Buying Multi-Family Properties: What’s All The Hype About?

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I recently had the opportunity to join Mr. Joshua Dorkin and Mr. Braaaaaandooooooooon Tuuuuuuuuuurneeeeeeeeer (and the crowd goes wild!!!) for a BiggerPockets Podcast 61.  This was, indeed, an honor for me.  Guess who was the first ever guest to return for a second show?  Tada…yours truly; the one and only Ben Leybovich.  Drum roll…taking a bow, with a look of proud satisfaction on thy face!

Right out of the gate, the first topic of discussion was – Why Do People Buy Multi-family? I think that everyone at the “virtual coffee table” agreed that the most basic premise behind income-producing assets such as multi-family is indeed INCOME.  In this article, though, I’d like to put a human face to this concept – people I know truly are benefitting in their lives from the income resulting from multi-families…

TRIP TO CINCINNATI

About 4 years ago I took an impromptu trip to Cincinnati – about a 2 hour drive.  The occasion was that one of guys I went to conservatory with came into town for a day to audition for an opening in the Cincinnati Symphony Orchestra.  I hadn’t seen him in about four years and thought that we would have fun catching up…

Well – about ten or twelve of us ended up getting together.  It was great to see all of these people I went to school with. We went to a local watering hole – haha, I’ve always wanted to say watering hole.  Actually it was a nice restaurant where we were seated at a big long table, and we talked, and talked, and talked…

Most people talked about music, their careers (or lack thereof), musical instruments, jobs, auditions, etc.  But, I did not get to talk about those things.  You see – I happened to sit across from a gentleman who graduated one year after me (I think) – let’s call him Max.  This dude couldn’t shut up about real estate; I mean he kept going on, and on, and on.  He literally sat directly across the table from me and completely monopolized me for the entire 3 hours at the restaurant.  I actually felt bad; one of my professors from college was there, and neither her nor any of the other classmates got any attention from me.  Truth be known – I’d rather talk RE than how to get a job in an orchestra that’s going to go on strike every 3 years any time of day.  But, I truly did feel bad about basically ignoring everyone else; including the guy I came to see in the first place…

Turns out that while Max and I hadn’t exactly keep in touch once I left school, he did in fact keep tabs on me through the proverbial grape-vine, and knew that I had been buying property.  He, as most of us, had read Rich Dad, Poor Dad, and was admittedly utterly fascinated with the topic.  He wanted to get in the game, but didn’t know where to begin…

DO YOU HEAR BELLS RINGING?

There is an old Russian proverb which doesn’t translate well but kinda goes like this:

You hear bells, but you don’t know where they are or how to look for them…

Has this happened to you yet?  Have you ever experienced sensing that an opportunity exists but not having perspective on what it is or how to capitalize?  That was me at one point as it related to investment property, and this was Max.  He was so close, and yet so far away…

I WORKED WITH MAX

It took 2 years worth of long telephone conversations.  Perspective takes time!  But, then it happened – I received an email with a spread-sheet attached.  It looked good.  This was a brick 4-plex within a 5-minute drive from his house – he was comfortable with the location.

He ended up buying that building!  And this is where we get to discuss the question of why people buy multi-family…

ONE YEAR LATER

Max and I talk on the phone a lot – not as much as Brandon Turner and I, or Serge Shukhat and I, but that’s only because for now Max actually has a job; otherwise he’d be talking RE as much as we do :)  Well – he called me about a year following this acquisition and literally said the following:

“Ben – the only reason I can afford child-care services for my baby is because of the Cash Flow from the 4-plex I bought a year ago.”

Yep – Max and his wife were expecting their first-born at the time of this acquisition – a beautiful little girl named Maxene :)  The plan was to use the plus or minus $700/month of cash flow to help pay for child care, and it worked out rather well.  It hasn’t all been smooth – managing tenants never is, but by and large IT WORKED!

How’s that for why people buy multi-family?!

