Rental Property Investor · San Diego, CA · Member since 2022 · 40 posts · 26 votes
I'm new to REI and targeting either two fourplexes or one small apartment building out of state as my first buy and hold properties? Is a 6-8 unit property better to help me scale and grow the business faster to eventually more properties, or is picking up two fourplexes just as good?
I've heard that apartment buildings are often better built as commercial properties compared to typical 2/3/4 multi-family homes purpose built for residential. I'm also familiar with the major difference between residential and commercial loans once you setup up into anything 5 units or more and that it's a more complicated loan process based on how the property operates as a business. I've heard "the more doors the better".
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
4y
If everything were equal, and that is never the case, the two fours would give you more flexibility in terms of sale or re-fi. I have a 12 unit and two duplexes. On a return measure the 12 flows so much more cash per dollar invested than the duplexes. I spend a lot less per door to maintain etc. The laundry more than pays for for itself. So for me the apartment building wins hands down. More doors under one roof works better for me.
It really just depends on you and what your business plan is. What do the numbers say? I ask this question because your occupancy rate will drive your analysis. The vacancy of a unit in a quadplex may or may not hurt but will that be the same in an apartment building. My suggestion is to run the numbers for everything, CAP Rate, Cap Ex, ROI, etc. to drive your decision making process. Best of luck!
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
A few thoughts:
1) 6-8 units is a weird number for a multi, you don't get too many economies of scale 2) long distance one is better than two probably but what condition 3) location, location, location: school districts, neighborhood quality, ease of commute to local employment 4) commercial loans are much easier, its just that rates are a little higher and amortization shorter.
Id totally say, two fourplex,, BUT always double check your numbers! & Location, if the small apartment building is in a grade C area ( Late rent, missing payments, headaches) and your making a 9-12% Return, but the two Fourplex is in a Grade B or A area and your return is the same or maybe even a little less, BUT less headaches and everything runs smooth with great tenants..
Just being honest, the more doors the more headaches TOO...
Very Simple Explanation Obvs so much more to Explain but that's something I would consider...
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
4y
If everything were equal, and that is never the case, the two fours would give you more flexibility in terms of sale or re-fi. I have a 12 unit and two duplexes. On a return measure the 12 flows so much more cash per dollar invested than the duplexes. I spend a lot less per door to maintain etc. The laundry more than pays for for itself. So for me the apartment building wins hands down. More doors under one roof works better for me.
If your experience is anything like mine in terms of trying to find lending, you'll get much better terms on the fourplexes than you will on the small apartments. Several commercial lenders didn't even want anything to do with smaller apartments at all.
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
4y
Hi James,
There are a lot of variables here.
For instance I'd rather have a 4-plex or a 5-unit in the path of progress then a 4-plex or a 5-unit in Resume Speed Iowa.
For others that might be the reverse.
Are you looking for cash flow or appreciation, what is available to you that you can get a good deal on. Too many fish in the pond chasing the same bait drives up price.
Can you find lower expenses 4-plexes more easily than 5-units, or the reverse. Such as all brick, metal roof, newer construction, Hardie Board vs wood, etc..
You might want to find out what you need to do/be to qualify for a loan for a 4-plex and also for a 5-unit. Because 5-units use commercial loans.
Where can you get a better interest rate, and other loan terms.
Hook up with a multi-family inspector in the area and bounce that question about which is built better against him.
Talk to property managers and get costs to manage 4 and then 5 units...see if there is a savings one way or the other.
Investor · Newport Beach, CA · Member since 2019 · 68 posts · 66 votes
4y
Hey James,
For the 6-8 unit, since it is still a small amount of units, most lenders still might underwrite it like a residential deal. I would look at the two 4-plexes and look at doing a DSCR loan which would not put the loan in your name.
Id totally say, two fourplex,, BUT always double check your numbers! & Location, if the small apartment building is in a grade C area ( Late rent, missing payments, headaches) and your making a 9-12% Return, but the two Fourplex is in a Grade B or A area and your return is the same or maybe even a little less, BUT less headaches and everything runs smooth with great tenants..
Just being honest, the more doors the more headaches TOO...
Very Simple Explanation Obvs so much more to Explain but that's something I would consider...
Thanks I appreciate the "more doors more headaches" concept. I guess it will come with the territory If I intend to scale. Hopefully I can find a good PM!
If everything were equal, and that is never the case, the two fours would give you more flexibility in terms of sale or re-fi. I have a 12 unit and two duplexes. On a return measure the 12 flows so much more cash per dollar invested than the duplexes. I spend a lot less per door to maintain etc. The laundry more than pays for for itself. So for me the apartment building wins hands down. More doors under one roof works better for me.
Bjorn I love your comments on how your 12 unit flows so much more cash per dollar invested, and how they are less per door to maintain. I've heard laundry can be awesome as well, which you likely don't have in most fourplex. Thanks for your comments!!!
For instance I'd rather have a 4-plex or a 5-unit in the path of progress then a 4-plex or a 5-unit in Resume Speed Iowa.
For others that might be the reverse.
Are you looking for cash flow or appreciation, what is available to you that you can get a good deal on. Too many fish in the pond chasing the same bait drives up price.
Can you find lower expenses 4-plexes more easily than 5-units, or the reverse. Such as all brick, metal roof, newer construction, Hardie Board vs wood, etc..
You might want to find out what you need to do/be to qualify for a loan for a 4-plex and also for a 5-unit. Because 5-units use commercial loans.
Where can you get a better interest rate, and other loan terms.
Hook up with a multi-family inspector in the area and bounce that question about which is built better against him.
Talk to property managers and get costs to manage 4 and then 5 units...see if there is a savings one way or the other.
Good Luck!
