Apartment complex or smaller MFHs?

Question

Hi guys,

I got lucky in the Bay Area housing market and was able to buy my house pretty cheap. I'm planning to sell it soon to take advantage of the 250k tax exemption, and invest it in MFHs in other areas while renting a place here.

Depending on how much I sell it for, I should be able to afford something around ~1.5 million with a 400k down payment. In most places that should be enough for a mid size (~20 units) apartment complex or 3, 4 quadruplexes. ( sadly that can only get me a small SFH in the Bay Area).

I've read in some of the blog posts that apartment complexes arent really that much harder to buy and manage compared to smaller MFHs, and it scales better too. But that being said, given that this will be my first time buying investment properties, let alone in a distant area, would you guys recommend that I jump straight to apartments, or should I start with smaller MFHs to better learn the real estate investment business before attempting something bigger?

Thanks

Ray

Nik Divakaruni · Answer

Hi @Ray Li, I currently live in the Bay Area too and actively invest in the Pittsburgh and Phoenix markets.  By June of next year, I will have over 150 units combined in those markets.

Happy to discuss experiences with you.  Feel free to PM me and we can set up a time to talk.

My advice to you - invest in a syndicated deal (as David mentioned above) in a market that appeals to you.  Learn the ins/outs of that market as much as you can, in that deal, and then go buy your own property.  I made the mistake of jumping into the market on my own without any experience, so I have quite a few cautionary tales for you.

Nik

Account Closed · Answer

I like that idea because the upside (i.e. appreciation) in Sacramento is pure speculation at this point. Good luck Ray!

Grant Greene · Answer

Good afternoon, @Ray Li! @Pratik P. makes a great point about picking a market and finding a great management company.  Just food for thought: have you considered the Phoenix or Tucson markets?  There's a big demand for what you're looking to do.  In fact, Scottsdale just approved numerous areas for additional MFH complexes. I wish you the best!

Kaz M. · Answer

Out of state investing is hard enough so taking it slow in the beginning might be a good way to start.

Think of it as a proof of concept and start with say 2-4 unit and manage it as if it were a 20 unit. You can limit your mistakes due to the lower price and you can build you team and system with the mind to scale up on the next deal. Take you time and do your research!

David Thompson · Answer

Hi Ray,

It's a good question.  For active investors, I think most folks would recommend staying local especially being this would be your first apartment investment.  If you are looking out of state, you would really need to do a lot of homework, target cities and spend time going there, developing relationships, asking BP folks, going to local MF meetups and really understanding who are the players in town that are successful and can lend solid advice.

Alternatively, if you are accredited, you could take some of those funds and scale into larger apartment investments through syndicates.  Taking a hybrid approach by balancing some investments in smaller local MF while investing and learning w/experts that do larger MF, you can accomplish your goals.  I really like syndications especially for out of state investors, just the logistics, hassles and risks are minimized investing w/experts that may be in better markets than you (pop/job growth; diversified industries), cash flow, relative value, etc.

Kevin Fox · Answer

Hey @Ray Li

Excellent questions!

Feel free to shoot me a PM if you'd like to run through the numbers and pros/cons of a few scenarios in various locations.

Happy to help!

Jo-Ann Lapin · Answer

Wonderful questions you have asked . It all boils down to you personal finances. MFH will always have larger fluctuations in down markets but from a long term cash flow the rents depending on the area can be consistent. Remember the shelf life on MFH is shorter. Have clients all thru Southern California that have a lot better with rentals and flips spread with the product. Happy to speak further with you.

Tim Puffer · Answer

@Ray Li - Do great in-depth research on a few markets and then start to assemble a team in that market. Definitely a great idea to look outside of California for an apartment building so that you get a better return - your future self will thank you!

A great book that goes decently in depth about assembling a team is - The ABCs of Real Estate Investing by Ken McElroy.

If you want to chat, or need help analyzing anything please reach out to me - I would be more than happy to help you!

Pratik P. · Answer

This is my understanding of MF investing.

1. Pick a market and know it well.

2. Find a GREAT management company that knows how to handle large MF.

3. Find a deal that works and close. More doors under one loan would be much better than a bunch of small MF. You can focus on just one building instead of many scattered around the city.

Ray Li · Answer

Thanks for the suggestion guys. I originally considered Sacramento as well, but decided that if I'm going to hire a property manager, I might as well pick a city with better growth and cheaper prices. I'm currently looking at the Raleigh area, and hopefully will be able to find some good deals there.

Thanks,

Ray

Apartment complex or smaller MFHs?

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