Trade up to bigger multi family?

Question

I currently have 39 units about half multi family have a single family. I have debated whether to consider “trading up” to larger multi family properties. Good idea or bad? How would you time the sale of multiple other units to purchase a larger unit if you think this is a good idea. Thanks

Greg Dickerson · Answer

@Steve Corder @Cameron Tope a lot of this depends on the numbers, your comfort level and your resources.

You can scale way faster with larger multifamily and hire professional managers to run the day to day as you don’t want to take that on.

It’s not a matter of units under one roof it’s about diversification. Your spreading risk over many units With smaller units and single family as you know one bad tenant or extended vacancy can kill the returns and put you in the hole fast. Large multi is a hedge against those issues.

Most markets are still under supplied so new inventory will not be a factor in most markets. That being said you can hedge new inventory pressure by researching the markets you want to invest in and find out how many units are in the pipeline. Also people will generally not go through the hassle and expense of moving just to be in a new complex unless there’s a really good reason so your competition will be for new renters when you turn over units so if you are buying right you will be able to keep your rents below the new construction product.

Bottom line run the numbers to see what produces the highest and best return on your time and money and let that guide you.

Javier D. · Answer

@Steve Corder

I have 60 doors, 48 being multifamily and can relate to where you are now. The return on leveraged multifamily is higher and looks prettier on paper but there are pros and cons to both.

I would put the math on the back burner for a minute and look at what your goals are.

My goal was to have 50k net cash flow without being overleveraged(75%+).

I rather have 39 units paid off than 150 units leveraged. Its hard paying off a 2+ million dollar mortgage as opposed to a 100-250k mtg on a sfr.

It really boils down to where youd like to be. I have a property manager for my sfr and one for my multis so its the same amount of oversight for both. The multi take more attention obviously.

What I did was 1031 3 houses (600k) into a 40 unit.

1031 1 house into 2 duplexes side by side and another house and some capital into two side by sode quadplexes.

I will be keeping minimum 10 sfr thst are paid off. I dont care about IRR , coc , cap , dcsr bla bla at this point. Anything happens and I have cashflow and reserves to weather any market volatility or interest rate issue once refis are needed on the commercial property. I hope my point got across. English is my second language so my grammar might be a little off.

Cameron Tope · Answer

@Steve Corder I have also thought of this but I've heard horror stories because operating a large multi is not the same as operating small multis and SFRs.

You also have the risk of a lot of mutli units being built recently - at least in the Houston market.

While you have all your units under one roof, you also have all your units under one roof. If the area takes a turn you could lose your shirt.

That's why I decided to keep all my small multi's and SFRs.

Does that make sense?

Dave Foster · Answer

@Javier D. Nicely done!!!  I was just going to suggest a similar course to @Steve Corder.  You can treat your portfolio like a work of art you've created.  Sometimes you just want to tweak it a little to improve it.  The 1031 exchange lets you transitiona your portfolio at will bits at a time which lessens risk and keeps the essence of who you are as an investor.

Sometimes it's right to erase the canvas and go big in one fell swoop.  But Javier's approach lets him increase ROI with much less risk. It doesn't mean you end up with the large MF if you want.  But you transition to it letting the market speak to you and using the tax deferral of the 1031 as he says you'll be pleased with the compounding results.

Greg Dickerson · Answer

You really can't compare the two in this context. You simply can not scale SFH as fast or as efficiently as you can with multifamily. Also the likelihood of losing all your income from all your units at once on a multifamily is pretty slim but possible as we have seen with fires and flood prone areas as of late. You can also lose SFH to the same natural disasters. The solution is not to buy in an area that could flood or is prone to fire. Also you can build a portfolio of 30 multifamily properties just like you can with SFH and accomplish diversification across markets as well.

Also you can't always sell a SFH for a profit as you know. It's just not the same conversation at all.

Cameron Tope · Answer

I agree with Greg on a lot of things but not the above.

Yes, you can hire a professional property manager to handle the complex but you still have to manage your property manager.

Purchasing a large multi-unit is the exact opposite of diversification. During hurricane Harvey there were landlords with one or two properties that flooded out of there 30 SFR portfolio. What would happen if your one large multi-unit flooded? Bye bye cash flow and get in line for your insurance payments.

It's easy to make the numbers look great on a large multi-unit, I see "guru's" do it all the time. Increase the cashflow $50/mo per unit and VOILA you just make $200,000 based on current cap rates. What they forget to tell you if what if your rents fall $50/mo per unit? What happens to your property value then? Is this where you want to be in a market correction?

With SFRs you can sell to any homeowner that can qualify, it's not dependent on the cashflow. If the property doesn't cashflow how you want it to anymore then sell it to a homeowner.

Hope that helps. Best of luck!

Cory Carlson · Answer

Steve,

You are describing the precise niche i work in. Consolidating your equity position to reposition your portfolio to one that scales up enough to both increase your returns and capital/equity growth. Generally, with appreciation and pay down over time on real estate investment your returns based on the invested equity position goes down (per the math) with significant appreciation which in my market we have seen. For example, you bought a duplex for $250,000 and put 25% (62,500) down. That same duplex today is worth $400,000 X amount of years later. Combining your pay down on your loan and appreciation of $150,000 you need to ask yourself would you buy that same duplex with $200,000 down (adding 50k for pay down for illustration). Likely no if you are using leverage as a TOOL.  To realize those returns you either have to sell or refi which appears to be the position you are in. By consolidating your debts on the SFH properties and even the plex's and moving into larger multifamily or commercial it comes down to the analysis. Quantify your current position, and run a scenario where you sell X of them and reallocate that money into a larger apartment. The beauty of the larger multifamily (meaning larger than what you have, as that's subjective) is the property management. Sure, there are horror stories but this is where the due diligence comes into play. You move into a role that consists of managing the manager.

I would exchange out of several properties at once. PLEASE hire a professional to do this, as there are so many variables. I am currently exchanging out of two clients SFH and into approximately $1,500,000 multifamily and it will improve his cashflow by $20,000+ (5.0% + or -) year 1.

Cameron Tope · Answer

Greg, I agree with you - multi-family can be a great investment if managed properly. I think you would agree that SFRs and large multi-families are similar but differently run businesses.

I simply wanted to emphasize that they are different businesses and it's not always an easy jump from SFRs to large multi-family.

I always appreciate your insights on the forums.

Thanks for the discussion!

Taylor L. · Answer

Sell and scale! Maybe start by selling 10 and buying a 30 unit. Then go a bit bigger and start raising money if you want. Having more units in one place will help you from an economy of scale standpoint, undoubtedly.

Chris Salerno · Answer

Steve, Congratulation on growing a 39 unit portfolio. You have a couple of options in my opinion.

You can refi the 39 units and with the refi ( depending on what the refi amount is) you can then deploy it in a larger property.

You can sell the 39 unit and 1031 the funds into a larger property.

I think it would be best to start investing in larger properties. Numbers make sense, property management can be a lot easier compared to 39 units. When you resell the property you could get larger profits.

I am looking forward to your success. I am located in Charlotte so now too far from you.

Trade up to bigger multi family?

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