Duplex/Triplex Vs. Apartments?

Question

I currently have a duplex and planned to purchase more however...I started reading,"The ABCs of Real Estate Investing" by Ken McElroy and I'm now considering in putting my money in apartments. Something small like a 6-8 unit to start off. Any advice or tips would be great. I plan to listen to Podcast 52 on my way to work tomorrow morning.

Ayodeji Kuponiyi · Answer

@Giovanni Isaksen I like your point. That's why I'm leaning towards 5 - 8 units to start off with. I'm thinking of refinancing my duplex and using the funds to purchase a 5+ unit if I find one that fits my criteria. What do you think?

Giovanni Isaksen · Answer

@Ayodeji Kuponiyi Turn-key can work great if the incentives are properly aligned but typically more units are better just based on the math. One unit vacant in a triplex is 33%; 1 unit in a 7 plex is only 14% so you can withstand two vacancies in the seven unit with less of a hit than one in the triplex. Provided that you aren't stretching and overleveraging to get the larger property of course.

When you're looking at the numbers make sure your investment works with 10% property management even if you will be managing to start. We find that even if property management is quoted at 5% by the time all the other charges and fees are loaded in it winds up closer to 9 or 10%. Which makes sense because property managers can't make any money at 5%.

Good hunting-

Ayodeji Kuponiyi · Answer

@Giovanni Isaksen Thank you for your feedback. I'm looking into a 6-8 unit property. I would managed it myself and after awhile shift the management role to someone else down the line. There are so many options and I starting to feel that getting a nice turn key triplex-fourplex is playing it safe.

Giovanni Isaksen · Answer

@Ayodeji Kuponiyi There's a big dividing line between 4 and 5 units. 4 and under you can typically get much better loan terms ( because it's considered residential) but once you get over 5 units the underwriting of the loan can get better because it's considered a commercial property.

There are other hurdles to consider too. Property management and maintenance are the two biggest ones. From zero to about 65-85 units (depending on the market) typically you're better off managing the property yourself.... if you have the inclination and skills to do it. That's because there isn't enough in rent coming in to cover the cost of a full time/onsite property manager/maintenance guy.

But there's this: Build a track record with a small multifamily property so you can raise money for a larger one. If you're talking to an investor and all you can say it that you hvae a couple houses that you rent out that doesn't sound nearly as relevant as if you can say I've got experience in multifamily and want to grow the portfolio...

Good hunting-