Small Multi-Family units - what's your experience?

Question

Merry Christmas to all you wonderful people and hope y'all have a great New Years as well! Question from a newbie investor...

I've listened and read quite a bit on small MF units (2-4 units) and the prospect of higher cash flow and the ability to house hack sounds great to me as a beginning investor just starting out. However, I met with an investor that I connected with here on BP this past week and he brought up some really interesting points that I hadn't really thought about - specifically, that small multifamily properties can be more of a management hassle since tenants can butt heads. What happens when Larry parks on Sally's side of the drive way or one tenant blares music while the other likes a more quiet environment? While I do think that good tenant screening has a lot to do with solving this type of issue, people still can get on each others nerves for whatever reason and in the long term this could (in my mind) jeopardize the likelihood of repeat residency and could just be an overall headache that no amount of tenant screening could solve.

Also, when it comes to an exit strategy, small multifamily properties are generally bought and sold between investors instead of an average Joe looking to buy a house who is more willing to buy that property for it's emotional appeal rather than how good of a cash flow they can receive from it. Therefore, the likelihood of selling it to someone for a favorable price is much slimmer and the margins are much tighter than compared to SFRs, at least at first glance.

So I guess what I'm asking is, what is your experience with small multi-family properties and have you dealt with issues like this before? Is there something that I missed or more things that I should consider with these types of properties? As much as I want to get on the hype train with these property types, I want to make sure that I get all the angles, both good and bad.

Any and all advice and insight into this is greatly appreciated from this newbie investor :) thanks all!

Fred Heller · Answer

I think a small multifamily for someone like you would be great, especially if you plan on living in one of the units. The rents from the other units will pay most, or all, of your housing expenses. It's the closest thing I know to living practically free.

As far as problems between tenants, I haven't really seen a lot of issues in 2-4 plexes. Since it's a small community, the tenants frequently become friendly with each other. And if you're living on the property, you'll be able to monitor what goes on.

As far as the price you can get when you sell, well that's driven a lot by demand. Right now there's a lot of demand in markets like Houston and Dallas. I see small multifamily buildings selling for crazy prices that I would never consider. A lot of that is based on the area.

Treivor Cashion · Answer

Wow, thanks all for all the feedback...I'm constantly amazed by how quickly and thoroughly my questions get answered on here! I come back after work every day and just soak it all in lol

@Vic Reddy starting out, I want to self-manage and as I start to expand and systematize my business, I would look to use PMs. But I think that it would help me as a beginning investor to self manage my own portfolio when it's small to get to know the ins and outs of the RE business through getting engaged in every way possible. Thanks for the insight!

@Fred Heller yeah, I kind of like the whole idea of "landlording on training wheels" since I'll be right there with the tenants for my first property and kind of get to experience investing right there in the thick of it. You're also spot on with the crazy Dallas prices...just saw some SFRs listed in the $1.5M range, they've gone up a ton over the recent months.

@Jay Helms my main goal is to buy and hold small multi-family / SFR investment properties for the purpose of long term cash flow with the intention of 1031 exchanging these properties (or selling them) later on to upgrade to larger apartment complexes. I want to cash flow $5,000 / month by the time I turn 30 years old and, from what I've researched and read, small multi-family properties provide the greatest opportunity to do so as they don't strictly rely on one tenant for the property to be profitable. I intend to do this either in the DFW market or College Station market, as I'm most familiar with these and I think they both have lucrative markets for the asset class I want to enter. As mentioned above, I want to self-manage my own portfolio while I'm small when I start out to gain a more in-depth understanding and insight in to the business, so property managers aren't really what I'm going for currently. I'm actually going Driving For Dollars this weekend and I'll be searching for deals through sites like realtor.com and through some real estate agents I'm connected with, just to start out. I'm building capital right now, along with my education and network, and I intend to have my first property by the end of 2018. Once I find a couple to look at, I would love some insight on how you analyze deals if you have the time!

@Michael Guzik thank you so much for that response, congrats on your success in the multi-family market with those 300 duplexes! Hope to get there someday...I don't think he was being negative, I think he was just trying to give me some balanced insight into that type of real estate asset class and some of the issues I should think about early on. But I do believe in what you said, taking a grain of salt with everything, but I also believe in trying to get a realistic view of the pros and cons of any large investment I might undertake. As someone that has managed such a large portfolio, what kind of stuff would you suggest I look out for when dealing with tenants? What do you contribute your success in managing that many properties to?

