Starting out with a 6-8 unit too ambitious??

Question

Hi, I'm a younger investor (27) with quite a bit of education under my belt. I've attended my local REIA for over a half year now, took the license course, read many great books, and did a 3-4 month intensive mentorship with a pro flipper.

I definitely see the value in learning flipping, rehabbing, and wholesaling. However, I'm not completely without cash -  I happen to have inherited close to 80k PLUS I could easily partner with my father for credit and more capital and buy a pretty chunky apartment building in Newark or Jersey City with a nice 9-10% CAP.

I have also been reading a lot about landlord law and feel I could be ready in 2-3 months to be a landlord or at least identify a good prop. management company to handle a 6 unit.

Is this unrealistic? I know it would probably be "easier" to start with a 3 unit, especially if I am going to be landlord. But I really feel that 6+ makes for a better, more stable, more efficient rental machine, as expenses are proportionally less at that scale.

On the other hand, I don't want to rush just because I have no job and need the cashflow. So perhaps I should start small if I really feel I need to upgrade to commercial res. just do a 1031 exchange within a few months.

John Chapman · Answer

For what it's worth, I think there is a significant difference in the amount of management time required for multifamilies as opposed to sfrs.  I've got a 4-unit that is a great investment but requires far more time than my sfrs.  I think that once people start sharing walls and roofs, the issues with management exponentially increase.  I agree with "Loc R. that there is really no difference between 3 and 6 units.  My personal opinion is that multifamilies are the best when you start getting true economies of scale (onsite management, amenities, etc.) on buildings of 20 units and up.  (That's probably an arbitrary number but is just based on my own observation.)  Otherwise, management is more expensive.  Mike Jakobczak is right, however, that if the numbers work then it really doesn't matter.

Finally, because it's your first venture into landlording, I would not discount the ability to quickly liquidate as Ed Lee mentions.  There is something very comforting about knowing that with an sfr that if you need to sell it, you can.  (e.g. you don't really like landlording or you want to trade up to something bigger).

Loc R. · Answer

First off, you have to decide whether you want to be a landlord at all.  If the  answer is a "yes", then I don't see a BIG difference between starting with a 3 unit vs. a 6-8 unit building.

Just make sure everything thinks you're just the property manager and NOT the owner.

Joel Owens · Answer

"So perhaps I should start small if I really feel I need to upgrade to commercial res. just do a 1031 exchange within a few months."

The IRS has a clear view on properties held for RESALE purposes and properties held for INVESTMENT when doing 1031's.

Even thought there is no set time most 1031 exchange companies hold that 1 year is safe before re-selling.

I can tell you for sure a few months isn't going to cut it.If you are self managing I would tell you to spend a few times in court during the eviction hearings.You will see tenants games,landlords games, and how your local judges rule on things.It will give you a better understanding of what you can and can't do and how to set up your lease.

Brian P. · Answer

You received some good posts, and I would like to suggest at this point you just focus on good deals. Whether that be a vacant lot or the Empire State building. My brother and I started out in single family homes and flats(one unit upstairs, and one downstairs).

But in our hunt for good deals we ran into a 24 unit others were ignoring. It had a lot of problems but turned out to be one of our best investments and we kept it for a long time. We gave them a free and clear set of flats and took over their loans. So my advice is to hunt for the good deals and don't box yourself into some general number, e.g. 6-8. let the deal decide for you.

We also once got into a 36 unit for no down because we asked for it. So it doesn't always have to be by the book of investing rules some bank came up with. We solved problems the owners had that better offers did not address. So build rapport with the owners and maybe they have a problem you can solve and get a good deal doing it.

David Kimball · Answer

You make a good point - the smaller multis are probably easier to sell later on than larger ones because there is more demand.

What other mistakes could I run into that I would have wished I learned on a smaller scale?

Ed L. · Answer

Go for it!   My first was a 9 unit Commercial property I purchased to house my real estate brokerage.  No regrets at all.   It's allowed me to grow the brokerage with virtually no overhead and still have cash flow every month.  along with tax benefits and the often overlookednequity buildup.

I will say that in my market the single family residential rentals are in much higher demand than comparably sized apartments.  They also offer the ability to invest in different neighborhoods  and are more likely to appreciate in value once the economy turns.  And easier to liquidate on average.

Every market is different though.  Sounds like you are well prepared.  
Best of luck.!

Mike Jakobczak · Answer

Yea I think it comes down if you feel comfortable jumping into a more expensive investment.

To me it all comes down to the numbers.  If it makes sense then buy it before someone else does.

Just make sure to do your due diligence.  Also have a good understanding of how much things might cost down the road.  Example: new windows, new roof, new furnace, etc  These are going to be a lot different then residential single family homes.

Walter Hill · Answer

Loc R is 100% right.

Never reveal that you are the owner this way you can blame everything on the "owner" that you supposedly work for.  You are just the messenger.  When collecting rent, you can't let some be late because you aren't the "owner" you are just a worker bee.

When you have to enforce difficult rules, like no pets, or no parking.  You tell the same story.  "Sorry, I have to do this or I will lose my job".  The younger you are the better this tactic works.

I say go for a multi-unit if the area is right.  Vacancy in a 6 -8 unit place will impact you less then a vacancy in a 1 family.

Good Luck
Walt

Starting out with a 6-8 unit too ambitious??

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