Would you do a 50 unit apartment for your first deal?

Question

Looking for advice and a starting point. Would you do a 25 unit or 50 unit multifamily as your first deal? (I currently have 2 rentals, but they don't really count because I have a PM manage them)

Beyond the "you need to work up to that level" advice, what other advice or pitfall warnings can you give?

I have 2 places I am looking at. #1 is a 50-unit for $1.9M with rents averaging $650/mo. #2 is a 25-unit for $1.1M and rents at $650. Both are in low-ish income areas but not war zones. Both are around a 10% cap.

What are you going to need to actually buy the place.? I have 25% down and the properties are 95% occupied. What other ducks do I need to align? Is anyone even going to lend me the money on this given my nubie status?

What experience / tools / partners / team, will I need to make this successful. Obviously a PM, attorney, contractors and a handyman.

How much liquid reserves do you think would be necessary?

This is eventually the type of real estate I want to invest in. Just trying to see if it can be done out of the gate and/or what is actually needed to make it happen.

Thanks in advance!!!

Joel Owens · Answer

Michael I generally like the 75 unit level or higher for my clients. The reason is usually you can build in the cost of 25,000 to 30,000 for a full time maintenance person on site which is just as important if not more important than the full time PM on site. These older buildings are like cars and require constant tune up to keep running smoothly. If you do not have a full time onsite repair person then generally 3 things happen.

1. You have a part time repair person living there. They cannot live off of what you pay them so they do work for 2 other property building owners as well. When you have a leak or problem instead of a one day fix they take 4 days or longer and the 50 problem is now 500 to repair.

2. Without a full time repair person your PM is constantly calling professional trades in at really high rates that eat up your monthly cash flow. If you need anything on a holiday or weekend it will be double or triple the going rate.

3. You will not like option one or two so you decide to fix things yourself. The cost of parts is cheap but you now go over there multiple times a week and congratulations you have now just bought yourself a job.

I know all of these things from experience.

Hope it helps.

Christopher Hunter · Answer

@Michael Delpier

I am a new Real estate Investor who wants to go into Multifamily.  You need to get a seasoned partner and leverage there knowledge and skill sets to get this deal done.  Do you attend a local REIA?  Have you run the numbers by some local hard money lenders?  If you have a deal there someone will be willing to partner with you.  I would go for it.  Go big or Go home is what I say.  Have you checked out the book 10X by Grant Cardone?

Joel Owens · Answer

Sounds like partnering up with one other person for scale or buying into a syndicate with a share with a smaller amount for now might be the answer as you build more capital.

It's really have diversified you want to be with your capital and active versus passive with returns.

Joel Owens · Answer

If it's 25% down you could try and tell the local bank the seller will hold a 10% second and the bank a 75% first so that you can keep that extra 10% for reserves on the property. They generally like that answer as you still have skin in the game but are savings funds for any unexpected events with the property to keep it performing.

Michael Delpier · Answer

@Joel Owens Thanks for the great reply's!!! Very helpful.

The 10% CAP comes from the seller. I get your point this may not be 100% truthful.

I would have the 25% down, but this would leave no reserves. My net worth would be very little after the down payment.

I don't want to buy a permanent job. I want to eventually leave the one I have now. But I could do the work for a little while. I would rather work on investments than on toilets.

My rentals are condos so these don't really count as experience.

So, sounds like I need a strong partner, or need to start smaller.

Aldo Ricaurte · Answer

I would buy the 25 unit for $1.1M, get a hard money loan putting 30 to 40 percent down, wait a year, use the rental income to get a 20 year loan from a bank.

There's nothing wrong with starting big if you know what your doing. Good luck Michael.

Joel Owens · Answer

"Both are around a 10% cap."

You haven't posted any numbers here so I would want to challenge that assumption. People come on here all the time saying this or that cap off XX price but they have not analyzed the numbers.

Experience in multifamily teaches you what the real numbers are and not what a seller or broker is showing a rosy pro-forma.

If this is local to you that will help with a local bank doing the deal. 25% down is good but I would need to see your overall financial situation with IRA,401K, stocks, savings, checking, businesses, cash value of your life insurance policy, real estate assets, etc. to see liquidity and net worth for the balance sheet after down payment.

I have clients all the time who start in large multifamily or commercial. They generally have considerable liquidity and assets.

If you have just the down payment and no track record in that space or reserves to fall back on then it gets harder to get funding and you might need to partner up.

Steve M. · Answer

Personally, No.

I have little to no experience with resident managers (which you will undoubtedly need).  I feel like I would be way in over my head and prior to going that large ~ I'd be a bit more comfortable working up to that point.  Remember, you can always 1031 in to larger properties.  Start with a Duplex/Quad and work your way up.  You learn each and every level, the fundamentals of a larger & larger properties, and exactly what goes in to successfully owning & managing a property that big :)

Just my $.02 cents :)  Good luck!

Jeff Rabinowitz · Answer

Originally posted by @Michael Delpier:Beyond the "you need to work up to that level" advice, what other advice or pitfall warnings can you give?

There is absolutely no reason why you should start with houses if you wish to own apartment buildings. In fact, if owning apartments is your goal you may be wasting your time and resources with houses. Make the investment that suits you.

Jarrett Harris · Answer

Are your current rentals commercial level properties? If not the bank will probably want a strong partner for you to share the deal with outside of just have the money to buy them on your own.

Would you do a 50 unit apartment for your first deal?

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