Buy multi-families or save for apartment complex?

Question

Hi BP,

I have an open-ended question here. I've been saving capital to purchase my first multi-family property but just realized that while I would like to start my property portfolio that I am in no rush. I have sat on the idea of building it with multi-families but recently thought to myself, "why not just wait a little longer and save a bit more and go for the bigger fish?" Is this reasonable? I'm only 23 and think that scalability would be a huge draw for me. In theory, if I could buy a multi this year or next year that'd be great but wouldn't the idea of pushing off buying for 3 years to save up for a complex be more sound and scalable? Thoughts? What would you do?

Hubert Washington · Answer

@Craig Moore

Investing in apartments is different than investing in smaller multi-family properties (less than 5 units). If you haven't already, begin educating yourself about the apartment side of multifamily and see if it is for you. I recommend 3 books on the subject:

1) ABCs of Real Estate Investing by Ken McElroy2) Wheelbarrow Profits by Jake Stenziano & Gino Barbaro3) Multi-Family Millions by David Lindhal

This will give you a good idea of what it takes to invest in apartments. You can determine if it fits with your own personal goals and if you want to start out with smaller multifamily properties first or go straight into apartments. You may also want to read through the great responses from the BP community I received on my post

How Can My 1st RE Investment be in Multifamily/Apartments?

Best of luck you on your journey and let me know if there is anything I can do to help you out!

Gino Barbaro · Answer

@Craig Moore

Hi Craig,

There is nothing in life like the momentum you can build when taking action.  If you are committed to buying multis, then go for it.  It sounds like to me you are ready, and if you continue to save for a bigger  property, your desire may wane and the your goal may become "Some day I'll do it."

If you want to scale your business, you can always take on a partner or raise money.  It is easier to accomplish these two tasks if you already have a portfolio, even if it is one deal.  That gives you credibility.

I also think it's important to start because if you don't like it, the thought will not be burning in your mind for 3 more years.  You can quickly cross it off and move on, although I think you will like the idea of creating wealth and building passive income

Best

Gino

Craig Moore · Answer

Hell of a response, Gino.  I know for a fact that creating passive income and being self-employed BY 30 is totally engraved in my mind. Real estate is how I would like to go about it. I like to think that multis can provide a nice income for myself, but in regards to starting a family, which I will in later years, I need to know that I have a massive/large enough portfolio to take care of my family comfortably.

Dave Foster · Answer

@Craig Moore, I'm not sure I've ever met an investor who started with one large property and never sold it.  Real estate investing is fluid and to maximize your return you will want to be flexible in what where, when and how you invest.  Transition between size, location and type of investment real estate are exactly what the 1031 can do for you.

You can start with whatever type of investment real estate you can find that meets your return objectives today and later exchange into other real estate that better meets your needs of that moment.  As @Chris Washington said you can use the 1031 to go from smaller units that may be more available and profitable today into that large apt. complex you want later when you find the real bargain.  Later in life you can also use the 1031 to go from apt to commercial or several SF or whatever your druthers are.   Of course the key to this mobility is that it is done tax deferred and if planned correctly can end up tax free.  So you get the added investment power of being able to use deferred tax dollars to grow your portfolio.

Chris Washington · Answer

@Craig Moore

My advice would be to invest in the next great deal you find. You will quickly realize that no matter how much money you have, eventually you will run out and will need to learn how to leverage other people's money (OPM) to further your real estate investments. If you are actively looking for deals, there are 2 potential outcomes:

1) Find a great deal that you can fund yourself, and invest accordingly

2) Find a great deal that you cannot fund yourself, and utilize OPM to secure.

From everything I've learned, if your strategy is to save until you can personally afford each deal you pursue, you will waste a lot of time saving when you could be using OPM to grow your real estate portfolio much quicker.

You can always also 1031 exchange from a smaller deal to a larger deal tax free, so investing in a solid, smaller deal today does not mean that you could not still go for the larger complex in 2-3 years.

Hope this helps! Best of luck...

Stone Teran · Answer

There are some economies of scale in going bigger.  My advice is to continue saving and patiently wait for a great deal.  Not a good deal, but a really great one.  That will affect your long-term profits more than the size.

Craig Moore · Answer

Thanks for your input! I am currently a commercial property manager so I have already been exposed to a big office building. I've seen it all from HVAC, plumbing, leaks, you name it. I never considered what a max would be for me right now though.

Craig Moore · Answer

Any other thoughts? You guys are awesome!

Jeff B. · Answer

If you've never managed a property, you will have a large learning curve, so keep purchase#1 manageable. I started with my home as a rental to get my feet wet.  Then 1031 into a 6-unit FMU (apartments vs multi - - it's all the same at this scale).  The SFR got me the docs, procedures and people skills necessary for the 6-units.

We've been Buy&Hold for 18years now and put the property into a Living Trust for the kids - - they will inherit tax free a turnkey which they can operate or liquidate.

Craig Moore · Answer

Exactly. I would like to stop at 4 (haha). By the time I have them I would like to have an immovable foundation to literally watch them grow. 100+ units or more maybe. Depends. I've got 7 years, and I don't plan on messing up "because I have time to fix my mistakes" as I've heard countless older people say. Do it right the first time and I never know what that could bear..

Buy multi-families or save for apartment complex?

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