$1 Million To Invest In Multifamily

[Peter Hamilton]

Hello,

I have a single-family home portfolio with a total equity of ~$1million. I also have ~$500k equity in my primary home.

I realize that having that much equity tied up in a handful of properties is not the best approach to maximizing returns. 

What do you guys think is the best strategy to use this equity to jump into multifamily in order to get greater returns? Is it better to buy many separate fourplexes or put all my eggs in one basket and buy a larger apartment complex?

Another factor I have been thinking about is keeping these single family homes for the purpose of net worth requirements for a commercial loans and saving a 25% down over the next 3 years for a ~$1.8-$2 million multifamily property.

I wanted to get your guys thoughts on my situation and thank you in advance for your responses. 

[Bjorn Ahlblad]

@Peter Hamilton welcome to BP! I lean towards your option 2. I don't like selling properties, it has been work to find them and getting them to perform the way I want. A bigger MF 12-20 units or even more is very cost effective to maintain. Having all your tenants under one roof is considerably less work and means more profit. All the best!

[Andrew Hogan]

Hey @Peter Hamilton, congrats on your success thus far. 

As with anyone posting publicly that they have a good amount of cash to invest, I wish you luck sorting through multitudes of DMs for the next year :

I'd recommend you speak with a real estate / private equity friendly financial advisor first. They can help you to see things that you may not have considered previously and recommend how much equity to keep in the primary residence. 

I've seen investors who prefer taking out a new 30-yr mortgage vs a HELOC or Cash-out refi. Why? It mitigates their risk and prevents the bank from changing their loan from something comfortable like a 5 yr I/O to "principal due now or we take your property" like we saw in 2008/09.

Regarding "jumping into multifamily in order to get better returns", what many investors have found is that they can get greater returns with less risk the larger multifamily deal(s) they can buy and spread their chips across. As I'm sure you're already aware, there will be much fewer head aches with nicer, newer properties vs run-down deals with more deferred maintenance. 

With the above in mind, 2000's or newer, 150+ units in desirable locations are the way to go. If your 1M can't get you there yet, raise the money or partner with somebody who can. 

Another point to think about is that if you can 2-3x your 1M in the next 5 yrs, that could enable you to buy a 10MM property by yourself. It just depends on how hands-on and active with the day to day you'd like to ultimately be. 

good luck!

[Peter Hamilton]

@Andrew Hogan Thank you for your response! From understanding the three main requirements for a large multifamily property is 25-30% down, net worth equal to or greater than the loan amount, and 10% of the loan amount liquid.

You said that I would be able to purchase a 10MM property by myself with 2-3MM down. How would I be able to qualify for a 7-8MM commercial loan if I do not have a 7-8MM net worth? Sorry if this has been answered elsewhere. 

[Jim Pfeifer]

I think the first question is do you want to be an active or a passive investor? I used to own a portfolio of SFH and small MF properties and was an active investor. I wasn't a great asset manager and had trouble dealing with the property managers and just didn't like all that came with active investing - not to mention, I thought I was "passive" because I hired property managers. It took a lot of time and energy and the payoff in cash flow wasn't great. My timing was good and all of the assets appreciated but that was not due to anything I did - everything went up back then!

I transitioned to true passive investing by investing in real estate syndications.  There is a lot of upfront work vetting operators and analyzing deals, but once you send the wire, there is nothing for you to do but (hopefully) collect reports and distributions.  I sold all of my active properties and used the Lazy 1031 strategy to defer/avoid paying taxes on all of my gains.  I was able to change my real estate portfolio from active to passive without paying taxes.  

Currently, I am a full time passive investor and my cash flow and returns are much better than when I was doing it myself.  Just like I don't write my own legal documents or prepare my own tax returns - I leave the managing of my assets to professionals!

[Dave Foster]

@Peter Hamilton, If you have significant gain or depreciation to be recaptured in your SF. portfolio then you will want to start with the 1031 exchange as your way to transition to MF.  Otherwise you'll see that equity disappear in large part from the taxes you'll have to pay before reinvesting.

That being said the next question is "how many" houses do you have?  If it's 2 or 2 then you might be able to sell them all closely together and do a 1031 into a large MF.  The 1031 has a constrained timeline that all of the properties will have to meet.  So you'll have to sell them close together.

If you have 7-10 properties then you face a difficult choice.  either you sell them all as a portfolio (one 1031 exchange) but you take a haircut on the price.  Or you try to sell them as closely as possible again.  Odds are you might need to carve them out timing wise into 2-4 1031 exchanges.  And this will determine whether you can go straight to the larger MF.   Or whether you would need to do an interim strategy of moving into 4 plexes first and then later go from the 4 plexes to a larger MF again using the 1031 exchange.

The market and your odds of selling those property closely together will probably determine your direction.

[Denver McClure]

Hey @Peter Hamilton, I couldn't agree more with @Andrew Hogan on this one. Your decision should be based on a several factors other than just leaning into fourplexes or buying one large complex alone. Tax exposure, risk tolerance, investment timeline, investment objectives, and diversification are all critical components that should determine the way you utilize your funds and equity. Without knowing your specific goal for each of those components, I could only recommend "spreading your chips" across several different investment types that you are comfortable with and understand. Estate planning is also another topic that pops up when I speak with people in similar situations, so you should consider that as a factor as well. 

[Andrew Hogan]

Quote from @Peter Hamilton:

@Andrew Hogan Thank you for your response! From understanding the three main requirements for a large multifamily property is 25-30% down, net worth equal to or greater than the loan amount, and 10% of the loan amount liquid.

You said that I would be able to purchase a 10MM property by myself with 2-3MM down. How would I be able to qualify for a 7-8MM commercial loan if I do not have a 7-8MM net worth? Sorry if this has been answered elsewhere. 

 Good question, I was speaking solely to having a ballpark amount of equity to get a loan. With the Networth requirement in that you mentioned, you'd likely need to find a partner who could sign off and put their Net Worth on the line as a KP.