Why I don't love small Multifamily

I’ve owned Multifamily property since 2016. I got my start househacking, have owned smaller multifamily properties and have also invested in syndications.

Househacking is a cakewalk. It’s so easy to manage, the debt you get is amazing and you have to bring next to nothing to the table to buy the place. Any investor would love the chance to buy a cashflowing investment property that you can force appreciation on, paydown a loan and get tax benefits on for 3.5%-5% down. I love househacking and have never had a bad experience. I’ve also made my best returns with househacking with the enormous leverage and the ability to force massive appreciation in mismanaged and beat up properties. It is very forgiving but of course, make sure to run a detailed analysis on the BP calculators before pulling the trigger.

Investing in syndications is the only way I’ve real made passive income through real estate investing. Even when I manage my own properties I don’t necessarily have to do that much. I don’t do any of my own repairs on the ones I manage myself and have a property manager on anything more than an hour away from where I live. Even with a property manager I hear about these properties all the time and need to talk to my property manager on at least a weekly basis to make sure things go well. With syndications I read one email a month. All of the work is done on the front end making sure I’m making the right investment. For me, it’s more about the operator than the deal. Of course I want to make sure the deal looks good! But again, the most important part of the process for me is knowing and trusting who I’m investing with. I’ve only invested with people who meet my criteria and those deposits come in every month with no input from me!

From the beginning of my first househack the goal was to grow a portfolio to 50 doors by 2025. My biggest mistake was trying to do this all on my own. Because I wanted to do it all on my own, the next logical step for building a portfolio was to get into small commercial multifamily. I had just enough money to start looking at 4+ unit buildings in Louisville where I am from. This sounded amazing to me! I could own an apartment building! I found a 6 unit in an area I was comfortable with and got the owner to agree to 15% down owner financing, which was all the money I had at the time. I was able to buy this building but had very little money left over to do any capital improvements so I had to finance any repairs out of cashflow, which was good because I was self managing the building. This being said I recommend having a source of funds for capital improvements right away to immediately start adding value and getting higher rents. I managed this first building for a year or so and was doing well. I started looking again and I found another 6 unit on the same street for sale. Turns out this owner had ANOTHER 6 unit a few buildings over. I jumped on the opportunity to buy both. He was getting out of both because he lived an hour away and running them had become arduous. Because I had owner financing on the first 6-plex and had added value, it made sense to roll all 3 buildings into the same loan with US Bank. A condition of US Bank loaning me $800,000 was that I needed to hire a professional property manager even though I had some experience managing rental real estate. This sounded good to me because I wouldn’t have to manage 18 units. Little did I know that property managers don’t love managing 3 separate 6 unit C class buildings that were built in the 50’s and not very well maintained over the years.

Fast forward 3 years and I’ve run through 4 local property management companies who all came highly recommended. For years I thought I was just finding bad managers but more recently I’ve realized that it was not the managers, but the properties. Small multifamily properties that are clustered together and owned by separate owners are a pain in the ass to manage! Not only are they too small to warrant physically checking on all the time but they also don’t get a lot of personal ownership from the tenants. In my experience most renters either want a house OR an apartment with amenities. A duplex can have allure since you only have one neighbor and you usually have a yard even if it’s shared. More than a duplex is not fun to live in unless you’re in a very large city like NYC, LA or Chicago where most everything is old and walkable. My experience with tenants that want to live in small multifamily of this type in areas like Austin and Louisville is that they want to do so just because it’s cheap. I don’t want tenants who just want to live there because it’s the cheapest option. I want them to WANT to live in my properties, not need to.

My experience over the last few years with small commercial multifamily has led me to understand why everyone tells you to buy properties that can be managed by on site managers. Smaller stuff is fine as a stepping stone but you need to have a plan to get in, improve the value and get out. In my opinion small commercial multifamily is not a long term hold asset. I love single family houses, duplexes and larger multifamily assets. I love investing in other peoples projects and getting mailbox money. I don’t love small multifamily. It’s too much of a hassle to manage well unless you’re going to do yourself which makes scaling hard. I understand that it seems to be the next logical step but the better move is to partner and move on to bigger and better things!