How to Get Started in Owner Occupied Multifamily Investing

I enjoy teaching investor students and helping them learn about multifamily investing and syndication and all of the benefits it brings, but some ask how to get started?

Not everyone is ready to start out buying large apartment complexes for many reasons. It takes time to learn the right emerging markets, it takes time to learn how to finance big projects, it takes time to raise money and build relationships with the Investors and Real Estate brokers and it takes time to learn how to analyze the deals. That’s a lot!

So when students ask how to get started now, I talk about the advantages of owner-occupied multifamily real estate.

What is owner-occupied multifamily investing?

Simply put, owner-occupied multifamily real estate is when an investor resides in one part of the property while renting out the other units.

Many new investors in this owner occupied multifamily area start out with duplexes, triplexes or fourplexes.

However, this is not for everyone as it puts the investor in the position of being a hands-on property manager with the tenants. The investor will have to deal with all the property management issues.

Here is a set of pros and cons from fortunebuilders.com. These that sets out some of the basics of learning the owner-occupied multifamily business:

• It can pay for itself 

• Easier to finance

• Learning property management first hand

• Tenant screening becomes very important as they are your neighbors now 

• The first step toward larger properties and your multifamily investing career

However, there are downsides:

• Tenants complain

• Renters may not want to live in the same building with the landlord

• Avoid becoming friends with your tenants

• Tenants are your neighbors and you may not like them

• Conflicts can occur

Leveraging the advantages

There are very distinct advantages that we must keep in mind in owner-occupied multifamily investing. Not only can you use rental income to offset the amount you pay against the mortgage, there are several tax deductions and depreciation advantages to living in the same property you also rent.

Living in your own rental property, of course, isn’t for everyone. Whether you will gain greater income from an investment property or an owner-occupied rental property ultimately depends on your individual circumstances. You should consult a financial consultant or tax advisor to discuss your bottom line. But here are several of the advantages to owner-occupied income properties to consider:

Higher quality tenants

Many renters are particular about who they have to live next to, and having an owner-occupied building is reassuring. Owners are also selective about who they allow living next door, thus attracting higher-quality tenants. It’s a beneficial dynamic that brings tenants who are willing to pay higher rent.

Writing off expenses

Simply put, owners who occupy their rental properties are allowed to write-off their rental expenses against their rental income. Any expenses that apply to tenant-occupied units can be used as an advantage.

Lower management and maintenance costs

Occupying your own rental property minimizes property management and maintenance costs that are typically handled by third parties, thus saving a certain percentage of gross income.

The value of depreciation

Depreciation allows an owner to deduct a portion of the building’s cost, plus the cost of capital improvements, annually from the income of the building. While it is allowed only for the portion of the building used for rental purposes, it can sometimes shield rental income from taxation.

The tax advantages

Along with depreciation tax, owners who live in their rental buildings can deduct the prorated part of the mortgage interest from their income. Property taxes can also be deducted.

Selling the property

Owner-occupied housing is also shielded from property gains taxes (at certain limits) when sold, and those that have been lived in for certain time periods – usually more than a year – are subject to lower capital gains taxes than other investments.

Through a tax-deferred exchange, owners who rent where they reside can combine both tax advantages and also defer gains on the sale of the property when they purchase another property within a limited time frame.

Finally, owner-occupied properties are exempt from certificate of occupancy and most rent control programs, therefore, the owner is not required to make certain repairs and improvements that these programs require of property that is used strictly for income producing purposes.

The best way to start

Michael Blank writes that he thinks duplexes are a great way to start.“Many real estate entrepreneurs who want to get into owner-occupied multifamily investing are frustrated by how long it can take to do their first deal. It takes a while to educate yourself, learn how to analyze deals, and to raise money. You have to be consistent with contacting brokers and generating deal flow. And you have to make as many offers as possible,” Blank writes.

I want to share with you a story of a duplex that came across my desk in our early years of investing. It was in an emerging market and it only was selling for $119,000.

