4-Plex or more for inexperienced investor?

[Simon Stahl]

Hi there

I am wondering if it is advisable for an inexperienced investor to get started with 5+ units or if it would be better to first stick to 1 to 4 units. I already know the process to get a conventional or HM loan, but never got a commercial one. In addition I will do this out of state and while working a full time job. Is getting a commercial loan too hard in such a situation?

Thanks

[James Kojo]

Originally posted by @Brian Garrett:

@James Kojo Curious why you say you cannot capture any forced appreciation on 4plex or smaller? There are lots of ways you can force immediate appreciation on residential MFR's.

I probably  should have put emphasis on the word "directly" in my statement: You can't directly capture forced appreciation in residential the way you can with commercial. Of course you're correct in saying that there are many value-add improvements you can do with residential which improve rents.

However, when commercial property is evaluated and underwritten, it's primarily evaluated by the numbers (NOI/Cap-rate), where as residential is valued via "comps", which is a lot more nebulous. So if you raise rents by $100/month on an 8-cap commercial building, you have now directly forced appreciation by (100*12)/.08 = $15,000, whereas on a residential, it depends a lot on what your neighbors last sold their properties for.

Of course, nothing ever works out that precisely in the real world, as caps also fluctuate, but caps are not as volatile as comps. Still, hopefully my example and explanation illustrates the concept.

Hope that helps!

James