BRRRR - Start with single family or multi family?

Question

Some background on me: I am 36 years old. Work for a tech company in sales. I average $250K year in W-2 Income. Excluding retirement funds I have set aside $300K of investment capital to start. Education is degree in finance and accounting. Although I don't remember half of it but a few credits short from eligibility to sit for CPA exam as well.

I am gearing up to start executing my BRRRR strategy. Although I am a bit torn where to start. My goals are all about monthly cashflow and scaling fast. But of course I have to manage risk and not get in over my head.

Should I Begin with Single Family, duplex through quadplex, or Jump Straight into small commercial multi family(say 5-8 units)?

One reason I'm interested in small commercial multi is the valuation's make much more sense to me. I guess it comes from my Finance and Accounting background, but NOI, Cap Rates, it's all straight forward. Increase NOI and you increase the value of the property. The whole process of valuation for residential comps is unappealing, wishy washy, cumbersome, I could go on. Also I would much rather deal with other investors in the acquisition process than overly emotional financially distressed home owners when buying SFR. The idea of lowballing grandma because she has cancer and can't pay her bills on her SFR makes me sick. This seems like a drag. Sorry. This is all just perception by the way. Maybe i'm wrong.

However I have never done a deal, and if I started with residential could start with all cash offers with no partners or loans require for acquisition. Risk is relatively low (with respect to my available funds) and I can learn the rehab process. After a year or two even of that then I'll have even more cash (hopefully another $100k-$200k or more though savings) and can step up to the next level when I have more capital and more knowledge.

If I start with small commercial multi my research tells me I could likely get in the game (maybe not?) looking at 5-8 unit properties in south and midwest acquiring around $500-$600K (assuming they are able to be financed) if not I would need to find OPM or another source for enough capital for acquisition and rehab and stabilization.

I'm trying to figure out how much from what I learn doing single family and duplex etc will translate to small commercial multi and if there's a real benefit to doing that for a year or two before jumping into small commercial multi family. In theory it's lower risk, but in terms of process, maybe I'm naive, but it doesn't seem that much different. In fact due to the formulaic method of valuing commercial property it seems more straight forward to me personally. Also - what's another $100-$200K in capital going to do for me in a year if I want to get into small commercial? Sure It's an extra $100K, but still going to need to figure out how to do acquisition and rehab with additional capitol through partners, banks etc. I won't have a 1 million dollar bank roll next year or two. My fear is I waste a whole year fooling around with single family and in the end I learned more about rehabs, but haven't learned many of the skill's I really need to jump into small commercial multi family. My feeling is to learn how to do small multi family commercial just pursue that.

Now all that said - I'm a newb, so what do I know. Am I a fool for trying to jump into small commercial with no experience and only $300K to work with? Maybe I'd find out pretty quick I just don't have the cash or experience to step into this arena yet or worse yet, go bankrupt and lose my cash savings.

Any thoughts from experienced R/E investors?

Noah Chappell · Answer

Hi Travis. I think your mind's in the right place. Honestly I think you can go through similar amounts of heartache and emotional struggling dealing with a small single family as compared to the larger buildings, and possibly even more so given I think some investors get emotionally attached to the smaller deals, focusing too much on details and cosmetics. I've always had the impression that what you practice, you'll get good at, and the strategy of 'starting small and building up' is flawed. Yes you may want to start with a smaller sized multi family, but I'd go in from day 1 treating this as a business and building the systems that can support larger deals and repeat acquisitions. You might want to look into investors like Michael Blank or Sterling White who, as I understand it, aimed for multi family syndications from the beginning, and in so doing developed their essential skill set early on, instead of getting distracted with the day to day of smaller properties.

Paul Welden · Answer

Just make certain you keep sufficient cash reserves in case tenants do not pay their rent. Many new investors try to squeak by with the bare minimum and then get stuck financially.

Travis Hawthorne · Answer

Thanks@Noah Chappell I'll take a look at Michael Blank and Sterling White. I think that's a good starting point is getting some feedback from people who went this route and what their experience was like. Additionally I'd love to hear from some investors that built up over and time can look back and assess how what skills transferred from starting with single family versus making the leap to small commercial. @Paul Welden - agreed on reserves comment.