Looking at starting with 8+ units has anyone here done this?

Question

I guess the word "starting" is a bit misleading because...

We have a SFH we have been renting out for several years. We have been overseas for 10 years and moving back in August (yay!) So I guess in a sense, we are "starting" with MFH!

This is our current plan:

- Buy 8+ unit complex (how do we decide how many units is too many?? I saw a 1,392 unit place on Loopnet and actually thought about it for a minute!!)

- Occupy one or two of the units until we stabilize, then maybe buy a house?

- Manage the property ourselves

So, a couple questions!

1. Is this a realistic idea for the Columbia MD area? That's where we are moving.

2. Let's say the loan is $3m. What is a good target interest rate and terms? 10y @ 6%? So $33k/mo payment?

3. Assuming #2, and rental income of $50k/mo (ex. 25 units @ $2000), how much would we reasonably expect to take home (Net rental income not counting taxes)? Are we missing any big monthly/recurring expenses? For that many units, would we need to hire anyone full time? I am handy and I could handle the finances, website, screening etc. but I would need to hire contractors for some things of course. And I assume I would need a 24 hour hotline of some sort...

4. If anyone is willing to hold our hand a bit while we look at this, we would appreciate it!

5. Back to #1... does it make sense to do this?! We don't want to pay rent, and the SFH's are priced so high right now. Plus interest rates are crazy. We want to leverage multiple units to pay for our housing and maybe even get some cash flow. I will also have a FT job, at least until I can replace my income....

We would need to raise some capital / find partners because we couldn't afford a down payment of the size we are thinking by ourselves.

Looking to network in Maryland! I did not apply a location to this post because the my questions mostly apply to any market. Never done this before but it looks so lucrative!

Thank you!!!!!

Randall Alan · Answer

@Silvia Baier

Hi Silvia,

Welcome to Bigger Pockets!

I think you are likely in way over your head in the scale of your thinking.  I probably have less answers for you, and more questions...

We don't really know your experience level, so my first question is, do you realize you typically have to have about 20-25% "skin" in the game for this purchase?  On your $3mm loan guesstimate, that is probably around $600,000+ cash to close if not more in today's market.  That's a tall order for most beginners - especially when you mention basic things like replacing income, full time job, finding some cash flow.

Then there is interest rates.  A pretty typical interest rate right now would be 7% for investment homes.  It's REALLY hard to make much of anything cash flow at that interest rate.  Hopefully rates start coming down later this year, but just finding a building that is priced to cash flow can be difficult today.

1,392 units?  You are way out of your league as a beginner.  That's a $139 million dollar purchase at $100,000/unit.  Never in a million years would I see that happening when you walk into your lender and say, "Hi, I've managed 1 property in my life, I would like to buy 1392 please."

Like I said, we don't know your background or resources.  But those types of numbers are typically in the 'rarified air' of institutional investors that are looking to park $100 million for some low rate of return.

Your 20-25% down helps you determine how much is too many.  So ask yourself, how much money do you have to invest.  Multiply that by 4-5 (for the 20-25% down payment) and you will know the size of your potential maximum purchase.

Bringing on other investors is a maybe in my opinion.  As a beginner, do you wield the charisma to entice another investor to follow you with little experience?

We own 37 units...and have been in real estate since 2018.  But most on this board would probably say we are pretty far along for only 6 years.  We HAVE replaced our W2 income and now manage our properties full time.  So I have some knowledge about what you are contemplating... but even with 37 doors,  I wouldn't even start to think about 1,000 units or something crazy like that without significant external resources and partners, and even then you are probably talking about a syndication deal with lots of investors.

My suggestion is to grow organically at first.  Meaning, buy what you can afford to buy yourself.  You start with a 1-4 door property and see if managing more tenants is your 'thing'?  While it's not rocket science, it takes a certain personality to find it enjoyable and not frustrating.  If you aren't making a lot of money, it can often bring feelings of "Why am I doing this in the first place?"

Also consider the risks of what you propose for yourself.  A typical descent financed rental in today's market might net you after expenses $300/month.  It's going to vary by market of course.   (We do better than that, but we bought when properties were cheap!). But just consider a $1250/month rental that after all expenses (including the loan, maintenance, Capex reserve, taxes, insurance, etc) nets you $300/month clear.

