Should I transition into Multi family property?

Question

Looking for some outside opinions on my next move.

Currently own 4 SFH and 4 condos. We operate Short and Midterm rentals with strong rent rolls and little vacancy with decent cashflow. Some units bring in $700/month after expenses and others bring in $300 depending on the location. Me and my wife both work W-2s still and it is a lot to manage with 2 small children in the mix. Also the increase in value over the last few years has put us in a position of $700k+ in equity. There is a 9 unit property on the market that we could acquire if we sold half or all of the current portfolio. Economy of scale would help the overall monthly cash flow on a multi. It's in a great location with future appreciation. The downsides are that it is in a lower lying area and could be in a flood zone so insurance might be much higher. It is attached to another townhome complex and it is unclear if the HOA applies to this building or not. Details are scarce until under contract. Property sold at 900k a few years ago and is back up for 1.7M now with upgrades and a rent roll of $10,000/month on long term leases. We could double the monthly income with our STR and MTR strategies and focus our efforts into one building. We have been looking to move into small multi and starting with a 4 unit but this option hit the market recently and we are considering going big now.

If I sold the 4 SFH I could do an 80/20 mortgage with my local lender and break even until I can cycle some units out of long term renters.

If I sold everything I could do a 60/40 and profit a few thousand a month with the long term and even more when I switch to STR/MTR.

Dimitrius Kiritsis · Answer

Hello @Zane Cress, congrats on your success thus far. 4 SFH and 4 condos is a lot to manage with children and a W-2! You would be correct in saying that going bigger can lead to better economies of scale. However, I would still argue that it will likely result in being more "hands on" than you wish. I'd recommend researching top multifamily owner/operators who buy 200+ units and allow you to invest passively. This will free up your time to focus on your family and w2's, not the tenants, toilets, property managers, etc.

Michael Thach · Answer

I don't want to botch this tread but the question of the tread is " Should you transition into multifamily ? " The answer is a clear yes and also transition into commercial.

I understand that the claims I am doing here without a clear case-study and personal sources can lead to scepticism. Which is perfectly fine and healthy as an investor because at the end of the day, we all want to learn and share strategies which are working.

So let use two of my examples. Why it's better to do multifamily, especially commercial multifamily.

https://www.zillow.com/homedetails/604-Cragin-Park-Dr-Las-Ve...

This property got acquired 2022.

453k Purchase, 20% down = 90.6k + closing cost of around 4k.

Renovation to 5 units MTRs. Total renovation cost 120k and took us 5-6 months.

This is how it looks now.

https://airbnb.com/h/ind3

https://airbnb.com/h/ins5

https://airbnb.com/h/far2

https://airbnb.com/h/japa288

https://airbnb.com/h/eng4

From the booking calendar, you can find out that all are booked, you can also see the rates. If you subtract airbnb fees, management fee, tax, insurance... you see that this property is making 4-5k in monthly net cashflow after all expenses.

This investment will be a good investment for most investors. 210.6k down and around 50k return per year after renovation is a 23.7 % return, cash on cash. Downside of this type of investment, is difficult to sell, after you divide them into 5 units, even with permits and general contractors, it will be hard to sell to a family. The issue is, if you want to sell it to the next investor for 700-800k it's not possible unless they pay in cash. No lender will give a loan out for that amount because residential single family houses and multifamily are based on comps. Meaning what did a similiar house in the neighborhood sold for. The valuation is not, " how much is the property making ? "

This lead us to the second example. Which I own with partners.

https://www.loopnet.com/Listing/1321-Kari-Lee-Ct-Las-Vegas-N...

Is a 5plex, bought for

710k, 30% down with a DSCR loan with interest only, means 213k down payment + 5k closing cost.

NOI is around 40.5k. Caprate is 5.7%. (40.5k NOI / 710k Purchase price ).

We spent 12k to buy out long-term tenants to start a renovation process. From the picture you can see the condition, inside was pretty much the same. We spend around 205k and 5 months for renovation. New roof, new AC, new windows, new paint, new flooring, appliance, furniture... simply everything.

Total cash in the deal is 435k.

Of course lets back it up with proof.

https://airbnb.com/h/modernmadrid

https://airbnb.com/h/mtm1316b

https://airbnb.com/h/tropicallv

https://airbnb.com/h/stmt168

https://airbnb.com/h/1320ekarilee

From the calendar, you can see that the booking is strong, everything is booked. From the nightly rates you can estimate the monthly income, minus tax, insurance, cleaning fee, ect. ect. To make life easier have a look at the year end statement. Upper part is management fee. Lower part is payout to investors.

