All Forum Posts by: Alain Perez-Majul

Thanks, @Theresa Harris! You're completely right that most investors aren't able to purchase properties outright, specially depending on their respective markets- in general, I'd that that applies to pretty much any market, almost. In hindsight, my post does assume the investors ability to not only purchase one property, but several, in cash. My mistake there for sure.

Hey guys! Surely this has been discussed before, but figured I'd start my own thread on this topic for convenience's sake (selfish, I know haha). 

Although my active real estate business is wholesaling, my goal is to channel the opportunities and income from wholesaling into a buy-and-hold approach, as I'm sure many others who find themselves in a similar situation do. While I've accumulated a decent amount of experience on the rental side over the last few years, as time goes on I continue to learn more about real estate financing, taxes, and my own sanity (lol), and as a result, my perspective and opinion on debt and how I personally approach it changes.

Undoubtedly, there are many pros to leveraging debt when investing. One can scale a lot quicker. One can take advantages of tax write-offs. It allows you to employ BRRRR (if done correctly). However, leveraging can also bring about its negatives. Your cash flow per unit is significantly affected. When scaling quickly, you have more properties to worry about and more potential headaches. It also makes you more vulnerable and susceptible to economic swings. Overall, it can add a lot more stress to your life, and while scaling and owning a ton of real estate sounds (is?) sexy, if it's detracting from your quality of life, one could argue it defeats the purpose; I personally know investors that went from owning 60+ SFR's with debt to selling most doors in order to own a fraction of them free-and-clear for the peace of mind and ability to "sleep better at night."

Of course, there is no one way to skin the cat, as different investors have different risk tolerance, and different approaches to this business in general given a wide array of varying factors. And so I'm curious:

As a buy-and-hold investor, where do you stand and why? Do you prefer to leverage as much as possible, or would you rather own free-and-clear? Have you found a happy medium with a mixture of both? Perhaps you throw debt on some, and not on others, or maybe you leverage each at 50%, or any other ratio that is not a typical 75% LTV (of course, this depends a lot on the lender), in order to cover more risk and utilize the advantages of leverage while safekeeping sanity. Regardless of approach, how did you arrive at your chosen relationship with debt (or lack-thereof) and what major points did you consider when arriving there?

There is no right or wrong way to this, and investors figure out what is personally "right" for them. I myself am still on the journey figuring out my ideal balance- which is why it'd be great hear how people approach this relationship in their personal investments. 

Would love to hear your thoughts!

Cheers

@Melissa Searing yes, you most definitely should. Specially if there are only 75 of them... wouldn't be that big of an expense. "Nonpayment" is not the only reason a water list is good- it could mean they just lost a tenant and recently became vacant (or the owner occupant moved), or maybe there were plumbing issues and they needed the water shut off. These are all good reasons to mail them.

@Jill F. awesome, that's great feedback! It's good to hear your experience as you're in that space. I don't think I would mind managing the manager, just wouldn't want to be the manager overseeing the day-to-day operations myself; so something like this would be feasible for me. Happy to hear you're making it work! Good luck on the current deal :)

@Rick Martin Exactly. And it makes total sense. Like you said, "you may be lucky enough to find a professional 3rd party operator." I personally don't want to depend on this type of luck to make it work- and I don't want to self manage, so the 3rd-party-operator road is the one I would have to travel. And to your point of losing deals to locals who are willing to self-manage/self-contract: they make it work because they eat up those numbers on their end that you take into consideration when you underwrite, and they can make it work while the numbers don't pencil out for you. Again, there are plenty of ways to skin a cat, I just wouldn't want to skin it that way. Seems like it leads one to conclude that one would have to find a mega-homerun to make the math work, given this desired approach.

@Enrique Huerta oh definitely, I'm aware it would never be 100% passive if you were looking to invest outside of going the LP route (and even then, you could argue there's some "work" in keeping an eye out for how things are going and communicating with the GP's whenever needed haha). But of course, understanding this, I would still look to be as passive as possible in the investment, and am trying to go through the mental exercise of how to do that with a smaller apartment complex, specially since the feedback I get is that it's not possible without thing being riddled with headache and a ton of work. Part of the reason I got into real estate was to sustain a desired lifestyle, not be simply be able to say I own a bunch of real estate haha.