Scott that's a great idea to discuss how property managers charge for a 4 plex vs an actual apartment building. It may just be per door or it may be higher once you get into these commercial properties. I'll look into it!
Raleigh, NC · Member since 2017 · 347 posts · 94 votes
4y
@Bjorn Ahlblad
What do you mean the laundry pays for itself? Do you not use an outside company that just pays a percentage of their income, and they take care of the machines
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
4y
@James Brewer - At this point in my career I'm always in favor of more doors, less buildings. But make sure you learn to walk before you run. Why two 4plexes or an 8 unit instead of just one 4plex to start with? More importantly, what's your plan to get your money out of the property and back into your bank account? If you're looking to scale quickly (and it sounds like you are) you need to figure out how you're going to have the extra capital laying around to keep buying and buying.
What do you mean the laundry pays for itself? Do you not use an outside company that just pays a percentage of their income, and they take care of the machines
The machines bring in 250/month; the tenants schedule and tidy up. The outside companies won't service smaller cities.
@James Brewer - At this point in my career I'm always in favor of more doors, less buildings. But make sure you learn to walk before you run. Why two 4plexes or an 8 unit instead of just one 4plex to start with? More importantly, what's your plan to get your money out of the property and back into your bank account? If you're looking to scale quickly (and it sounds like you are) you need to figure out how you're going to have the extra capital laying around to keep buying and buying.
Thanks Salvatore, you bring up a great question I was wondering about - how to tap into the equity of the new investment property. I haven't fully thought this out yet so bear with me and don't beat me up too bad. Since I'm using a HELOC against my current primary residence to give me the ability to purchase this investment property, perhaps once I've purchased and stabilized the property within the first year I take out a HELOC on that property itself and remove all the equity out to pay off the HELOC on my primary residence, effectively transferring the debt to be self contained within that property. Then use the extra cash flow and reserves to pay down that HELOC and eliminate it over time which will eventually increase cash flow over the long term. That also frees up my initial HELOC cash to buy more properties and repeat the process.
While I'm certain it could work that way with a residential loan, I'm not sure If you can HELOC on a commercial multi family the same way. Can anyone confirm?
Investor · Holmdel, NJ · Member since 2015 · 61 posts · 60 votes
4y
I like 1 larger building as opposed to 2 smaller ones for a couple reasons. 1 visit for property manager instead of 2 separate trips will cost you more in long run. 1 roof is better than 2. All utilities under same roof. 1 lawn or yard to maintain. Less expenses in long run will be to your advantage. Best of luck in your search.
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
4y
@James Brewer - it's called a CELOC as opposed to HELOC (C = commercial, H = home). They're not very common and the LTVs are lower so usually there's not enough equity to pull it off. You're better off focusing on adding value (through increased rents and decreased expenses) and then just doing a cash out refi. Use the cash out to pay off the HELOC. Just be sure to add padding to your numbers and timeline. The property may not appraise for what you hope and there are fees to factor in. It's not as simple as it seems to buy, refi and get ALL your money back. Numbers on paper don't always match real world transactions. It can be done but don't assume it's easy and that it will happen every time.
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
4y
I'd say that you can get a HELOC on the 1 to 4 unit buildings, as well as typical residential financing. They are reasonably common, but not so common when closing with an LLC.
---> Another topic you need to consider is the entity in which you hold, btw. The entity also changes the opportunities for financing. I have a number of SFR held by a holding company and a series LLC, or plain Jane LLC. Can't do conventional mortgages in this structure. So we pivot to other financing.
That is what I am funding too. There seems to be steps like 4 an+ 20, many hard money lenders do not do more than 4, even fewer do more than 20. Maybe I have not found the right lender yet
I like 1 larger building as opposed to 2 smaller ones for a couple reasons. 1 visit for property manager instead of 2 separate trips will cost you more in long run. 1 roof is better than 2. All utilities under same roof. 1 lawn or yard to maintain. Less expenses in long run will be to your advantage. Best of luck in your search.
@James Brewer - it's called a CELOC as opposed to HELOC (C = commercial, H = home). They're not very common and the LTVs are lower so usually there's not enough equity to pull it off. You're better off focusing on adding value (through increased rents and decreased expenses) and then just doing a cash out refi. Use the cash out to pay off the HELOC. Just be sure to add padding to your numbers and timeline. The property may not appraise for what you hope and there are fees to factor in. It's not as simple as it seems to buy, refi and get ALL your money back. Numbers on paper don't always match real world transactions. It can be done but don't assume it's easy and that it will happen every time.
Salvatore I didn't know that - wow such a simple variation that makes sense I just didn't know that existed. Thanks!
I'd say that you can get a HELOC on the 1 to 4 unit buildings, as well as typical residential financing. They are reasonably common, but not so common when closing with an LLC.
---> Another topic you need to consider is the entity in which you hold, btw. The entity also changes the opportunities for financing. I have a number of SFR held by a holding company and a series LLC, or plain Jane LLC. Can't do conventional mortgages in this structure. So we pivot to other financing.
Kerry that's an interesting point you brought up, my intent was actually to set it up the way you describe.
I've just started a holding company LLC that I'm doing business out of and once I've secured an out of state property I'll set up an LLC there for just that property (or Series if that state allows). Was initially planning to make the residential 2/3/4 purchase in my name then afterwards retitle into the property-specific LLC.
So you're saying once its owned by the LLC banks my conventional options for refi or HELOC go out the window and I'll have to use commercial lending or something else? Can't you just keep title in the business name and still keep the conventional financing tied to my name?
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
4y
@James Brewer, yes you can keep the pre-existing mortgage and change title to a single member LLC. And yes, you might want to consider DSCR mortgages.
I mention these lenders in my posts regularly, and have been recently dinged by a moderator for "advertising" said mortgages, ones I get no benefit from sharing.