Crazy idea or good idea?

Question

Hi everyone!  I'm new to real estate and BP.  I'd love to hear your opinions about this....

First, let me set the stage.

My boyfriend and I live in Fresno, CA.  We both have solid full time jobs in construction - I build elevators and he's a plumber -  with no intention of leaving our positions anytime soon.  My credit is excellent and his is above average.  We have minimal debt and an emergency fund established.

We are interested in long term buy and hold multiple family properties as passive income for retirement.  Given that our first loan via traditional financing methods will probably be the best deal from the banks we will ever be able to get, is it a good idea to go big on our first purchase?  By "go big" I mean a 10-20 unit, maybe bigger, rental property.

The logical part of my brain says this is a good idea, but it is definitely a nerve wracking way to start investing given the multitude of ways this could go horribly wrong.

What are your thoughts?

Nathan Emmert · Answer

Personally I would stay away from commercial loans at this point... banks are basically giving money away for free on conventional loans for people with above average to great credit (as you described your positions).  Between your bf and yourself you qualify for 20 loans (only put 1 name on each loan for a property so it only shows up on 1 credit report).  Conventional lending is around 4.25 - 4.75% fixed rate with a 30 year amortization (as close to free as you'll ever get probably).  Personally, I want as much of that money working for me as possible.

On the conventional side you'll pay and extra 1 - 2% in interest... generally the rates will be variable... you'll have shorter amortizations ... and you can have balloon payments which require additional planning to prepare for.

I'm not saying you won't eventually want to get there but if you can get $2 or 3M of conventional loans on residential real estate first I think you're in a pretty good spot.

Nazz Wang · Answer

@Amelia Kayes Awesome that you are thinking ahead and planning your financial future. Congrats on taking the most important step and getting started!

It has been done before. Do you have any plans on how you want to run your rentals? Are you going to buy locally and self manage? Are you going to use a property manager? Are you going to use an onsite manager? How does your numbers look? Most banks, as far as I know are skeptical about lending commercially to people without any rental experience, per se. And do you have a good size reserve fund? If something happens to a complex building that made some, or a lot of the units inhabitable, are you going to have money to invest in fixing it? I have seen many that didn't have enough of a reserve fund, can't fix up the units to be rented, lose rental income and becomes cash negative, thus losing more units because the units are inhabitable. It can be a vicious cycle, in the worst case scenario.

That being said, it has definitely been done before. Just like any investments, the best thing is to explore an idea, get some information on some real deals on the market now, do your numbers really carefully, talk to banks to see how much you can leverage, and do everything you can to really understand what you want to get into. Then you can make an informed decision for yourself. Have a lot of ideas but don't be afraid to toss an idea when it doesn't profit, and commit when it does. Do a lot of homework, and then do your homework again.

Joseph Ball · Answer

You have decided it would be nice to learn to fly. You are standing on the runway. You say, "I think I would like to start with that 747 over there. I want to solo first. Can anyone please tell me how to open that funny little door?"

Start with a single family 3/2. Build from there.

Congratulations on planning ahead with real estate though. Done right, it will serve you well.

Amelia Kayes · Answer

Hmmmmm.... With all the prep and research I've been doing over these past months I failed to really look at the ins and outs of commercial loans. It would definitely be a stretch to come up with that big of a down payment and we only have minimal collateral.

Thanks @Tim Bishop !

Amelia Kayes · Answer

@Nazz Wang and @Joseph Ball    Thanks!

Tim Bishop · Answer

Can you handle 10-20 units?  If you can, if you can get a commercial loan, if you can come up the minimum down payment and if you still have cash reserves to get you through tough times then it's a great idea.  I don't know you but that seems unlikely, I think you've got the right mindset though and I bet if you get a good start on a good property (that you can qualify for) and soak in all you can here on BP, then you can and likely will make it work!

James Stevens · Answer

Hi @Amelia Kayes and welcome to BP.  What @Tim Bishop said above is absolutely true.  Anything that is 1-4 units is considered as residential but once you go above 4 units it is all considered commercial property so it won't matter whether you live there or not.

Amelia Kayes · Answer

@Tim Bishop  Even if we go after a commercial loan?

Ricardo S. · Answer

I believe you can start with a 4 plex and eventually transition to 8 plexes etc...

Crazy idea or good idea?

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