4 fourplexes or a 16 unit complex? Advantages/disadvantages?

[Jack Zhuang]

Hi everyone, my name is Jack and this is my first posting to bp forum! I've been actively browsing the forum and today I pulled the trigger and upgraded to pro. Anyways, here is my question, if I want can pull together 500K from refinancing on my current rental property and want to invest out of state, what are the pros and cons investing in multiple fourplexes (residential family) vs. a larger apartment complex (commercial)? I understand the economy of scale favors the larger units, but is more units always the better?  Assuming both properties are in the same area which has the same cap rate of course.

I've also found that there are far less larger complexes listing on LoopNet comparing to fourplexes. Does it mean it's harder to find great deals for larger complexes? I've heard people saying it is often buyer's market for larger complex because of higher barrel to entry comparing to residential properties, is that true? Thanks!

- Jack

[Charles Soper]

Economies of scale come in to play pretty quick after you get into commercial properties.  4 4-plexes = 4 roofs, four sewer systems, 4 water/garbage bills, etc. as with larger multifamily you’ll save some of those hassles and costs.  You should still be conservative on your underwriting and use about 50% for your expense ratio until you have systems in place to reduce that.

Since you are considering out of state you’ll need to take PM costs into account as well, 4 4-plexes would likely be 10% management fee per versus maybe 8 percent of a larger single complex.

Some say LoopNet is where deals go to die, I believe you can still find good deals but you either need to be quick or lucky.  With the market as hot as it is most good to great multifamily deals never see the open market, they are pocket listings and only the “proven operators” usually see those deals because of their relationships with the broker.  That can be hard to overcome but if you search BP or find a book or two about doing syndications you can find great advice on creating those relationships, Id suggest Joefairless.com as a starting place.