How to upgrade and what to expect from 3 SFH to multifamily?

Question

I'm seeking advice and stories from anyone who has jumped from SFH to multifamily homes. I have 3 properties that I'd like to 1031 into a multifamily building. My primary goal is cash flow and to keep personal time involved low.

My homes are valued at $1.7M and I have around 770k of debt.

What can I reasonably expect to buy with this and what range should I expect from a cash flow perspective?

If the range is 50-100 unit building, do you think this is manageable as a first-time multifamily? What's different about managing a building this large?

Should I be able to afford a full-time property manager?

What's the best part about owning a large multifamily?

Whats the worst part about owning a large multifamily?

Any lessons you are willing to share as I seek to make the switch?

Thank you

Michael Bender · Answer

Thanks for all the feedback. Ideally, I'm not looking to upfit or renovate anything.

I think I've spotted an Absolute NNN property for sale at the top of my price range that seems to cashflow around 130k/year with today's rates and putting all my equity back into the property for a down payment.

The lease is with a well known value chain restaurant and has operated there for 15 years. I'm familiar with the area and know it to be growing. However, the lease expires in 2 years.

Is it common to get a lease renewal as part of the purchase? My bank is saying they'd need to see that to finance it.

Does any have experience with Absolute NNN leases and renewing them that can offer any tips or gotchya's? Any negotiating tactics I can consider with the seller? I'm not at all familiar with this type of real estate transaction. What are some common terms of a deal?

Dave Foster · Answer

@Michael Bender, The MF market has seen a crazy ride for quite a while.  Finding your perfect next property might be dififcult.  But don't let perfect become the enemy of good.  You've got a lot of gain to shelter in your 1031 exchanges.  And the 1031 will give you a great deal of flexibility.  It's conceivable that you could finance a $3 - $3.5 mil property.  The number of units that is will vary according to market.

But thankfully you don't have to be stuck with that if properties in that range end up being unicorns.  The 1031 will only require that you purchase at least as much as your net sale (1.7 ish if selling all three).  And that you use all of your net cash ($700K ish).  So keep your eyes and open for anything that makes sense in a market you like between $1.7 and $3.5.  You may find that you purchase less but make more because you can buy it right.

Consolidating three sales into one purchase is not incredibly difficult.  Your purchase will simply have to meet the 45/180 day deadlines for each of the sales.  So I usually recommend that you get as extended a closing as possible for your first sale in order to cluster the other two sales close

Avery Heilbron · Answer

@Michael Bender

Cash flow is definitely dependent on what you're buying and where. It is also more difficult to find a multi that makes sense today with the debt you take on. Even hitting the DSCR requirements a bank would have can be difficult at what owners are trying to sell at. Do you want to do any value add or just looking to change asset classes and park your funds?

It's possible you could manage it yourself but you will need solid systems in place and depending on where you buy to hit your goals you might be giving yourself a very active full time job while you're learning how to manage that property. Overtime It would get easier I am sure.

Economies of scale and everything being under one roof is probably your biggest attractor for owning multifamily. The negative could be that you purchase a bad asset and have put all your eggs in one basket.

I think the biggest lesson today is that you would need to be patient in order to find what you're looking for and it's possible you don't find it within the timeframe that a 1031 exchange allows.

Happy to connect or chat further. I am an agent in the area.

Cory J Thornton · Answer

@Michael Bender -

I do not have all the personal experience to answer each of your questions, but I did have a few thoughts to share after reading your post.

- In this market a 1031 exchange property is not easy to find. You will need a very clear plan in place to achieve selling three properties as a part of an exchange and consolidating into a single larger multi family property.

- I'm not sure anyone will be able to give you a solid answer on the cash flow question. This will be very property and market specific. If you are rolling everything into a mobile home park you can likely find a CAP rate of 12% provided you are area agnostic. If you are wanting a true multi family property, in an in demand location, that is more turn key in nature, then your CAP rate is probably going to be 6% or less.

- A big aspect of how every deal preforms is the debt. If you are looking to take your equity and match it with debt then you are probably shopping for a property with a price tag around $3M. I would recommend developing several banking relationships now to get an idea of what debt options are available to you. Then use the term sheets you collect to run your numbers on potential properties.

- Your stated goal is cash flow with minimal personal involvement. You also asked if a manager was needed. If you are willing to step into the role and function as a professional property manager, then you can improve cash flow. If you optimize to keep personal involvement low, then you will absolutely need professional management, but will give up some of your cash flow for that trade. One tenant takes active management. You will absolutely need a solid plan for how to manage Fifty or more tenants.

- Given the amount you are looking to exchange, and your desire for minimized personal involvement, you may want to consider finding a commercial property with NNN leases in place. This is a shift away from residential and will have a new set of risks, but if you educate yourself on this space, then it could be a path to cash flow, with much less personal involvement. I don't have any NNN properties, but I do have a few commercial spaces and I personally enjoy the commercial investments over the residential.

It sounds like you have made some awesome progress on your journey as an investor. When you are sitting on $700+ in equity, it opens up a lot of different options.

If you are in the Raleigh market it would be great to connect in person or if there is anything my team or myself can do to help, just give me a shout.

Jay Thomas · Answer

Transitioning from single-family homes (SFHs) to multifamily properties is an exciting venture in your real estate journey. With your current assets, utilizing a 1031 exchange gives you substantial purchasing power. Assuming a net gain of $1M from selling your SFHs, you can explore multifamily options in the $2M to $3M range, covering the balance with financing. Anticipate a higher cash flow per unit in multifamily, ranging from 5-10% of the gross property value, potentially yielding $150,000 to $300,000 annually for a $3M property.Consider the smart move of hiring a professional property management company. Fees range from 5% to 10% of the gross monthly rental income, approximately $7,500 to $15,000 for a 50-100 unit property.. While large multifamily ownership offers benefits like scale, diversification, increased cash flow, and appreciation potential, it comes with challenges such as management complexity, potential vacancies, and tenant-related issues.

John McKee · Answer

Keep in mind you're putting all of your eggs in one basket, so make sure the dirt is worth something in case the tenant goes dark in a few years and you're stuck trying to lease it.  I wouldn't invest in it either if it only had two years left, however the price should be discounted because of the short term lease.  Your bank is a great underwriter so follow their lead.

Alex Olson · Answer

@Michael Bender Going for SFH to MF is quite easy but it takes a mindset shift. We have helped a lot of people out of state that are selling their SFH and then doing a 1031 exchange into near turn key, cash flowing, multifamily properties in A,B,C areas of KC. It just takes a team and a great broker to understand the short term and long term risks and benefits. In other words a lot of trust. Hope that helps.

How to upgrade and what to expect from 3 SFH to multifamily?

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