Quote from @Silvia Baier:
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!!!!!
@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
