Time to move to the next level?

Question

Hi Everyone,

I'm currently an investor in 2-4 unit buildings and am interested to hear your thoughts about whether to 'level up' into larger multi-family or commercial properties, expand into new markets, or continue on my current path in the same city.

I live in Los Angeles and have been investing in St Louis for the past 2 years, amassing 14 doors in A & B-class neighborhoods. Before that, I engaged in the Vero Beach, FL condo market, but opted to sell my properties there due to weather and rising HOA fees. My CoC return in STL is 10% now that the buildings have stabilized, it seems like the buildings are appreciating at an acceptable rate, and I have a team that I trust there (realtor, PM, contractor, lender).

I'm eager to hear if other investors make it a priority to diversify into other markets (I think my neighborhoods in STL will continue to have demand, but nothing is a given), and if you feel there's more of a return to be had with the same amount of effort by scaling up into commercial properties or apartment complexes. The alternative is to continue accruing 2-4 units along this well-trodden path.

Real estate has been a '2nd job', and I don't want to make it a full-time one. My goal is to continue earning 10% CoC in buildings that will appreciate substantially by the time I retire (~30 yrs from now).

Any advice would be immensely appreciated!

-Craig

Bradley Buxton · Answer

Right now the focus is the greater Reno Tahoe, NV area. This is where we have collected the data for analysis. Once the concepts and processes are proven in our own backyard we will expand to new cities and area.  The best cities to invest are the ones that fit your budget, time, and energy.  As many posters here have said there are deals in most every city. Some are harder to find and it will take different amounts of capital to invest there. Of course there is a spectrum between Ohio and Aspen. For CA investors the flights and time going to the Midwest are cumbersome and choose markets closer like Reno, Vegas, Boise, Phoenix. Every market has it's pros cons and your goal investing with guide to to which pros outweigh the cons.

Marcus Auerbach · Answer

I have struggled with the same question: somehow there seems to be the expectation to "graduate" the bigger properties and go commercial. Here is the backstory: I started buying single-family homes in Milwaukee 15 years ago and pretty soon migrated from C into B neighborhoods ("A" would be 500k plus here) and some of my friends invest in larger MF so I thought that's the next step for me as well and started shopping for a commercial deal maybe about 50 units.

The issue is that I did not want to go into the affordable housing space and assets in the quality I liked were so insanely high priced that I would have needed 40% down to meet DSCR guidelines - not to mention rehab cost to bring it up to our standards. We looked into several projects and eventually, I concluded that there is no real reason for me to reinvent my business, other than "just because". We are seeing solid numbers and I know this market in my sleep.

I also don't like the small MF space: 5 to 12 units, maybe even 24. It comes with all the downsides of MF and not enough of the synergies that you get with larger projects.

It also comes down to your financial goals: because more doors means also more headaches. The other option is to go into commercial, for example, warehouses. The concern I have is that I like the fact that every individual investment represents only a very small percentage of my portfolio. NNN leases are great. but if you get a vacancy in a property that represents 10% or 20% of your portfolio value and it takes you a year to fill it, you are more willing to compromise on the tenant or negotiate the lease.

Sounds like you have a good thing going. You know this market, the asset class and you have a great team. Nothing wrong with riding that wave I think.

Gino Barbaro · Answer

@Craig Peckwe are vertically integrated so we try to focus within a three hour radius

We actually focus in Knoxville. If your city does not have enough deal flow then I would expand.

If you can find good third party management then I would consider diversifying. That's the advantage you have. You can diversify across markets and different asset classes

St Augustine is the capital of short term rentals

Not enough hotels, the beach, the city, nights of lights. Covid doubled valuations here.

Gino

Mike Klarman · Answer

When you go above 4 units you get into a different loan program that offers less leverage, has stricter guidelines, higher rates.

I'd stay right in the lane you are in.  You know this lane.  It's working.  The 2 - 4 loan programs are all like the SFH.  They DSCR well.  Before I went to the 5 - 10 unit inventory, I'd open another market like STL.  I have about 12 investors working in PITT right now.  We've come across a few 2 - 4 unit assets that went well.

Joshua Christensen · Answer

You have a great start and a 30 year runway.  You're not looking for a 2nd job in RE.  Keep it simple with what you know.  You have a team you trust in St. Louis.

How long did it take to build out your team in St. Louis?  How many did you have to go through to find your dream team.

Every market you go to will have growing pains associated with learning the market nuances, finding the right team, and finding the best deals. If you don't want another full time job, why go through all that?

You could consider REITS, Private Placement Deals, Hard Money Lending, Syndications, etc. and invest passively, or continue acquiring hard assets that come with heavier time expenditures.

More markets equals more time needed to track, meet with your team, travel to and from, tax season, etc.

Best wishes

Gino Barbaro · Answer

@Craig Peck

Love your strategy, either way makes sense. If you are crushing it with smaller deals and find comfort and ease and low ROE (Return on Effort), then stay the course.

If you want to scale, you may have to find a partner to help with capital and balance sheet. I wouldn't be where I am without Jake or my partner Mike.

I was at the same inflection point you were, and. decided to partner with Jake, looking for some income on the side. Turned into something much bigger.

Ultimately, listen to your gut and follow your values.

Good Luck my friend!

Gino

Robert Rixer · Answer

I'll keep it short. If you want to keep it part time, keep doing what you're doing. Why mess with a good thing!

Craig Peck · Answer

Thank you so much for your feedback, Gino! I've looked on your website and found a great deal of useful materials. My mom actually has a couple of STR's in St Augustine. Do you focus on local Florida cities or do you diversify across multiple states? I'm trying to decide if I'm going to continue in St Louis or move on to spread my portfolio across multiple cities.

Alecia Loveless · Answer

@Craig Peck My larger properties 5&8 units take considerably more time and effort than do my 2-4 unit properties. I’m dealing with needier tenants and more issues in general.

That being said if you have solid property management this may not be the case as I self manage.

That being said I would prefer to buy the larger properties (to a certain size, do not have the funding to go bigger than 8 units or so). I feel the economies of scale are better and the returns are greater.

Time to move to the next level?

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