Related: The 50% Rule: How to Quickly Analyze a Multifamily Investment Property [Video]

GUESS WHAT…

Yesterday Max called to inform me that he had closed on his second 4-plex!  He had been working on this one for over 6 months.  It’s around the corner from the first one, and should do very well for Max indeed.  Congratulations my friend!!!

And guess what – Max and his wife are expecting again.  This time they are having a boy, cause Max said so…  And if he is right and they do have a son, I wouldn’t be surprised if they name him Ben…:)

What kind of positive experiences have you all had with Multifamily? Let’s discuss…

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About Author

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

34 Comments

  1. Ben, great article! I have no doubt multifamily is great for many if not most people. In my area the numbers are better on SFR. I have no idea why; there must be too many investors looking for multifamily.

    I have had a few if those time suckers attack me at functions. I always make a point to break away and talk to others even if it is uncomfortable. I can always call the person or email them later if they want tot get more in depth.

    FYI, I was planning on writing about SFRs this week. It has nothing to do with this article but I didn’t want I make it look like I was countering every article you write!

      • For Weld County where I buy most of my properties this is the info from Wiki: The median income for a household in the county was $42,321, and the median income for a family was $49,569. Males had a median income of $35,037 versus $25,757 for females. The per capita income for the county was $18,957.

        • Ben Leybovich

          Very interesting Mark. So – median income of 50k means take-home pay of around $3,500/mo, or so. In which case, $1,200/mo rent for your houses means that you are doing business with the upper end of income earners; you are dealing with families bringing-in more than the average. Is that a correct assumption?

        • Yes, for the most part my renters are making more then average, even though the homes I buy are below the median price. It is a nice situation since they usually take great care of the homes.

  2. I always do enjoy your posts. I’m still saving up the money fro the purchase of my first property. Although I’ll probably use fha financing and my numbers will never be super great I’ll. Still have that first property to get me in the door. Slow but steady at that point.

    • Orlando Semino on

      Great Article Ben, as the proud owner of 2 quads in the Miami area I can testify to the monetary benefits I receive from them. Currently lining up a Heloc on my primary for 75k in order to use as a down payment for the purchasing of my 3rd quad. My broker setting me up with the other 75% financing, any thoughts on that strategy?

      • Ben Leybovich

        The strategy works well Orlando, especially if the 3rd building is value-ad so that in 12-18 months you can refi and get all or some of your equity cashed out. Understand, ELCs are usually no longer than 10-year maturity, so you MUST have a plan relative to cashing it out sooner or later. The other option is an equity loan or a complete refinance of your primary. In some ways those are safer options in that both would be fully amortized. However, due to amortization your payment would be higher…

  3. Orlando Semino on

    Thanks Ben! I can’t refi bc property was refinanced back in dec 2013 at 30yr 3.625% so rate is too good to give up. Plus I’ve been paying it down monthly based on a 15yr mort. The heloc would be a fixed 3yr 4.25%, my exit strategy would be at year 3 either refi into one loan or sell.

  4. That Russian proverb completely speaks to me in my current situation. I’m just starting out. I got sucked into the wholesaling hype by some gurus but ultimately decided that MFs are the way to go. I’ve decided on my budget after analyzing my financial situation but I’m still having trouble finding where to invest. I live in North Metro Atlanta so there are a lot of growing areas. I’m familiar with most cities around me but I can’t seem to decide on which area to focus deeply on. Any advice?

    • Ben Leybovich

      Hi Stephanie,

      Here are a few thoughts:
      1. Unless you are dealing with 100-unit + I do not believe in property management. The CF on small multi simply can’t afford professional systems that will allow you to track.
      2. If that’s the case then you need to self-manage.
      3. If you are going to self-manage, then you need to be within no more than a 30-minute drive, which should narrow down your search.

      Hope this helps :)

      • Thanks, Ben! It helps a little bit. I already planned on self-managing as part of the learning curve every investor must undergo and I had already decided on a location within 30 minutes. Unfortunately, 30 minutes in North Metro Atlanta means many, many cities! I guess my question is: What kinds of things should I be looking out for as I scour through all the data on each of these cities? Or maybe I should speak to someone who is already investing in and is knowledgeable of this area? I’ve attended some local REIAs and I can’t seem to find someone specifically in my area. Maybe I should hold a sign up: “Looking for active investor in Gwinnett.”

