goals to this broker, he suggested I flip a SFH to start as it will accomplish my goal of magnifying capital using leverage (5% conventional down) while giving me experience. I've started to consider pivoting my strategy in the spirit of "failing fast," and figure that in 2-3 years I could conservatively do 1-2 flips and then 1031 that into a larger multifamily property and try to execute my original strategy.

What would you do if you were in my shoes? What advice do you have? What do you think of my initial and long-term strategy? Any input is greatly appreciated!

[Abel Curiel]

Quote from @Luke Ezzo:

Hi all, this is my first post on any forum! I’m a new investor based in Chicago, but willing to relocate to nearly any city in the Midwest. My long-term goal (10-15 years) is to own cash-flowing 20 door+ multifamily properties as a form of (semi) passive income. I know that to get there I need 1) more experience and 2) more capital. I also understand that the real money will be made on the 3rd, 4th, 5th+ deals, so my primary concern is getting started, getting experience, and making a little cash on my first investment.

My initial strategy was to purchase a light value-add dup/tri/quad that is selling at a discount per key to FMV ideally with rents below market. Hold it for 1-3 years, fix it up, raise rents, and sell at a profit. For the last ~month, I've been building manual comps (both income and expense) for dup/tri/quads in a single market in the Midwest to underwrite my own deals. That said, through conversations with brokers in the area (and evidenced in the comps I've created) I've learned that this strategy may be slightly outdated as most properties are currently at market rents given the current rental environment, expenses aren't a realistic lever to rely on to add value, and there is a real risk I get priced out of the market by buyers with cash, 1031 exchanges, and with longer term hold strategies willing to pay an extra $10-20k per key.

When I explained my goals to this broker, he suggested I flip a SFH to start as it will accomplish my goal of magnifying capital using leverage (5% conventional down) while giving me experience. I've started to consider pivoting my strategy in the spirit of "failing fast," and figure that in 2-3 years I could conservatively do 1-2 flips and then 1031 that into a larger multifamily property and try to execute my original strategy.

What would you do if you were in my shoes? What advice do you have? What do you think of my initial and long-term strategy? Any input is greatly appreciated!

Hello Luke!

I am leaning towards your initial strategy... 

I'd recommend closing on a 2-4 unit property that needs some work but would still qualify for traditional financing. 

Use a 203K or homestyle loan to finance your renovation and leverage the project management. Rent out your units at, or slightly below, the market rate and gradually increase rents YOY (2-2.5%).

This strategy will allow you to get your foot in the door with a low down payment AND less competition. Most first time investors and homebuyers will shy away from a property that needs work and most experienced investors prefer total gut rehabs which leaves you somewhere in the middle with less competitors in the market.

By utilizing this strategy, you'll get: acquisition, project management, and property management experience. Build the equity then use that + your savings for deal #2... Eventually, to scale, you'll want to continue seeking opportunities with more cashflow.

Regarding 1031, IRS deems property that is "held for resale" to be ineligible for a 1031 exchange. You can speak with a specialist to go into further detail on this. Basically, if you don't hold onto it for over 1 year and try to sell in the same calendar year you purchased the property, this deal won't qualify for a 1031 exchange.

Hope this helps!