With just 20% down we bought it with a mortgage of $648 a month. Since it was in an emerging market with good rental demand, each unit rented for $1100 a month. It was a huge cash flow machine. wish I would have found a fourplex! My mantra is to go for more number of units. Live in one and rent the other three, and you live rent free. 

Even though we purchased a lot of single-family homes early on in our quest for financial freedom; in many cases, the cash flows were just not that good, especially when the tenant left and it would be 100% vacant, on top that the expense of getting it ready for the next tenant etc... It really hurts the total cash flow especially when you have to buy a boiler, do roof repairs or buy appliances, some big-ticket items.

Research is key

Once an investor has a clear vision of what they’re looking for, the next part is to find it. Unlike the investment days of old, technology today has granted investors an invaluable resource. There's a tool that provides up-to-date and highly detailed information with the click of a button: The Internet.

The majority of today’s research for real estate investment is done using the Internet. Investors are taking full advantage of these online super tools. For sure, investor’s due diligence when investing in multifamily properties shouldn’t conclude with online research only. It should rather serve as the prelude in the research process.

Your best bet is to find an owner-occupied multifamily property that the owner has a great interest in selling, whether because of moving, divorce or frustration with tenants.

Actually, if you are currently renting and thinking about using this technique perhaps your landlord would be happy to help you out!

Assessing the situation

There are a few variations that can be used depending on you and your seller. Do they want the market price or are they just eager to get out from the monthly payments – perhaps facing foreclosure? Ask for owner financing it rather than going through the loan qualification process. You can also approach the seller with a master lease option.

The simplest method is to take over their mortgage payments – called ‘assuming’ the mortgage. Although these loans are rare these days, some lenders still offer assumable loans. You will need to be approved by the original lender to assume the mortgage. If you cannot get approved for an assumable mortgage you may also try a ‘subject to’ assumption where you merely make payments while the property remains in the seller’s name.

You take over the original mortgage and create a second mortgage on the remaining cost of the house with the seller. Offer a high, interest-only payment for a short period of time – 2 or 3 years. Instead of having the money sit in a bank they

Why I preach to all?

Please leap forward to multifamily as soon as you can!! Move from Fourplexes to Eightplexes to 20 units and 50 units and then 100 units… It’s just one transaction just with some extra zeros….ha ha! The rewards are many. Let's think along the lines of economies of scale, ease of management, and single transactions. There's also easy maintenance, depreciation benefits, more consistent cash flows, value-add to increase revenue and NOI.

Equity gains due to the increase of rents over time and we can bill back a portion of the utilities (water, gas, Trash and Pest Control).

While purchasing a multifamily unit may seem more costly up front, it is surprisingly easier to finance. Why? Because multifamily properties generate significant cash flow on a consistent basis. When banks see this, they are more willing to provide a loan. This is great news for investors because there is less risk involved with the investment.

If one tenant leaves your owner-occupied multifamily property, finding a replacement becomes far less urgent. If your tenants decide to vacate your single-family unit, you won’t earn passive income until a new tenant is found.

Why multifamily

Another reason to invest in multifamily properties is that it becomes financially sensible to utilize a property management company. This means, as an investor, you don’t have to deal with day to day operations of your rental. You can sit back, relax, and watch your passive income checks roll into your bank account.

You may say, Vinney, I just don’t have the funds to jump into this 20 units, 50 units or 100 units side of Commercial Real Estate; my answer is to look at HOW MUCH MONEY IS FLOWING RIGHT AROUND YOU. Many of your relatives, friends, colleagues at work have savings in cash, the stock market or Retirement funds. They have done well in their professions but don’t have the time or energy to find the best deals in Multifamily. You can step in and be a Syndicator.

You can pool their money together legally through the SEC regulations and Invest in these kinds of larger number of units.

This the avenue I decided to take 12 years back and haven’t looked back since. It has been a tremendous ride going from acquiring single-family homes to Duplex to 14 units, then 109, 72, 64, 132, 128, 192 to 267 units; 26 syndications so far!!

Good Luck in jumping into Real Estate very soon or taking quantum leaps into larger Multifamily Deals!! Remember it’s a few extra Zeros!!!