Small complex or 3-4 unit properties?

[Eric James]

I'm in the process of moving to TX and am purchasing a primary residence. I asked my mortgage broker approximately how much my DTI ratio would allow me to purchase for a multi family property(s) and was surprised to learn it's high enough to allow me to purchase something like a 10-15 unit property, or alternatively 2 (or maybe 3) triplexes or 4-plexes. I've owned a triplex for the past 7 years. Eventually I would like to purchase a small apartment complex, but I don't know if I would be better off going the multiple triplex/quad route first, and then later trade up. Do you have any thoughts on the advantages of each possibility? Thanks.

[Patrick Liska]

Eric,

which would be more profitable for you ? 1 unit with all the apartments under it, or 3 units? compare your expenses vs income, and try to predict future appreciation. it may be easier to manage and maintain on unit rather than three, but the three units may pay more taxes than the one. will the rent be the same or can you charge more for the 3 units than the apartments in the 1 unit?  you are going to need to run the numbers and make a comparison, it's not a matter of preference but a matter of profit in that situation.

[Scott S.]

Do you self manage? If so, having everything at one location and under one roof would offer economies of scale that you should be able to put a dollar amount on.

Presumably there are more potential buyers for the smaller multis for when it comes time to exit. Having said that, I'd love to find a 10-15 unit MF to sink my teeth into.

I'm interested in hearing the responses you get, as well!

[Patrick Liska]

Eric,

which would be more profitable for you ? 1 unit with all the apartments under it, or 3 units? compare your expenses vs income, and try to predict future appreciation. it may be easier to manage and maintain on unit rather than three, but the three units may pay more taxes than the one. will the rent be the same or can you charge more for the 3 units than the apartments in the 1 unit?  you are going to need to run the numbers and make a comparison, it's not a matter of preference but a matter of profit in that situation.

[Andrew Campbell]

@Eric James  Sounds like you are in a good spot to grab some more units.  Congrats. 

In general, I would advise you to go after a single, bigger property, for the economies of scale/time mentioned above.  As we have grown our portfolio, we're moving away from smaller properties and are in fact selling the single families we have this year, and talking about selling our duplexes and fourplexes to roll them into a single, bigger asset. 

The one consideration you should think about is financing.  If you go with a 4-unit or smaller, you can get a traditional, personal loan with 30-year fixed rate money.  Once you cross into 5-units or more, you're looking at commercial financing--with shorter amortizations and adjustable rates.  

Since we are cash flow buyers, the 30-year fixed rate is the route we chose. Each individual can get up to 10 of those, so you can accumulate a good sized portfolio with that strategy, if you choose to go that route. 

Good luck!

[Andrew Johnson]

Eric James It really depends what you're after. I like the simplicity of 5+ unit properties. You're not competing with house-hackers, you can "force appreciation" through rent increases, you have less roof/siding/quarterly pest control expenses/etc. per unit, you stand a chance of developing a tenant wait-list. But you have a 20 or 25 year amortization period, usually a 5 or 7 year loan term with a balloon, full-recourse loan, slightly higher insurance premiums, etc. I think you can argue "preference" but I think it's hard to argue definitively that one option is better than the other (except in hindsight).

[Eric James]

Thanks everyone. My wife and I would self manage if we can buy a place close enough to where we live, which would probably be more likely with 2-4 unit properties. If/when I get into the multi unit arena I will have a learning curve regarding commercial financing (and other issues related to multis). I know next to nothing about commercial financing. I've spent a little time looking at small complexes listed for sale, and the only ones with cap rates >10% are in small towns and have low occupancy rates. I'm wondering if cash flow and ROI are more likely to be higher with several 2-4 unit properties than with a small complex. Is that common?

[Jeff Kehl]

@Eric james I own a '12 unit apartment complex' that is just 3 quads next to each other. Operationally there is no difference. Even larger complexes are much the same. 12 8 unit buildings are colocated are exactly the same as a 96 unit apartment complex.

Because of arbitrary rules there is are lending differences and transactional differences.

But Operationally and financially it's the exact same thing.