        • All of the above. Know the prevalent rents – call for rent signs. I am tempted to say speak to professional mangers, but unless they have 1,500+ under management they are not professional. Talk to brokers and leasing agents and other investors. Talk to bankers. All of the above..

  5. Mehran Kamari on

    Heya Big Ben!

    I have very little experience with M/F so far. I co-own a duplex and I’ve got a triplex under contract (as you already know :) ). I got the seller to carry back a 2nd mortgage on this triplex deal and I had an epiphany! I feel it’s a lot more efficient and simpler to raise private funds/do creative financing on bigger M/F properties as opposed to multiple SFR purchases. Would you agree?

    • Welcome to life Mehran :)

      Remember – private money has likes and dislikes. Remember I wrote about $30,000 houses? One of the reasons I stay out of those is because you’ll have a hell of a time trying to attract capital to 1) SFRs and 2) low-grade. It’s all about collateral – money likes to be safe…

      But, in principal you are there – congratulations! And now you are ready for CFFU :)

      • Mehran Kamari on

        I see your point, man it feels good to have a sharp dude like you spreading the wealth of knowledge you do :) There is definitely also a “cool” factor and an upper echelon feeling, for the private money,when it comes to raising capital for M/F properties.

        I feel like entering this space is a step in the right direction, more questions to come :)

  6. Sara Cunningham on

    Thanks once again Ben for a thoughtful article. I feel like I am slowly working my way to the MFR side of the fence. I closed on a triplex yesterday to add to my duplex and the other 10 SFR I presently hold. Am also watching the sales and activity very closely in my market in the Multi Family arena. I’m sure my next purchase won’t be a 100 unit but it’s a step in the right direction.

  7. I own five 4-plexe and two duplexes. All managed by myself. All purchased as foreclosures over the past six years.

    Multi-family is where it is at, at least the 2-4 unit multi-families. I could see where a 5+ plex gets a interest rate reset and put an investor out of business.

    Mine cash flow like a madman, with only 1 unit in each 4-plex needed to pay the mortgage.

  8. Great article Ben! This is my plan to have my first if not already my second before my first little one comes. Overall this a great simple way to show people why it is a great idea to invest in multi family. Thank you.

    Abel

  9. @Ben great article and great stories :)

    A formula I like with multifamily properties is 1/number of units. It explains a number of advantages that they have over sfr. For instance if you buy a ten unit property 1/10= 10% which means that you only have ten percent of the transaction brain damage that it would take to buy 10 sfrs.

    It also demonstrates the difference in vacancy issues where 1/units = the percent one vacant unit represents in the property and the cash flow. 1/12 = 8.33% so a vacant unit in a twelve unit property is only about an eight percent hit to occupancy.

    On another subject you mentioned, having grown up doing property management on my families properties I would say that the fact professional property management can be hired and all you have to give them is money, not your firstborn child or let them drive your car around on the weekends, is one of the best deals on earth :) Personally if a deal doesn’t pencil with pm fully loaded it’s not a deal in my book. Granted it can be easier on cash flow with more units… but that’s just a good reason to buy larger properties-

    Keep up the great posts and don’t give Brandon too hard of a time, we’re all backwards here on the west coast!

    • Ben Leybovich

      Haha 1 over is an interesting way. And I concur…

      I will disagree about management, however. I will write on the subject over the next few weeks. But, basically you can not afford what can be described as truly professional management unless the number of units is large enough to absorb on-site salaries and payroll + management fees. I am learning this as we speak for the syndicate and I got to say – there’s management and then there’s professional management…

      Watch for this and please chime in over the next few Tuesdays :)

      • Definitely agree that there’s a (huge) difference between prop mgt and professional property management. On a recent acquisition we’re recovering from the former, fortunately with a big help from the latter!

        Will keep my eyes peeled on Tuesdays, have a great week!

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