What did you wish you knew before buying your first multifamily?

Question

Hi BP community,

Here still trying to pick your brains. I am in the beginning stages of multifamily real estate. Please share with me what you wish you knew prior to buying your first multi family.

I am looking at buying a 4-plex in south Florida.

Mike D'Arrigo · Answer

@Eduardo Bilbao one of the biggest mistakes I see investors make when buying MF units is not understanding the operating expenses. You need to know who pays the gas, electric, water, sewer, garbage, lawncare/snowplowing etc. Some may be paid by the tenants and others by the landlord. Another big mistake is buying in the wrong area. A lot of MF's are in lower rent, high crime neighborhoods. Be sure you understand the neighborhood class. Keep in mind that with a 4 plex, you have 4 of everything to break or replace. Get a full inspection report to see how much deferred maintenance and CAP Ex there is.

Will Barnard · Answer

This is a great answer and I agree. I would add that a common mistake of multi family due diligence is buyers not walking into EVERY single unit to inspect for one reason or another. Do not do that, ensure you have eyes on each and EVERY unit. Aside from knowing who pays what on utilities and learning and knowing the market well (which includes all the important data statistics like population growth, income growth, crime rates, vacancy factors, cap rates, etc., knowing how to read financials and read between the lines of owner supplied financials is crucial. Do not make the mistake of using the seller's current property taxes, your taxes at purchase and beyond will be higher. Same could be for insurance as well. Knowing every possible operating expense, having adequate capital reserves for capital expenses, and plugging in missing expenses from seller's financials will help ensure you make wise decisions.

Percy N. · Answer

I could write a book (or at least a few chapters) on what to look for in larger multi-family (100+ units).

For a 4-plex, that is closer to an SFR so I would do the typical SFR things - inspection including MEP (Mechanical, Electrical, Plumbing),  clear title, zoning, HOA rules (if applicable), etc. Check for signed leases and if you can confirm it with the residents. Ask about current and past delinquencies and if possible cross-reference rent deposits in the seller's account.

Make sure you get a preliminary insurance quote and talk to some banks to make sure you can get lending approved without many issues. If you are planning to buy the property under the name of an entity (LLC, etc) let the lender know that upfront. The rental income should count towards loan qualification.

There are just a few items...hope it helps you get started.

Cheers

Percy

Bryan Escudero · Answer

Hello there Eduardo,

I am actually in South Florida and just put in my first offer in TN. Hope to get in the game soon! My reason for going that route is that, believe it or not, I have been able to find a good team over there. The barriers for entry in South Florida being what they are lead me to figure out "how" I could invest while not really wanting to be in over my head. One thing that has been helpful to me for finding what I believe to be a property worth buying is defining my "Crystal Clear Criteria".  Defining the following:

- What type of property

- Purchase range

- Cash on Cash Return requirement (at least a range)

-Amt of $$$ per door

-Rehab time to Rent

There are other parameters, but you get the jist...What are you looking for can help you gain focus so as you analyze possible deals, you will be able to take out the ones that do not fall into your 3-C's.

Good luck!

Andrew Hogan · Answer

Syndications can offer much better economies of scale, long-term tax advantages, and wealth creation in addition to less headaches due to their passive nature.

Tyler Peitzmeier · Answer

Looking back, I would think bigger. I spent too much time in smaller deals, and it took up a lot of time. As you get into more units, you are able to afford the best people to get on your team. So my advice, don't be afraid to think a little bigger.

Hope this helps!

William Costello · Answer

@Eduardo Bilbao renovations and replacements take time and also being prepared for emergencies like a new roof, plumbing breaking etc. If it is a long term hold even having different phases of renovation. Prioritizing and figure out the useful life of everything in your budget is important. Best of luck!

Evan Polaski · Answer

@Eduardo Bilbao, everything needs replaced in time.  A new roof will wear out and need replaced.  A new fridge, etc.  Styles change, so that brand new kitchen will need to be updated in 15ish years to stay current and continue achieving top of market rents.

If you think you are buying something to own forever, figure out the useful life of EVERYTHING, and build that into your budget.

Second piece: Do not buy into "A=Appreciation, B=Both, C=Cash Flow".  Class C properties only cash flow better than A if you underwrite with the same assumptions.  But, in my experience, my better quality properties turn over less frequently, have lower turn over costs, rent faster to better tenants, and get higher rents with a tenant base that is more easily accepting of rent increases.  My class C properties have more deferred maintenance, higher turnover costs, and I can't grow rents nearly as quickly, because the tenant pool cannot absorb those increases as easily.  All told, my Class A and B+ properties have better cash flow and better appreciation. (maybe if you only plan to own this a couple years, you can defer your Capex items and get a Class C property to cash flow better, but it is a gamble)

Joshua Janus · Answer

@Eduardo Bilbao When you purchase a large MF building, you do have the advantage of paying less per door but on the other hand you need to account for replacing more capex items. You have to account for the maintenance and replacement of additional furnaces, water tanks, heaters, ac etc.

What did you wish you knew before buying your first multifamily?

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