Partly of 2023 we had to do construction, so this is not the total income but it's a big part of it. Approx. 85%.

New net operating income will be around 81k. I want to point out to anyone who is reading this post to make the following very clear, each quarter in cap-rate is a big difference in property price.

I let every investor decide, what the CAP-rate should be. A property which made 40.5k in NOI is now making 81k and got improvements worth of 210k. Is is worth a 18% caprate like above mentioned for 450k ? Or can we assume that the cap-rate stay the same for 5.75% caprate for 1.4m ? This is something each investor need to ask themself. For what price would you sell the property with this performance and with 205k in capital improvement invested ? I doubt that any one will sell it for 8% Cap at 1.012m, this would meant just slightly profitable. No investor in their right mind will spend 5 months of construction work to be breakeven after 2 years. I really hope that this breakdown shows how important cap rates are, each quarter points mean thousand of thousand of dollars.

Commercial real estate broker are confident being able to sell it between 5.5% to 6%.

So when I said double initial investment. The math behind it is this. Selling for 1.408m - 6% closing fees, agent fee, transfer tax, title and those kind of stuff. Leave us total 1.323m. Paying off interest only loan of 497k. Leaving us with 826k. We invested 435k, leaving 391k in profit. Don't forget 1.5 year of holding time is generating about 60-70k in positive cashflow which gets distributed quarterly. So each investor more than doubled there investment.

It's possible to sell it with a T12 to the next investor but it would caused paying capital gain tax, so it can be hold for 2 years to avoid this.

Back to the question of someone should transition to multifamily and I suggest to commercial multifamily is a clear yes, because the exit plan is beautiful.

I hope investors here understand what happened here. It worked for me, it will work for you. This forum should be about sharing. The market is big enough for all of us. Even after this model is saturated, there will be other models to invent and follow. Real estate is easy, based on simple math. The art is to create value and not squeezing out tenants. I am big believer of being an " add value investor " and not being a slumlord.

If anyone got questions, need more info let me know. Always willing to share.

LeeAnn Owens · Answer

Do you live near your investment properties? I’m pro-multi family for a few reasons. My multi family is 6 hours away from where I live, and I would have no idea what was going on there if it was an SFR, but I have 3 families there who will all tell me if something is going on. When (good) tenants share a space with other families/renters they are more likely to keep up on exterior maintenance (which is the tenants responsibility per my lease). I can also have 2/3 units empty and still cover most of the mortgage.

I think that for you investing in a multifamily would be a great idea, but you should maintain the diversity in your portfolio. Pull equity out of a few properties if you can, buy a 3-4 family to get your feet wet rather than jumping right into a 9-unit.

Melanie P. · Answer

You're not going to get an 80/20 on a 9 unit right now. If you really think you can add that kind of value to the rents then you should probably continue to investigate. Knowing only what you wrote, I wouldn't be a buyer at more than 1.5 and 1031 out of everything so you can get 700k down. You'll end up with similar income/expense profile but have all the upside you described in your post. Plus more basis and more opportunity for appreciation.

Omer Dar · Answer

@Melanie P. it sounds to me that Michael Thach just calmly and gently proved that not only he knows what he is talking about but elegantly showed that those that choose to attack and claim their expertise - are usually the real clowns.

Bonnie Low · Answer

It sounds like your biggest issue is that it takes a lot of time to manage your current portfolio of STRs and MTRs...but you want to buy a small multi-unit that you would convert to STR and MTR. What are you gaining other than the appreciation of the bigger property? You'd still have multiple STRs and MTRs to manage in order to get your cash flow back to where you're currently at. Have you run the numbers having someone manage your current portfolio for you? With your cash flow, eliminating the headache factor of self management might be worth it. The HOA situation and insurance would be big concerns for me with the unit you're looking at. You'd have to make sure you can hit your numbers with long term rents if your usage is ultimately dictated by an HOA.

Melanie P. · Answer

Interesting response. Not that you follow the law, but that when you do something "sketchy" you don't post about it. Since this is not only your business but you say you've taken money from banks and investors you might want to take some time to learn about the licensing and zoning requirements. It just takes one unhappy guest or late checkout request you couldn't honor for someone to make a stink. Be careful.

Michael Thach · Answer

We are doing +30 days, which is considered MTR... totally legal. Wouldn't post here if it's something sketchy.

Melanie P. · Answer

Any plans on getting the units licensed? The city WILL find out about them eventually.

Melanie P. · Answer

You see a lot of upside in multi family right now? Seems like truly awful advice.

Should I transition into Multi family property?

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