Residential (4 units) or Commercial Multi-family?

[Kim Allard]

Dear fellow members,

With all your experience, may I pick your brain please?!

My husband and I are at a junction. We want to acquire multi-families within the first half of this year in the Miami-Dade and Broward area.

We have to take a decision about how to use the capital at our disposal as well as how to make the best use of our borrowing capacity.

We want to invest in multi family as we realized that condos and SFR will not get us where we want to be within timeframe.

2 options:

1) use our capital to make down payments on as many multi family as possible through conventional loans (which means a max of 4 mortgages x 4 units each = 16 doors)

Or

2) use our capital to make a down payment on a commercial property of 12 -20 doors and not use our personal borrowing capacity

Objective wouldn’t be to stop there but to continue to acquire some buy and hold multi family properties after these initial acquisitions.

Any thoughts and/or piece of advice on how to move the pieces on the chessboard?

Many thanks in advance!

[Tom Shallcross]

Hi @Kim Allard - a few thoughts/comments below they may help:

• For option 1 - are you stating you're stuck at 4 mortgages because the amount of capital you have?  You can get more than 4 Freddie/Fannie and there are also portfolio lenders who will continue to lend - you will not be stuck at 4 4plexes.  This does not make option 1 right or wrong, I just want to make sure you're aware that you can go beyond 4 conventional loans and even after 10 you have options. 

• With either option, the best way to scale is to buy right and have a value-add so you can refi (BRRRR) your money out. Therefore you need to look at more than just placing a down payment and receiving monthly cashflow. Yes, appropriate cashflow that meets your personal underwriting and expectations is absolutely imperative. However, if you're just buying turnkey and do not have a value-add to force appreciation (which is much more mathematical and "owned" in multi) and create the appropriate equity spread, you won't be able to refi your money out and repeat the process leveraging the same capital.

• Others might disagree, but in my opinion  you don't need to choose either/or on a 4 unit or 10 unit assuming property management (whether it's you or a 3rd party) will be find with either option.  Figure out where you want to own, set appropriate underwriting parameters, and build the appropriate relationships so you can pounce on a great deal in that area - whether it's 4 or 10 units.