Thank you all for the help and advice, I look forward to learning more!

Jay Helms · Answer

What are your goals @Treivor Cashion? If you’re just starting out, you might find, as I did, your goals will change, but spending some time and rally defining your immediate goals should reveal if you want to be in this niche or not.

If you’re looking for the least hassle in REI, then a good property manager is the goal. The issues you brought up can just as likely happen with a neighbor in a SFR. As you mentioned , the screening process is highly important.  My current portfolio consists of  1 SFR, 1 Duplex, 2 Mobile Homes, & 1 apartment complex. My primary goal is cash flow and out of all these units, my duplex produces the best. Other factors to consider like location, but  the duplex has been a great investment so far, enough to shift my focus to acquiring more. I haven’t sold one yet but the opportunities I continually see are mom/pop investors who have done little to keep up with market rents, so yes , I’m not paying a premium for them.

BTW, none of my units are a hassle because I have great Property Mgmt in place. Happy to analyze a deal with you once you find one.

Treivor Cashion · Answer

@Chris Quinn I will most certainly do that, thanks!

@Bart Hedgcock I was actually just looking at some duplexes around Skillman, as I'm dogsitting for a friend while they're away on a trip. Haven't started running any numbers yet, but based off what I saw, you hit the nail on the head. Pretty beaten up and rough duplexes for the most part, some look like they required some major work and most of them were at least $200k+. I'm glad to hear your experience with house hacking, as I've had that exact discussion with my girlfriend (I plan on proposing sometime soon), and she's sold on the idea of house hacking and essentially living for free. I also like all the different financing options that are available to you once you claim it will be owner occupied, makes it a lot easier to get in to initially and you get some up close and personal landlording experience. Thank you for the great insight!

Paul B. · Answer

Multi-family and single-family each have their pros and cons. You've already mentioned some of them, and the other posters have brought up a few more. There are numerous articles on this site that discuss the differences. Here is one, but there are many more. You just have to decide what is best for you. I happen to think large multi-family is the best, because economies of scale make management much easier and more cost-effective. But, for someone just starting out, you're not going to be able to buy a 60+ unit complex. You'll need to get your feet wet in either single family or small MF, like you've said.

https://www.biggerpockets.com/renewsblog/3-15-unit-buildings/

Sarah Nowak · Answer

Hey Trevor, you got some great responses here...just wanted to echo the sentiment that small multi family is the way to go and to add congrats on the impending proposal :-D

Bart H. · Answer

I think you will find in Dallas there is a real shortage of 2-4 unit properties.  Very few come on the market, and the ones that due are usually in terrible shape or so overpriced that they don't come close to cash flowing.

We owned a duplex on Live Oak near Skillman, bought it in 2013, we bought it and there were multiple offers, and we sold it in 2016 for a really nice gain with multiple offers.  As you mentioned at some point small multi family  values are determined by cash flow and you will be buying and selling from an investor, ad that is why we sold.

I will say, not knowing your situation, what worked out for us as we started our REI journey is we sacrificed and lived in our first few properties before renting them out behind us.  (lived in 5 different properties since 2012).  I would HIGHLY recommend buying a 204 unit property and living in one of the units.  IT allows you to get owner occupied interest rates, lower money down etc.

And honestly you can go with a little higher valuation than a pure investor, because its your house, and the risk is a lot lower for the same reason.   Our first duplex had what I am sure would have been considered mediocre numbers had we asked for input from BP, it more or less was a couple hundred dollars in cash flow/month when I did the model.

In our case we determined we could afford the payments on a house for x $'s, call it 280K.  so instead of one front door, our house costing 280K had 2 front doors, and we only lived in one half of our house.  So if we hated being landlords, or couldn't find renters, it was no big deal because we bought a house for our $280K budget.  Any money we got in rent was gravy.

The point is it allowed us to step into the REI game in a way that we couldn't have done.  I highly recommend a house hack for someone who is just starting out in Real Estate, its the safest way to get started Imo.

Jay Helms · Answer

absolutely @Treivor Cashion. just hit me up when you find that opportunity!

Chris Quinn · Answer

@Treivor Cashion if you ever want to bounce market questions off a local College Station realtor, feel free to shoot me a DM anytime. Congrats on your journey towards building wealth. As you can see, there are plenty of people here wanting to help you.

Small Multi-Family units - what's your experience?

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