Is This A Stupid/Bad Idea?

Question

A little history (and I know that I'll inevitably come up short providing info) - My wife and I are in our early 30s. We've been casually investing in Real Estate for about 5 years, but in January decided to get more serious about it as a business/investment plan for a lot of different reasons.

We purchased a 4 unit building in April that's performing extremely well for us, and we're currently in the process of selling our 2 SFRs to free up some capital for more small multi-family properties. We have pretty decent W2 income and very good credit scores, so it would be pretty simple for us to keep picking up another 3/4 unit building every 6-12 months or so, without touching the cashflow from our current properties. We have a pretty strict criteria about what we'll buy, and I typically want to see a COC in the twenties on solid properties in decent areas with conventional 30 year/20% down mortgages (which is obviously tough to find right now.)

BUT a deal just came up near me for 45 units - asking price is 1.65M, stated NOI is "Over $200k" (but with the variations I've seen on what some commercial brokers count as expenses, I'm waiting on more information to get really deep into this analysis. Gross rents are $350k, and it's 45 units split between 12 properties, so I'm essentially analyzing them as a bunch of small MFRs (which I'm comfortable analyzing.) It's being advertised at a 12 Cap.

Here's the dilemma: I would have to partner and borrow and finagle my brains out to get into this deal without getting crazy good seller financing terms - right? I don't have the cash for 20-25% down (plus another 10% liquid reserves.) I'm thinking I saw this deal and figured if I could work out a way to buy it that I'd essentially be reaching my REI goals for the next 5 years all in one shot.

Is it stupid to be looking at this? Should I just stick to buying small MFRs? I think realistically that's what we'll wind up doing - but I'm curious about everyone's thoughts.

Thanks all!

Ronald Filian · Answer

wait it out. there will always be another deal. the only partner you need is the one you are married too now. Sleep at night with a happy wife.

Simcha Davidman · Answer

@Jason V. I totally hear you about listening to that stuff.  I'm trying to find my first deal, and after I look at a bunch of listings that are nowhere near cheap enough, and I think about all risk and illiquidity of this asset class (I'm in it for buy and hold), I start thinking how I should just stick with the stock market, with which I'm very comfortable, and how I should just stop this real estate nonsense.  And then I listen to another podcast, and it's like, no way, I gotta do this!  This has happened numerous times.  So for me, it's taking me from negative to positive, not positive to gung-ho.

But if it's not going to help your returns, I think you should stick with certainty.  That, of course, is based on my vast real estate investing experience :)

Jason V. · Answer

@Ronald Filian & @Dewain J. - That's kind of how I'm feeling, so waiting for a deal that fits better and doesn't put me so far beyond my reserves is probably what I'll do.

@Simcha Davidman - And that's exactly the reason I'm struggling with the decision: I don't know if I'm being smart and conservative, or wussing out on an opportunity. Maybe one of the pitfalls of listening to podcasts/interviews about real estate all the time is I can get a little gung-ho. Your point about the returns is a good one, and I can probably do just as well without the risk of a monster deal and partnership by buying one at a time - it'll just take me longer. I'm trying to remind myself that patience isn't a dirty word.

Thanks All!

Simcha Davidman · Answer

I literally listened to this today https://www.youtube.com/watch?v=RSHb2nlCQp4&list=P....  At each stage of their expansion, something bigger than they could handle came up, and their initial reaction was, nahh we can't do this right now.  Upon further review, they decided to jump into each of them, and are thrilled with the results.

On the other hand, if you borrow and partner, would you still be reaching your goals after splitting returns and more debt service?  If the numbers still make sense, I recommend taking a long and hard look at it.

Alternatively, there's another podcast (much earlier on the youtube playlist) in which the guy being interviewed was able to get the seller to "agree" to high valuations on some of the houses in a portfolio he did not want, which then effectively lowered the value on the remaining houses which he did want, and successfully negotiated purchases on the few that he did want.

Good luck!

Is This A Stupid/Bad Idea?

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