Like @Craig Sloan mentioned, you'll have limiting factors, such as capital. Although not impossible, I would think it (might be incorrect on this one and be unaware) much easier to get into smaller properties. For a few reasons:

Purchasing power: if you simply don't have enough money to buy the asset, well I suppose the conversation ends there haha!

Experience: if you lack experience, perhaps it's too daunting to talking huge properties, even if you have the capital. And even then, without a partner whose experience you could leverage, lenders might not be willing to work with you as you'd be too big a liability.

Competition: seems that the one good thing about smaller properties is that there might be less competition, and less strong competition as well. The established syndicators are already playing in the larger property space, and I would think it very difficult to enter it unless, again, you get in with someone who's already established. I'd like to think that brokers at that level would be working directly with some of these guys who have transacted with them before, making it even more difficult to shoe yourself in. Which might bring another plus of targeting smaller property: there might be more "deals" with mom and pop owners. 

Thanks for your thoughts, Enrique! And you also, Craig!

@Erik W. Great points! Yeah, it's to understand that you're going to need a property that brings in sufficient revenue to be able cover the expense of the on-sight management and related employees, and seems like Enrique mirrors the 150 unit mark. 

Perhaps hiring someone part time will be an excellent way to find a workable balance. I like that idea, and think it smart to explore. One of the reasons I wanted to hear from others is that I have a close friend who owned a 42-unit (recently sold it) and mentioned she went through 5 PM's (off-site PM's) before landing on one that was finally decent enough; they stabalized the property sufficiently, and she was able to get it sold. But her feedback was that she would never do it again (she lived in another state, so clearly that adds to the stress).

From experience, it's just so incredibly important to not only have the right tenant in place, but also the right PM. And I can understand that an off-site PM will never care enough about your property (not all, of course) as you would, or as an in-house PM would (if you're a large company and actually do your own management, thus more control).

Also huge: thinking of the exit strategy. While I personally would approach it with the idea of holding long into the future (would invest for the cash flow and wouldn't be looking to do a 7 year-ish hold and then sale like most syndication models), it would definitely be important to keep that in mind in the event things changed and I did want to liquidate. As you said, mom n' pop or smaller investors would most likely be the end buyer for said product.

Thanks for the feedback :)

Hey guys!!

Would love to hear opinions on this topic from those with experience in multifamily investments. As I've spoken to many investors in regards to the size of multifamily one should pursue, I keep running into the following sentiment, from both smaller individual investors to larger syndicators alike: it is not worth it to pursue multifamily investments under [let's call it] 75-ish units that allow you to make sense of on-site property management and other economies of scale. 

Of course, this generalizes to a large degree, as well as takes a subjective stance as to what "success" is, and also makes assumptions regarding investors' personal preferences on how they want to run their investment, what they're willing to tolerate, and what they're looking to accomplish. Assuming the aim is to not self-manage as an owner and have third party management in place and be as "passive" as possible, how realistic is it to be in the 20, 30, 40, 50ish unit range without investing yourself into a job or a headache? It would be ludicrous to think that it is impossible to do well in the space of smaller-unit-count apartments, but does it require significantly more hassle than if you simply went "big" from the get-go? From conversations with large experienced syndicators who started "small" and progressed the multiple-hundred-unit apartments, to individual investors that currently own on the smaller end, it has been my experience that they say it's not worth it to start "small."

To be clear, I'm not saying what I've heard is always the case- I'm just curious given that it's a sticking point that has repeated itself many times over when talking to experience investors and I'm looking to hear from those who manage/have managed smaller or larger multifamily and can speak from personal experience to the validity of such a view.

Would love to hear thoughts, push-back, personal experiences, etc! :)

Cheers

You guys are incredible. Thank you for the feedback. 

Time to do some homework.

Thanks, guys! Yeah @Greg Dickerson, I thought just that, but I figured I would ask. And like @Taylor L. said, being more specific definitely would've helped, as not only does multifamily fall under the umbrella (although of course, I was excluding it in my post), but there might be tailored events to storage unit investing, or trailer parks, or office buildings, etc. Clearly I'm ignorant when it comes to the spaces, and assumed the might be a "general" event.