Now scale that just a little and say you have 8 units, just to run with your scenario above.  So each unit is grossing $1250, and netting $300.  So you are grossing $10,000/month... but clearing $2,400/month.  Now let's add in some variables.  Let's say you turn over a unit and it takes a month to fill it by the time you advertise it, screen the tenant, and get them moved in.  Or you have someone that lost their job and does't pay their rent that month. (We are presently having to evict a tenant that stopped paying their rent.  We are out a couple of months of rent at present.).  So if you happen to have 2 of those types of things happen in any given month.. .or the thousand other things that can go sideways with rentals where you don't see your money for some reason... you are now minus $2,500 in profit for that month.  That translates to a NET LOSS for your 8 unit property, just because 2 people couldn't pay, or the unit sat empty, etc.  In our 5 years, we've had all sorts of crazy things happen.  We had someone die in our unit as the sole occupant.  State law says you have to let the unit sit for 60 days before you can clear it out if no one comes to claim the tenant's possessions.  We've had 2 fires - one a grease fire, and one an electrical fire.  Or say you need to replace a $6,000 AC one month... what's your profit level then that month?  Do you have the funds to float and pay the expenses to keep your units operating in a month like that where you are having to pay the mortgage out of our own pocket?  I just replaced my 4th AC system in the past 2 WEEKS!!!! (That's $20,000 in Capex in 14 days!).  We budget for it, so we have it... but can you pull that off?  Roofs are $10-15,000 for a typical duplex where I live.  My point with the badgering is that beginners often don't consider the real world scenarios they will run into.  It's easy to go from "Wouldn't it be cool to make some passive income?" to "I'm in way over my head and I'm losing money each month" if you aren't careful.    You need some descent reserves to be a larger landlord, because you don't get a choice when the AC unit goes out, or the hot water heater floods the upstairs unit that then floods the downstairs unit.

I'm less trying to scare you, and more just impress upon you the need to be logical, and systematic in your approach to growth.  Start small... maybe the 1-4 unit building, and then look for the next one.  Along the way you will gain more experience, build 'street credibility' with your lender, grow your reserves,  and prove that you can manage larger operations.

I wish you all the best.  Real estate can be very profitable... but it can also have a few surprises along the way.

Randy

Gino Barbaro · Answer

@Silvia Baier

We pride ourselves on being the DoRus, two guys who are continuing to buy assets, and have gone through various market cycles. We've realized it's a business, and manage right is something that everyone needs to focus on.

It only takes one!

Gino

Gino Barbaro · Answer

@Silvia Baier

You need find potential partners or investors if you can not fund the down payment, or if your balance sheet is not strong enough.

Living in the property would be huge! Being able to save, while managing for a while would be a great learning lesson.

My first deal was a four unit, and my first deal with my business partner Jake was a 25 unit, but we were three people on the deal.

Congrats on getting back to the states

Gino

Randall Alan · Answer

@Silvia Baier

I love your enthusiasm, but I think you have a lot to learn.  What stood out most to me in your reply is that you would never raise rent on a good tenant.  You will quickly either go out of business, or learn the error of your ways there.

We raise the rent every year… and we have very little, if any turnover due to it.  How and why?

Why, is because our expenses are constantly increasing.  Taxes, insurance, vendor repair rates, etc.  if you only had a $300 profit margin per month on a unit, what happens when taxes and insurance have gone up by $2,000/year?  In Florida our insurance rates have doubled across the last two years.  But the answer to the rhetorical question is - you are no longer making  $300/month, you are making less than 1/2 that.  You are effectively losing more and more money every year.  Your purpose for owning real estate is likely not to be a charity.  It is to earn cash flow to better your own life.  The only way that happens is through raising rents.

Then there is Market Rent… which is what everyone else is renting properties for the same type of unit as yours.  It will take into account inflation and such.

Your Tenants will love you for not raising your rents, but you will either change your ways soon enough or I or another bigger pockets landlord will be buying your property from you when you sell it because you stopped making a profit because you chose to be ‘nice’, instead of running your operation like a profitable business.

Understand it’s not that we aren’t nice whatsoever… our Tenants love us… seriously!  Do they love rent increases ?  Of course not, and neither do we…but they are a part of the business.

The methodology we adopt is that our existing tenants are always a little below market rent.  This means when the rent increase comes , they may look for somewhere else to go, but all those places are higher… so what do they do?  They stay put.  New tenants come in at market rate.

You may tell yourself, I’ll just raise my rents when tenants move out, but a tenant is ‘never’ going to move if their rent is $500 below market… you will have them for life… or until you go out of business!!

The scenario you set up for yourself by not raising rents is that your rents will be way out of sync with market rents.  In 2018 we bought a property that was managed like your thinking.  A 2/1 duplex unit was being rented for $400/month when market rents were $850/month.  Over 2 months we raised the rents with our new lease to $750/month… and today those rents are closer to 1,100/month… and still below market rent.  (we didn’t lose a tenant at all raising those rents, by the way.Inflation has likewise increased like crazy in the last 3 years.  A 12 pack of soda has gone from $3.50 to $9!   Your rents should also be going up, trailing market rent just a little to not encourage turn over.

