Multi-Family Investing - Something to Think About...

Multi – Family! Mult – Family! My kingdom for a Multi – Family! Not quite how the saying goes but the last horse I tried to ride just about killed me and I haven’t been on one ever since! On the other hand, a good multi-family investment won’t kill you, at least I hope it won’t. It might make you richer or, it could make you poorer. It all depends on whether or not you did the due diligence needed before you bought it.

So what are the similarities and differences between Single Family Residential (SFR) and Multi Family Residential (MFR) investing? That’s a good question! Risk, Cashflow, Expenses, Management…the list goes on but one thing is certain, both, when done properly, will produce passive income that can set you financially free. Now, as anyone on this site knows Mr. Brandon Turner is a huge proponent of MFR investments and I’ve read through a few of his write-ups as well as listened to him on his podcasts. Still, I wanted to understand it more. I was not the only one and, after a discussion with a couple of like minded investors in my local area, we approached our REIA about hosting a meeting dedicated to discussing multi-family investing and bringing deals to the group.

Ironically, the guy that pitched the idea and wants to learn more about this segment of real estate investing also got tagged to run it! You would think that after 30+ years of military service that I would know better than to make a suggestion as that person ALWAYS gets tagged with making it happen! Needless to say, I came to the position of attention, saluted and did what all good Army planners do, I made it happen. Thankfully, I had the assistance of my two like minded cohorts, Charles and Kayla and we also had some guidance from our REIA President Marc who Charles and I sat down with to flesh out the first meeting.

We decided that for the first meeting we wanted to introduce the subject then do a comparison of the two investment segments. Since I like numbers and I really like statistical analysis I started to gather data so I could represent things in a way that was factual versus based on opinion. Yes, I know what they say about statistics and I fully understand the concept of how data can be manipulated so I worked to keep the data as close to similar as possible. This meant focusing on B and C grade properties within the categories I chose to analyze. Not surprisingly, my first draft was a bit overwhelming as Charles quickly pointed out. “Too much data!!!” Yeah, sorry about that Charles!

I do tend to do what we term a “deep dive” in the military and always find myself having to pare back the information to make it more digestible. On the plus side, I gained a lot of knowledge and information that I had not known prior to going into this which helped me do a better presentation the day of the event. Now, I am by no stretch of the imagination an expert in this field and I don’t even OWN an MFR at this point although, I am actively looking. This being said, I’d like to present what I think were some key takeaways from the presentation.

1. Know how to find them. As most know, SFRs and MFRs have specific property use codes. In Florida the state has two main codes 003 – 10 or more MFR units and 008 – 10 or less MFR units. Each county has a derivative of these codes and, depending on the county, you can usually search for a specific MFR type if you understand what the codes are. This being said and as I stated earlier, each state and county is different and not everyone has the ability to do a search at this level of detail. Hillsborough County here in Florida is a prime example. 

Thankfully, where I live in Manatee County they DO have the ability to do this. The picture below is a snapshot of the Manatee county property appraiser search tool that I use.

Knowing how to find MFRs is pretty important and gives you the ability to find properties that are not on the MLS.

2. Opportunities. Not unexpectedly, SFR opportunities are usually 80% - 90% greater than MFR opportunities. Our presentation focused on 2-4 MFR and 5-10 MFR opportunities. Know where your opportunities are and the market you are looking at. Because the opportunities tend to be smaller, the competition tends to be greater. You must understand this when you start looking at moving into the MFR segment. Below is just a snapshot of my County but does not include properties that are over 10 or more units.

3. Cost & Cost per door. For my purposes I found four sample properties in five categories that had all sold recently. SFR, Duplex, Triplex, Quadruplex and 5 – 10 Unit properties. I also tried to keep the grades similar so that their was a common criteria and even the most expensive 5-10 unit price was still only a B grade property. So as to make it a bit easier to present, I calculated the averages and used this for the comparison. Surprisingly, the cost for a duplex and triplex was less than the average SFR but I think this was because I threw in an A grade SFR into the mix. Unsurprisingly, when you hit the quads and greater the price shot up. 

Now, this is where it gets really interesting. When you start to do the math and break down the cost per door, the results change dramatically!

Now, I will caveat this, the reality of what a door cost is, “it depends.” There are many factors that affect the cost per door however, I have found that the concept of “Economies of Scale” are easily applicable to MFR investments. When production numbers of a product increases the cost of the product decreases. With MFRs, the trend is similar, when the number of the doors increases for the property purchased, the cost of the doors decrease. This essentially means you get more for the dollar you invest.

4. Less gets you more. I think Brandon and others have said this quite a bit but maybe not in the terms that I am using. Again, there are always many factors that affect this but in general there is a converse relationship between Net Operating Income or NOI and quantity of properties that are needed to reach a goal. I chose the goal of wanting to net $500,000 a year in passive income then used the averages to show how many properties I would need in each category to reach that goal. First, lets look at the hypothetical annual NOI.

Now, I won’t go into detail on what expenses I used as that would be way too much info and, each person may approach how they determine expenses differently. The point of the chart is to give an overview of how your NOI is affected based on the category of property you have and the rents in the area.

I mentioned that the relationship between NOI and property quantity is converse in nature, the below chart shows exactly what I meant based on wanting to achieve a monthly net of $500,000 a year.

I think this was probably the biggest takeaway for the group as there was more than one person whose eyes lit up when this was shown. In truth, I understood this concept but it wasn’t until I crunched the numbers that it really sunk in.

After this was put up we moved to a discussion with a bank who brought their commercial loan officer and commercial underwriter to discuss the differences in financing and what they look at. Unfortunately, this meant we ran out of time before we got to discuss RISK. We will tackle that topic the next meeting we have and plan on doing a comparative deal analysis on a couple of properties to talk through risk identification and mitigation strategies.

All in all, I learned a lot from having to do this and it has definitely helped me as I analyze potential MFR deals. I still have a long way to go in understanding this segment of the market but definitely have a much better understanding than when I started. I’d love to hear comments and input from those of you out there that are already well versed in this area especially on what you think the risks are and what you did to mitigate those risks. I'd also like to hear what you consider important factors when you look at MFR deals and how you find the information to do the evaluation.

I hope someone gets something out of this and I look forward to any discussion it generates!