Scale of First Multi-family Investment: Go big or go home?

Question

So I was listening to one of the BP podcasts (I can't remember which one) and the guest speaker brought up a really good point: Whether you invest in a 50,000 dollar property or a 500,000 dollar property, theres no difference as long as you really did your homework and know what you're getting yourself into.

Now for a first time buyer who's looking to purchase his first multifamily, could this concept apply to me? Would it be smart to go big (ex. purchasing a nice multifam in a really nice area or one with more units) for my first investment which could in turn generate more cash flow, or is it wise to start small (find a smaller multifam) and work my way up?

I would also strongly consider house hacking and living in one of the units. But I'm still young and could rent out all of the units and live with my rents which would obviously be the more economical thing to do. Furthermore, I was thinking I could even pay off a nice chunk of the mortgage by using my own income from my 9-5 and beat the interest from a loan before it compounds.

Micki M. · Answer

I love it, you could go big AND go home.  It is true you could go bigger on your first purchase without additional capital if you can create the right financing situation, partner, etc.  You will be taking on more liability, and if you go bigger than 4 units you won't have the owner occupier financing available.

Exercise your analyzing muscles by vetting some possible deals in different price points so you can see the difference in finances. Make sure you've got good numbers and then assume your income is too high and your expenses too low and reanalyze. Get a lot of advice from experienced multifamily investors and ask yourself how comfortable you'd be in a worst case scenario situation on each property. Then jump on in with the level of risk that you can stomach.

Keep us posted.

Yazeed A. · Answer

Thanks @Dillon Loomis for that perspective! I didn't realize that staying home with my parents is seen as an investment from a bankers POV.

Account Closed thanks for the advice john! i will definitely have to consider all my options. Btw, I just stalked the JC Property Group Facebook page, inspiring stuff man great work!!

John Cohen · Answer

David Hays I do agree with you analogy about the bike, but the difference between a bike and real estate is that with the larger deals comes with greater economies of scale. Do I think you should go out and buy a 100 unit complex NO, but there is a happy medium. The same problems that happen on single family houses happen on larger mylitfamily properties. At a young age with a good paying 9-5 you can take some bumps and bruises. Also the fast the asset is paid off, the future cash flow is great.

That's why I always ask people there goals and what they are looking for in an investment before recommending mylitfamily.

Ozzy Smith · Answer

I am by nature a very impatient person and believe the philosophy that the only difference is a few zeros.  It's still just drywall, paint, etc, just more of it.  That's not entirely true though.  Financing is completely different, and even doing the work is different.  Once you pass 4 units the codes change completely most times and many contractors that "know how to fix it" have no idea how to handle this.  Also finding the right contractors to get the job done is extremely hard for a single family project let alone a large project.  I wouldn't have listened to me a year ago if I had the means to go big and maybe you won't either.  However I'm glad I didn't go real big then or I would have absolutely went home because now I realize that I didn't come anywhere close to knowing what I thought I knew.

David Hays · Answer

While I'm familiar with that podcast, and I can agree with this concept in general, I feel like there's a pretty big caveat here - when you have the experience to know what you're doing. Maybe you feel like you've "done all your homework and understand the deal", but if it's your first deal, then you're almost certainly wrong - maybe not on everything, but absolutely on some things. More than that, there's things you're just not going to learn until you're actually in this business and have some experience under your belt. Does that mean I think one has to be a 20 year industry veteran to be doing large multi-family deals? Absolutely not, but you definitely do need to have some experience managing an asset, managing tenants, and dealing with "oops" moments...and the higher your liability while you're making those mistakes, the bigger the potential fall.

I make the same analogy whenever a friend asks me what it's like to learn to ride a motorcycle - it's not if you're going to go down, it's when. Better to be riding a $2,000 Kawi 250 than a $30,000 Harley, in that case.

John Cohen · Answer

@Yazeed  Atieh I appreciate that!! If you have any questions let me know.

John Cohen · Answer

@Yazeed  Atieh I love the idea!! I am a multifamily investor and agree, weather is $50,000 or $500,000 as long as you do your homework and understand the deal it's the same thing.

I would also recommend ask as many questions as you can and use BiggerPockets. The resources and information here can help you navigate the potential deal.

At a young age you definitely want to pay off the mortgage fast to create cash flow in the future, if this is your goal. If your job pays you well and you don't need the cash I would consider pay the mortgage down aggressively and buying in a great location.

I love where your head is and ambition, go out and GO BIG!!

Dillon Loomis · Answer

@Yazeed  Atieh Just keep in mind that if you plan to stay at home with your parents, that investment will be treated as in investment meaning that you will probably be required to put 20% down as a down payment. Compare that to living in one of the units as an owner-occupant where you could qualify for an FHA loan and only be required to put 3.5% down. Being younger, having enough cash to put 20% down AND have enough cash reserves for unexpected maintenance, repairs, vacancy can be very challenging. Just something to consider! Best of luck :)