Starting out MFH instead of SFR?

Question

If one has the capital to go straight into MFH, is there any reason not to? Obviously, with no experience one would really need some good mentor hand holding, but I'm seeing some properties within reach that seem like they'd cash flow better and more efficiently than SFH. I've seen some quads that look workable if not impressive but they look less good than some 8-15 unit small complexes. Of course those might be just out of reach, or at least a not super comfortable stretch.

How much of a factor might the lack of experience be in terms of financing?

I suppose partnering might be beneficial in terms of both education and extending my financial reach, too...

Or would a partial interest in a property be problematic for financing?

How much of a factor might the lack of experience be in terms of financing?

I suppose partnering might be beneficial in terms of both education and extending my financial reach, too...

Or would a partial interest in a property be problematic for financing?

George Paiva · Answer

Nothing wrong with Multi's.  I went straight into these investments because you get 3 to 4 checks and its all under one roof.  I don't see the advantage of acquiring and renting SFH.  Could be that my area around here lends more toward MFH rather than SFH when it comes to rentals.  I manage 2 - 2fam for my mom and its seems like a pain in the butt to do the regular maintenance and inspections vs my 4 unit which is just one location and one property.  Don't even get me into the insurance and taxes.  The 2fam equal about the same as the 4fam in those regards.  Doesn't take a mathematician to figure out which is producing more CF$$$.

Joshua Dorkin · Answer

Folks - This is not the place to promote your loans or to solicit them.  That may only happen in the Marketplace.  Thank you.

Scott W. · Answer

and mike h isn't kidding....he literally would talk all day about real estate if he could...trust me, i know from personal experience! :)

he's great.

Mike H. · Answer

Ah. Yea. Then multifamily into some bigger complexes with partners would seem to be a good fit.

For me, my hobbies are Chicago sports teams and fantasy sports. And photography.  But those just don't move me like real estate.

I could do and talk real estate all day every day. By the end of the baseball or football season, I'm burned out. And if my teams aren't in the playoffs, I rarely watch.

But even if its going to look at houses with friends who are thinking of investing, I never get tired of that.....

Robert Blake · Answer

Boring's ok with me.  I'm self entertaining.  At some point I'd like to spend some smaller number of hours on that boring stuff, some number of hours enjoying my life and hobbies, and none on that other job stuff, though I know it's years away. :)

Mike H. · Answer

I think your returns on individual SFH's are much greater than any multifamily deal you can get into (quads or complexes).  They're also a lot easier to manage than quads or smaller complexes (i.e the 12 to 18 units you had mentioned).

The recommendation to partner with other people and go bigger makes sense. You're giving up returns with the bigger complexes (compared to SFH anyway), but you're getting the management baked into the deal so you're truly passive.

If I were you, I would do both. Try to do the bigger complex to get yourself into a deal thats truly passive. And then do some sfh's for the returns and the fun.

One thing that people tend to leave out when comparing the different models is that, while the larger complexes are passive, they also seem like they'd be very boring to me too.

To me, the thing I love the most about investing is taking down the deal. With sfh's, I can do my 3 or so houses a year and keep myself busy and have some fun. With a large complex, once you're all in, you're kind of done for awhile where it would seem to be more like investing in a stock or something. Just that it would actually send you a check every month.

But where's the entertainment value in that? I like the checks every month. But I like the fun of taking down the deals just as much.

My suggestion would be to do both if you can afford to.

Theresa Bradley-Banta · Answer

Hi Robert,

You ask a [i]great question. I'm happy to see you consider going straight into MFH while in the same breath mentioning education. Smart. That will be key.

I completely agree with Joel re: the potential for a property turning into a full-time job. The mid-range deals you're considering (ie. 8-15 units) may not handle a third party manager and be able to cash flow (money in your pocket) at the same time. Not for the first years of ownership.

The other consideration is that you are talking about two entirely different types of financing. Residential vs. commercial. A lender will have different requirements of you and/or of your partners. Your team will play a critical role in a lender's decision. Who do you have on your team (such as professional management)? Who are your partners? A bank will want to see that the players are bringing some experience to the table--it does not necessarily have to be you.

Another consideration will be your exit strategies. I've invested in large and small multifamily properties in Denver. I like the fact that with, say, a quad, it's potentially easier to sell or convert. I know what you're saying about du/tri/quad plexes in this area. Again, I think your exit strategies, as well as your holding period, will play a role in your ultimate decision. I'm sure you've also given some thought to economies of scale. For example an apartment complex has single, rather than multiple, building mechanicals.

This is a great topic Robert. Thank you for adding this discussion to the forum!

Cheers,

Theresa
theresabradleybanta.com

Joel Owens · Answer

Hi Robert,

I have clients all over. Some are okay with partnering and others want total control.

Rather than an 8 to 16 unit usually it works better to partner on acquiring a larger property where a full time property manager and a maintenance person is on staff. This allows the property to run with minimal oversight.

You want this to be an investment and not a job. You do not want to be fixing tenants, toilets, and termites and other issues that are minimal per hour work and take away time from your family, your business, or your career.

Robert Blake · Answer

Good comments on some things I hadn't considered, William.

Oddly here, it seems like the du/tri/quad plexes aren't a great deal compared to somewhat larger units that aren't actual complexes.  From my (probably bad!) math it seems more able to go into those for similar prices than quads at a lower flow.

Even so, I think partnering with someone who does have the experience might be the way to go, since that would be informative and educational to me on the whole process.  Again, I'm not sure how financing works in a partnered case.

William Bannister · Answer

If your financing and this is your first deal then 4 unit is about as big as you want to go, when trying to finance unless you arent personally managing. If you plan to manage you need a crash course in management before you buy a 4 unit!
   Banks likes to see experience if your doing 4 units and above but I would still look at deals and run it past your banker. Explain it to your banker before you bring him a deal you would rather start on a 4 unit because the roi is just better.
 A local banker might over look the lack of experience on a smaller 4 unit if the cash flow is there and your down pmt and credit are in good shape. They will definitely want to see 2 years income taxes. 20% down probably.
  Just remember there is a lot more management involved in a 4 unit. You will probably be paying fort at least lights in the driveway and also have to manage coin ops in basement once every couple weeks. 
  You will have lawn mow and snow blow duties. Its not that big a deal on a 4 unit compared to a 24 unit. The thing is if you have a day job you will want a manager and let them do it. You will pay them somewhere between 150 and $200 a month for this activity if you decide to let them do it.  
  The coin ops could help defray your water bill a little if its not separated.Also regarding the buildings heating system make sure you check to make sure the numbers to pay utilities dont wreck your plans for positive cash flow. Call the utility co and check electric and gas usage to see where it will put you in your monthly expenses.  On older 3 and 4 unit buildings. High utility costs on buildings can drive the price so low that you can find bargains and go green with building and have great cash flow after stabilizing units.  
  I have been in negotiations for almost 6 months with an owner that left town on a 4 unit and this building needs a heating overhaul at present doesn't look like much for cash flow. A new furnace and insulate building could change all of that.
  My most important due diligence on older 2 to 5 unit buildings has been call to check utility costs.