Better to buy multifamily rentals close to home?

Buying & Selling Real Estate
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Better to buy multifamily rentals close to home?

Tara Brodersen
Rock Springs, WY · Member since 2013 · 8 posts · 1 vote

I want to invest in multi-family rentals,but the market where I live is quite high and limited. Is it wiser to buy closer to my area, or should I look somewhere afar, where it is less expensive, and hire a property management company?

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Michael Wentzel
Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
12y

@Tara Brodersen Welcome to Bigger Pockets! There are advantages and disadvantages to both options. Presumably, you know your home market well and it is nice to be able to look at potential properties in 15 minutes. You also have the possibility of managing your own properties if they are close by. But managing your own properties can be a lot of work and a lot of headaches. Even if you purchase in your town, you might want to consider a property manager.

We turned our original home into a rental property and were forced to use a property manager when we moved overseas. It was great. The best 10% I ever spent. Basically, they deal with 95% of the issues and get in touch with me only when there is a major problem.

Recently I heard the quote on a podcast by the Real Estate guys which said, "Live where you want to live, but invest where the numbers make sense." If you're willing to utilize a property manager, it opens up most of the US to you. I would recommend doing some research on a few markets and then picking one to really get to know and invest in. It doesn't have to be a major market. We've found great buys in a community of about 100,000 people 40 minutes away from us.

So weigh your options. If you can find a market that doubles or triples the returns of your own market, I would make the jump. If you find markets that are only marginally better than your home market, I would stay at home and enjoy the local knowledge and convenience of being close to your properties.

Mike

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  • Mary B.
    Real Estate Investor · Lansdowne, PA · Member since 2013 · 1k+ posts · 656 votes
    12y

    Depends on the deal structure and the numbers. That goes for MFRs near or far...

    Kudos,

    Mary

    0Reply
  • Michael Wentzel
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    @Tara Brodersen Welcome to Bigger Pockets! There are advantages and disadvantages to both options. Presumably, you know your home market well and it is nice to be able to look at potential properties in 15 minutes. You also have the possibility of managing your own properties if they are close by. But managing your own properties can be a lot of work and a lot of headaches. Even if you purchase in your town, you might want to consider a property manager.

    We turned our original home into a rental property and were forced to use a property manager when we moved overseas. It was great. The best 10% I ever spent. Basically, they deal with 95% of the issues and get in touch with me only when there is a major problem.

    Recently I heard the quote on a podcast by the Real Estate guys which said, "Live where you want to live, but invest where the numbers make sense." If you're willing to utilize a property manager, it opens up most of the US to you. I would recommend doing some research on a few markets and then picking one to really get to know and invest in. It doesn't have to be a major market. We've found great buys in a community of about 100,000 people 40 minutes away from us.

    So weigh your options. If you can find a market that doubles or triples the returns of your own market, I would make the jump. If you find markets that are only marginally better than your home market, I would stay at home and enjoy the local knowledge and convenience of being close to your properties.

    Mike

    1Reply
  • Tara Brodersen
    OP
    Rock Springs, WY · Member since 2013 · 8 posts · 1 vote
    12y

    THanks Mary B. for being supportive!

    Michael W. - Great advice - loving it!!! I will look at other markets, any advice on how to go about this?? I really don't know how to start.... I will also search more on this site to see if anyone has posted on how to go about this.

    On a side note, I am trying to edit my profile to not say my entire last name but only my last initial instead. It does not let me edit my name, how do I change this??

    0Reply
  • Michael Wentzel
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    @Tara Brodersen Click on your profile. Then account settings and privacy tab should give you an option to click a tab that will hide your last name.

    As for looking at markets, I would start in Rock Springs. Meet with a couple realtors, interview some property managers and/or attend an investment meet-up if there is one. Looking outside of Rock Springs, I could look for metro areas that are either within a two-hour drive or a cheap direct flight. Type any city name into the search bar up at the top and it should bring you plenty of posts and insights into markets. Memphis, Atlanta, Dallas, Kansas City and others are talked about as the top markets. At the moment I'm staying in smaller market where there is less competition and purchase prices are low. It allows me to learn a bit and make a few mistakes with lower risks (25% down on properties under $40,000).

    Mike

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Hi Tara,

    What is your planned cash down payment for your first property and how many units?

    Investing out of your area can work but the scale matters.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Tara other markets you need to see what kind of cap rates are possible versus quality of the area.

    What type of cap rate is where you live and what cap are you seeking versus security?? This will help narrow options down.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    12y

    @Tara Brodersen

    Good Luck, I don't have any great advice as I have not yet put my toe in the multi-family as I cannot find any that makes sense yet :)

    I will say that loop-net, is one of my favorite persuing tools :)

    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    12y

    @Elizabeth Colegrove A good use of loopnet is to use it to find brokers that are do MF in an area of interest. Call them and explain why that property doesn't work and what else he might have. They may also tell you to make an offer on the property even if it is low, if you felt it was over priced. It gives you an opportunity to start a relationship with a broker.

    0Reply
  • Tara Brodersen
    OP
    Rock Springs, WY · Member since 2013 · 8 posts · 1 vote
    12y

    Jeff & Elizabeth- great advice for loopnet - thank you!! I will be checking it out!

    Joel - I am looking at 4-plexes in my are, which typically go for 250k or more. I could put 25% down but would like to do less. The financing options I have, considering I am a homemaker now, are: 1. A local bank allows no income with 30% down, or 2. Another bank allows 25% down with minimal income (I plan to go back to work part-time soon). Please tell me how the scale matters in different areas. I am open to different scales but am new at this. I will have to figure out the cap rate and compare, thank you for informing me on that!

