5 unit vs bigger multi family properties

[Prashant Sharma]

Hello BP community,

I'm looking to enter the commercial multi family property market before the interest rates go out of hands. 

Being new to commercial (5+ unit), I wanted to get your advice based on your experience in this space. Is buying a 5 unit (to test the waters, get a feel of a commercial deal, understand how it works etc.) a bad deals in terms of exit strategy? Being just 1 unit over the traditional financing criteria of 4 unit, am I limiting my pool of potential buyers for when I do decide to sell/exit the investment? Since most experienced players in this space would want to do bigger deals as far as I understand, is it a bad idea to do a 5 unit deal?

Thanks!

[Joel Owens]

1. Are you investing where you live?

2. What class of building are you buying? A,B,C,D? 

3. What area? A,B,C,D?

4. What kind of time do you have for this investment to work on it daily,weekly,monthly for the return you hope it produces?

5. Are you an accredited investor?

6. Is the goal all cash flow, all appreciation, or  a decent return with a mix of both?

Really not much benefit to a 5 unit versus a 4 unit. In fact long term debt on a 4 unit makes more sense. Occupancy on a 5 unit one unit goes out you are at 80% occupancy. 4 unit it is 75% so not much difference. To get passive with multifamily you really need scale about 80 doors or higher to build in workers and ongoing maintenance costs and management.

If you have high income from your job or business and great liquid you might consider investing with a sponsor on a larger deal to see how things run and work before buying on your own. If you are buying local then a 4 unit might make sense if quality is high. Remember lower price per door is usually lower quality tenant with area and property tends to need more ongoing work as it gets abused more. Tenants income is less stable so more management and collections efforts are usually needed.

I look at return, how much of a headache, and if it meets my lifestyle goals for a fit. Example if the property was a massive headache turn around property for MF you might want a sponsor to do the heavy work.