First RE purchase being large Multi-Family. Recommendations?

Question

I am new to the real estate world. But am highly motivated to jump in. While I've been searching for deals my long term goals are associated more with multi- family. For my first deal, would it be crazy to purchase a large multi- family? 5-10 units?

Jaryn Pierson · Answer

Hey Summer

Not that crazy to start with a 5 - 10 unit if you've got yourself the right setup going in. Personally I'm happy that I went with a small duplex on my first deal and went into something that size after but anythings possible.  A few things below that I would want locked in before I jumped into something that size on my first deal . . .

- a quality mentor on my side that has done many deals at that size (if you find that, you'll be good)

- 6+ months cash reserves after all closing & renovation costs

- a management plan (if part of that plan is you being the property manager, then a plan of how you will onboard / manage / offboard tenants should be a big part of that plan)

For me, the duplex was a great place to figure out what I like to do (management, tenant communication, finances) and what I don't like to do (handyman / contractor type stuff) on a small scale. If I had jumped into an 8 unit on first pass, I probably would have been too overwhelmed and the ship mighta sank. I want to be in this game for the long haul so I'm fine with slow steady growth.

Happy investing

Jaryn

Jeremy H. · Answer

Here's the thing with you being a new investor - you don't know what you don't know

How much liquid capital do you have on hand? How confident are you in your due diligence numbers wise for income/expenses? How much of a network will you have in place? How will you manage? Do you have an estimate of any rehab costs? How much experience do you have with commercial loans? Do you have a back-up or exit plan?

Trevor Richardson · Answer

Welcome. Just a little terms cleanup, 5-10 is small multifamily. Large would be 50 or 100 units plus.

The challenge I see right now with small multifamily is the acquisition and getting a typical DSCR loan. These are a nightmare right now (depending on the market and properties cash flow). But I have been in battles and deals lately where the properties existing cash flow will require no less than 50% down. So if you have a $750k 6 plex opportunity (in my market) the buyer will need at least $375,000 to buy it. Interest rates and the conservative nature of lenders right now coupled with owners poor cash flow are making these hard to buy.

However because of all of that if you can get financing on a deal, the prices are good because 90% of consumers don’t want to put 50% down on SMF. So conversely I’ve seen spectacular deals lately primarily from cash or 1031ex buyers.

Evan Polaski · Answer

@Summer Shelton, the biggest factor is the amount of financial risk, since a 5-10 unit is likely to be more expensive than a single or duplex.

You mention first RE purchase.  Does that mean you have never owned a personal residence, either?  Again it doesn't really matter, other than your financial risk.

As Jaryn noted, to mitigate the financial risk that comes with jumping into something you don't know, many people will start smaller.  It really comes down to your risk tolerance with your capital.  A good property manager, contractor, leasing agent, inspector, etc will mitigate a lot of the risk.

Even when it comes to underwriting deals, the only real issue between a SFR/duplex/10 unit, is the financial cost if your assumptions are wrong.

That being said, in hindsight, I sort of wish I hadn't talked myself out of some larger purchases I could have made earlier in my investing career.  But hindsight is always 20/20 and it was a risk I didn't feel comfortable taking back then.

Summer Shelton · Answer

These are good questions to think on. I dont have much liquid capitol at the moment. Due diligence for numbers and expenses; I comb through very well. At the end of the day its a numbers game. Being new, I've done research and notated as much as I could. This weekend i actually did my first tour of a SFH and gave an offer. Estimating the rehab cost was fun. The house was very old but just getting out and actually recognizing the tactics I learned really helps. I have a very good network in place. I have a mentor and a fantastic community of investors always ready to lend their knowledge. I plan on starting out doing self managing. Estimating rehab costs is a skill I'm working on. My husband and I are handy people as well. So if possible we could save money on certain projects. I dont have any experience with commercial loans. Exit plan is refinance or sell.

Summer Shelton · Answer

Thank you for your feedback! I appreciate the insight. I would love to find a duplex in my area to start out with. They seem to be a scarce gem where i am. But none the less, I'm shopping in my home town and surrounding areas everyday.

I do have a fantastic mentor who specializes in multi family. They own properties of all shapes and sizes in a market not to far from mine. I know that having them for guidance will be one of the best tools for my RE journey.

First RE purchase being large Multi-Family. Recommendations?

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