    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    12y

    @Jeff Greenberg

    Good Insight!!!

    @Tara Brodersen

    Have you looked into a small business loan. They only require 10% down. I have not started the process but I have been researching them. They are based more on the income of the property than the "owner".

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Tara for that 250k what is the average rent per unit for the 4 plexes?

    Does that include landlord paid water or not??

    Let's do a very quick example to figure out cap rate in your area based on asking price average first.

    Let's say rent is 700 a unit times 4 units = 2,800 a month X 12 months = 33,600 annually gross expected rents. Now we take the 33,600 and take away 50% costs ( generally 10 vacancy, 30 operating and expenses, 10 property management for that size of 4 units)

    33,600/2 = 16,800 a year expected NOI (net operating income if paying all cash). The NOI is the same just if you have debt service it changes a bunch of your return numbers with a mortgage involved.

    Take the 16,800 and divide it by the asking price of 250,000. This would give you a rough cap rate of 7 percent. Then you look at rent per door versus recent SOLD prices to get the selling cap versus the asking price cap for your area.

    Figure out what rents you can get per unit for that 250k in your area and post back here.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Douglas LarsonPro Member
    Rental Property Investor · Salt Lake City, UT · Member since 2008 · 410 posts · 337 votes
    12y

    @Tara Brodersen

    Only you can decide what's best for you but I hate having rentals far from home. I have found that management companies never seem to care about my bottom line like I do. The initial savings in purchase price can be eaten up quickly by poor management. If you do invest more than an hour away, pick your management company FIRST!!! Get references and ask them what kind of properties they want to manage. If you are likely to give them many units that they WANT to manage, they are more likely to take care of you and your properties.

    This guide from BP is the best at answering questions on all things rental.

    Happy Hunting . . . and Make Your Own Luck!

    Podcast Guest on Show #41
    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Tara Brodersen

    A rental manager will not do as good a job as you will do yourself. I've been on both sides of that equation having been an owner hiring a PM and I previously worked at a PM. When I have a vacancy on my own property I go all out to get it filled. If there is a maintenance issue, I try my bets to have it resolved that day.

    The PM fees can vary and be quite high. Typical is in the 7-10% range, but I've paid as much as 12% and in some resort areas the management fee can be as high as 25% off the top. The PM fee is off the gross rent, and your return as owner is off the net.

    0Reply
  • Thomas Wright
    Commercial Real Estate Broker · Dayton, OH · Member since 2013 · 38 posts · 2 votes
    12y
    I specialize in multi family investment. In Ohio the apartment complex buyers find prices much lower than most other areas. A property manager makes your property truly an investment. This is a good way to buy.
    0Reply
  • Kizzy Robb
    Investor · Saint Louis, MO · Member since 2013 · 87 posts · 32 votes
    12y

    This is a good thread. It lets me know to think outside my immediate market as well. I also need to start developing relationships with local agents and PM.

    Thanks.

    0Reply
  • Terry HershbergerPro Member
    Investor · Nipomo, CA · Member since 2011 · 227 posts · 76 votes
    12y

    @Tara Brodersen,

    I believe you should live where you want and invest where it makes sense. If you put a good system in place to manage your properties, it shouldn't matter if your investments are just down the street or clear across the country. I live on the West Coast and invest in Ohio.

    1Reply
  • Tara Brodersen
    OP
    Rock Springs, WY · Member since 2013 · 8 posts · 1 vote
    12y

    Thank you everyone for such great advice!

    @ Terry Hershberger

    I want to look outside my area my area, but it seems like such a scary thing to do. Especially considering I wouldn't know the area. It seems like such a risk! Others have recommended looking at LoopNet and creating a relationship with a MF Realtor there. This is great advice but I don't think all realtors are trustworthy, what if they lead me astray or just don't know exactly what they are doing? I feel that I would be putting all my money and trust in someone I don't know in order to buy out of my area, however my return might be greater than in my area. So I am wondering if you have any additional advice on how to go about this?

    @ Joel Owens

    You are pretty much right on as far as your rent for cap calculations. For 250k I would have 4 units. 2 - 2 bedrooms renting for 595/mo and 2 - 3 bdrms renting for 725/mo. Thank you for breaking down the cap rate calculation for me, I did not know how to do that!! One question still, please explain how to do "Then you look at rent per door versus recent SOLD prices to get the selling cap versus the asking price cap for your area." Thanks!!!

    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    12y

    Investing in sfh and small MF requires a strong and trust worthy remote team. There a a lot of BP members that have developed those teams and are having great success, others maybe less so.

    I personally like the large MF (50+) where you can get professional management companies and on site personnel. Of course most new investors don't have the funds or other requirements to get into these larger properties.

    Syndicated property purchases are an option for those that want to be a part of a larger deal by having funds pooled for the acquisition. I will temper this statement with the caution that not all syndicated (private placements) are not all the same, nor are the sponsors of these deals. Each investor must do their own due diligence on the sponsor and the deal itself. Certainly you are putting your trust in the one running the deal.

    I just bring up this up as another means to invest out of state.

    0Reply
  • Terry HershbergerPro Member
    Investor · Nipomo, CA · Member since 2011 · 227 posts · 76 votes
    12y

    @Tara Brodersen

    When you systemize everything, it doesn't really matter if it's a 30 minute drive to a rental or a 3 hour flight to a rental because you shouldn't have to make either. Some people invest and other people create jobs for themselves. I would rather invest and have others do the jobs. It takes people you can trust on the ground where you invest and you have to create great relationships! I believe being a business owner for the last 26 years has helped me with this. I hope this helps.

    0Reply
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