Residential/Commercial Buildings

[Victor Eng]

BP -

I generally look at standard 2-4 family MFR investments, but the returns on 5+ unit res/com are very appealing. (ex: 7 unit building with 2 storefront and 5 1 bdrms). What sort of risks should I be considering that may not be different from the standard 2-4 unit multi? I'd love to hear from your past experiences, especially if you've had dealings in both res/com

[Matt Faircloth]

Hi Victor,

@Trevor Ewen thanks for pulling me into this conversation!

Things can change when you get into larger buildings but it depends on how you are currently structured.  If you are laying very little down and getting Fannie Mae backed money for your purchases of 2 to 4 unit buildings, you won't be able to do that moving up in size.  That being said if you are using financing from a bank (I prefer small banks based in the area around the property) you will be paying 25 to 30% down even for a duplex and it's the same on larger deals also.  We purchased an 18 unit building and a 10 unit building last year, both at 25% equity.  Rates were very comparable too, in the low 4% range.  You won't get a 30 fixed mortgage on these types of properties though, most loans have a rate adjustment every 5 years.  If that was the type of financing you got on your smaller multis, there is little change in larger deals.

With regards to building a building with a storefront, as @Sean T. said it depends on the business.  This is true both because people may not want to live over certain businesses and also because you want to evaluate the stability of that business.  A retail tenant is completely different than a residential tenant.  The business itself is what is paying the rent.  If the company is well run, well marketed, has a solid track record and following, and a solid lease, good for you.  Filling a commercial space can be challenging as you need to get the right tenant.  A vacant storefront can sit for months while you wait for the right occupant. And, unlike an apartment people don't just "move in" to a storefront. They need to setup the space to accommodate their business, this is called "fit out".  A savvy retail tenant will want to pay you a small portion of the rent while they get the business ramped up.  

And one more thought - larger buildings require more work to keep them healthy and a more complex budget.  Make sure to include a "capital reserve" to set aside money for larger improvements like boiler or roof replacement.

I hope that helps!

Matt