All the best!

Randy

Chris Seveney · Answer

@Silvia Baier

If you have never managed a building of that size, managing it will be harder than you ever anticipated. Property managers get slammed all the time on BP but they are thick skinned enough to deal with tenants who in a 36 unit building will have some that make your cringe and will suck up 90% of your time.

Of course it would be a great hgtv show to have people who have never managed a MF building step in and take it over and manage it.

Russell Brazil · Answer

Interest rate more like 8-9%

Silvia Baier · Answer

@Gino Barbaro

I truly appreciate you taking the time to say hello on my post and give feedback! A guru who actually has the assets to back it up! I truly believe I am in the <1% who can achieve this goal. (Partially because 99% of people don't WANT to deal with tenants and business finances!) I'm not looking to build an empire to hundreds or thousands of units, I just want one big building! I'm 45 and would love to leave the W2 behind in 5-10 years.

Extremely pleased to have a few gurus chiming in here! (look, if you have 30+ units you are a GURU compared to me and the average Joe!)

In the meantime I will check out your blog posts and podcasts Mr. Barbaro!

Silvia Baier · Answer

@Randall Alan

I do agree... I know it would come crashing down on me if I didn't keep up with the market rates. With one unit (house I've had for 19 years), and SFH market rates not changing much in my market (St. Louis City), I have been able to maintain rent level for the tenants. I increased rent between tenants, and came very close to increasing this year (year 3 for the current). But yes, with a large complex, it has to be much more business-oriented. Not that I don't treat my current unit as a business, but if I mismanaged the money on something big, my investors would be all over me. Thank you! I wouldn't want someone else to read my post and follow a failing pattern!

Silvia Baier · Answer

I would totally love to watch myself on TV! Except I wouldn't have time if I was managing this building. LOL! Thanks for the insight :)

Silvia Baier · Answer

@Russell Brazil

Thank you!

@Randall Alan

Congratulations on being able to quit the W2!! And thank you for contributing to the forums! Considering your empire and experience, I'm thrilled to hear your perspective. Yes, the message I'm consistently getting from others, including lenders, is to start with a 4-unit. I'm certainly not "above" that, if that's what's needed to prove my competency.

How much capital is good to keep handy for repairs/emergencies? Do you have a per-unit amount? Or a percentage of the value of the assets? Or just a big number to handle multiple crises?

Example: 10% of asset value or $3000 per door or $50k? My goal is to not burn up all my cash with a down huge payment, but find other investors to partner with and share cash flow or equity, and keep some of my own cash liquid reserved for repairs/emergencies. I do have a cash flow property I've been renting out since 2018 and I did a cash-out refi for the next investment when the rates were low. I'm confident in my ability to turn over tenants and deal with issues.

One of my most critical decisions is to get the RIGHT tenant the first time. Both my tenants (first and second/current) have been there multiple years each, young couples where one is a doctor receiving a housing stipend and the other spouse earns a healthy income as well.

The SECOND most critical thing to me is to have a great relationship with the tenants. They just want a place to live and "quite enjoyment". So I am always proactive about seeing if there are any repairs needed (every few months). After all, they are the primary caretakers of my asset! I don't raise the rent on great tenants. Even when taxes and insurance and mowing and water/sewer prices go up. I'll have a chance to raise rent when they move. And, they are great references for new prospective tenants.

I have not met either of the tenants in person. I had a relative show the house for the first time in 2018, and have remotely managed everything from day one, from 5000 miles and 7 time zones away. First tenants showed the current tenants. I found ways to be creative because I just couldn't fly 10 hours to deal with repairs or other things that came up.

The main difference(s) I see between my small operation of one and something with 30+ units is that I would need a website, lawyer, CPA, and maybe a call center. Everything else I'm doing I can scale up easily. And the huge upshot is that I will be there in person living in one unit to ensure stabilization is smooth, and staying local (living 10-15 miles away but probably using it as an office weekly) for years to come. Thank you again for your time and thoughts!

And I leave you with a big dream of mine. Look at this:

https://www.marcusmillichap.com/properties/154758/arbor-at-t...

36 dwellings, Class A, brand new, 100% vacant, and some retail as well. I'm sure the initial period would be low cash flow when 90% occupied but wow. Managing this property would be FUN in my opinion. How hard could it be to manage one building? And eventually owning it would be a retirement by itself!

Looking at starting with 8+ units has anyone here done this?

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