thinking of making the transition from houses to multi-family

[Adam Christopher Zaleski]

I have two single family homes that are rentals in two different college towns. I have owned one for 10 years and the other for 5 years. I am a college prof and have lived in college towns most of my adult life. I feel like my niche is college towns. However, I currently do not live in a college town.

It seems like most investors start with single family homes and if successful, they eventually transition into larger multi-family.

However, I have a few concerns.

1) I would feel uncomfortable if I bought something that was not in a college town.

2) I have never lived in an apartment complex. I don't understand anything from the tenants perspective.

3) Based on my experience in college towns, single family homes close to campus are highly valued by students. My vacancy rate has been zero over the last 10 years. When I put an ad on craigslist, I typically get about 30 replies within 24 hours. Condos and apartments near campus are less desirable (more supply) and their vacancy rates are higher.

Rental #1

Single family home (3 bed/2 bath).

Worth: 225K

Owe: 75K

Mortgage, taxes, insurance and PMI: $665

Rent: $1700

Rental #2

Single family home (4 bed/2bath). Thinking of adding 1 bed and 1 bath within the house.

Worth: 335K

Owe: 115K

Mortgage, taxes and insurance: $950

Rent: $2000 (can raise to $2500, if I convert to a 5 bedroom/3 bath).

I have no desire to quit my job. The rental game is a fun side hobby for me. It also helps reduce my W-2 taxes.

If I sold both properties, we would walk with 330K, after realtor fees, but not including taxes. As a result, 330K would be based on a 1031 exchange. We also have about 30K cash and another 50K in the stock market that I wouldn't mind selling. Is this enough capital to think about an apartment complex? Should I try to do a 4-plex before an apartment complex? Should I wait another 5 years? Any advice would be helpful. Thanks.

[Ken P.]

@Adam Christopher Zaleski, you definitely have enough equity in your houses and with your cash to make the move to apartment building ownership, though probably not in expensive Hawaii.  There are two main ways to get involved; as a passive investor in others' deals, or as the lead investor in your own apartment deal.  Within the category of being a lead investor, again there are several options; as the sole investor/owner, as a partner with several others as the owners, or as a the head of a syndication that raises money to buy an apartment building or complex.  Your time horizon and the amount of involvement you want will guide you toward the option that is right for you.

If your time horizon extends several years into the future, one way to get experience in multifamily investing and help decide what role (sole owner, partner, or syndicator) is right for you is to invest as a passive investor in someone else's syndication deal.  Typically the minimum investment required to participate in a syndication deal is either $50,000 or $100,000, and ties up the funds for 4 - 5 years.  Using your funds currently in the stock market, and your status as a sophisticated investor (the owner of other rental properties), you could find and join a syndication with a $50k minimum.  When doing so, look for a syndication with a lead that provides in-depth communications on the progress of the investment, so you can follow along.  Some leads welcome their passive investors to visit the apartment complex and open the books, which would allow you to see what they're doing to run the project.  You wouldn't have to wait until the end of the 4 - 5 year investment period before striking out on your own if that is what you want to do, just until you're comfortable you've learned what what.

Before or when making the jump to multifamily, to greatly increase your odds for success you could hire a multifamily mentor or coach.  There are several mentors / investors active on BP, including  @Joe Fairless and Michael Blank.  Both of those gents also have podcasts where you can learn a *lot* about investing in apartments.  There are other non-BP-related mentors that have been in business for years that are also out there and seem like they'd be worth considering, too.

If you haven't read it already, pick up a copy of David Lindahl's book "Multifamily Millions" on Amazon for some inspiration.  Good luck!