How much capital does it take to get into multifamily?

[Hank Lee]

And how do you find them?

Ok, I know that's subjective and very vague, let me backup and provide some context. 

We started our REI a year ago with one single family property with a popular Memphis turnkey provider on these forums and have been happy so far. However, I get the math, I get that at about $250 cash flow per property, it will take 20 properties to cover our expenses and many more to replace our income.

I see a lot of discussion about multi family helping to scale this process quicker. First, where do you look for them? I look at LoopNet, but I'm sure there's a better process. With our jobs and 2 young kids we don't have much time or energy left over to spend nights at REI meetups and socials, etc. Hence, why turnkey works for us.

We have about $60k available to deploy right now. That sounds like too low an amount to get a decent multi family property. And by multi family, I'm thinking 4 units or more. However, that amount can get us 2 more "Memphis type" properties and continue us on the slow and steady curve. We target class A and B properties as that's what suits our comfort level and risk tolerance. Denver, where we live is out of the question, we clearly can't touch anything here. We don't mind investing where ever it makes sense - hence our one property so far in Memphis.

So the questions are what's the best way to find multi family properties? And what are some opinions on a realistic amount of capital needed to begin looking at class A or B properties? (I know there's lots of variables here, what city, how many doors, etc - I'm just looking for big picture thoughts, stories, or opinions.)

Thanks!

[Erik Nowacki]

@Hank Lee I have to echo @Bill S.on this topic.  The most important thing for you to figure out is what kind of real estate investment fits into your current lifestyle.   If you take on a project that takes more of your time than you have available, something has to give, your job, your family or your multifamily property.  No matter which of those options you end up choosing, you'll be unhappy.  Either your job will suffer and you'll get fired or yelled at by the boss; if your family suffers, you'll definitely be unhappy; if your multifamily property suffers, you'll definitely lose money and be unhappy.

Let me tell you right off the bat that you don't have enough money to get your own multifamily property.  Even if you can buy a fourplex in Memphis for $60K, it will not be in a good area (A or B, as per your goals) and the management will be hit or miss.  If you use your $60K as downpayment on a larger property, you will amplify the potential problems and pitfalls.

In multifamily, management is the key.  A good manager can save a bad property, but a bad or mediocre manager can crash a property to the point that it cannot be saved.  Even with referrals, you're rolling the dice.  I've seen more bad than good MFH managers...

If I was in your current situation, I would look at two options: Either continue on the slow and steady pace of acquiring turn key single family homes, or invest in a multifamily syndication. The advantage of the SFH route is that you are familiar with the process and you will get better at evaluating the properties. The advantage of participating in a MFH syndication is that you can ride along with an experienced (hopefully!!) operator and get a feel for the numbers and different aspects of a MFH operation.

Who am I to give you this advise:  I have two MFH in Memphis for a little over 250 units.  One of them was run by a local investor and almost fully occupied when I took over, but after I cleared out the non-payers and general undesirables, I ended up turning over 50 of 76 units, which costs $4-5K per unit.  The other property was owned by a couple of investors out of state, it had been so thoroughly run into the ground by a crooked/incompetent manager that 35 of 178 units remained occupied when I took over.  After clearing out non-payers and undesirables, 18 units remained occupied.  I have since built it back up to 53 occupied units and continuing upwards.  At this stage, I consider myself a somewhat experienced operator and I still severely underestimated the amount of time, effort and money involved in operating apartments in Memphis.  Today, I'm off to look at a 30 unit property, all boarded up, vacant and probably with all copper pipes removed, that an out of state investor (like you) bought with the idea of retiring from their day job...  Most of the money they have put into this 30 unit property, including the purchase price and renovations, is probably lost.

How did I get here?  I built a portfolio of small multifamily properties near my home in San Diego.   I was able to involve my son in various maintenance and rehab tasks (he still has nightmares about carrying floor tile up to the second floor...).  Once he went off to college out of state, I realized that I could invest anywhere and picked Memphis for the cash flow aspects.  I did a couple of 1031 exchanges into my current properties.  It is now my full time occupation.  I even lived on-site for 18 months to keep an eye on the property.  I'm sharing this with you to show that it's important to invest in a way that's compatible with your current lifestyle and that your investing can change as your life circumstances change.

Happy investing

Erik