New to BP - Evaluating a 8 unit apartment Building

53 Replies

Hello BP, 

I joined this week and new to real estate investing - rental is the way I want to go. I found a 8 unit apartment building  $400k and have about 40k to use. Learned at the webinar this week that I need 20% down - and will have to take another 40K in equity from my primary residence which makes me nervous. The numbers look good - net 2,000 after applying the 50% rule and then paying mortgage. Should I start small -a duplex, or take the leap with this property. Thanks for your advice! 

Hello @Senia E Cuevas Welcome to the REI world ...Congrats on joining a fantastic community! starting out with an 8 unit apartment building is pretty tough to do as a new investor with just $40K. I would recommend starting with a smaller property because you not only need 20% down plus 2.50-4.50% closing costs and you need to have an emergency budget for repairs.

Best of luck to you moving forward!

The learning experience is great either way. I think if you get 8 units you should really try to network with other apartment owners in the area to help you out. There's a lot of little things that experienced investors can help you with that you don't know yet. If you don't have a network, maybe consider a duplex but then again... where do you see yourself in 3 years? Do you want a lot of units?

@Kai Kopsch Thank you for the advice... I am not too concerned with the challenge of managing as much as having no reserves after paying all the costs up front. I am still looking at duplexes and ever fourplexes - but I am ready to take action and learn on the ground! 


@Stephen Brown I will go big or go home. I have a good paying job and a decent life but I want so much more. The goal is 34 doors with 12k income in 5 years - considering this opportunity because it will be a rocky start but a great leverage for growth in terms of equity and learning. I am still looking at duplexes and looking at ways to start that allow for cheaper lessons. I will be spending some time at the property location and have some personal connections there - will make sure to learn from landlords there - thank you for the great advice! 

@Senia E Cuevas

Don’t be scared about starting with an 8 unit or making a stretch to get it, but you need to do better than just apply the 50% rule. You should be able to get a P&L statement from the previous owners, or recreate one. Call your insurance agent and get a quote. Call the City and find out what the taxes are. Talk to a local property manager about realistic rent and maintenance cost expectations. Get an inspection. I like multis this size, but take all the guess work out of it before you move forward.

Based on the initial numbers, that is 50k per door, which is reasonable on average nationally. 

However, you will probably need about 100k give or take with closing costs and possibly some light renovations post-closing. 

Though I haven't seen this deal and its fundamentals, I want to encourage you to definitely go for with! You've got this! 

Now, buying an 8-unit is not for the faint of heart, and I, 100%, advise you to find a great local property management company to help you with this before since it is your first you don't want to be managing this thing (believe me). 

KEY 🔑: Welcoming the fact that you are insufficient is the humbling first step to take in order to WIN in this multifamily game. This should not be seen as a vulnerability but an opportunity for growth. Embrace it! 

@Senia E Cuevas

I like your enthusiasm and drive.  Just make sure to work the numbers on your deal inside and out.  Also go through some worst case scenarios and work out contingencies for them.  If you can do that, then you should be good to go.

When I look at your situation, if you go all in with $40K and acquire the property, what happens if you get 8 broken water heaters at the same time or if all 8 tenants stop paying rent at the same time.

As long as you have a plan to mitigate that and it won't sink you, then go for it.  

I hope you are very successful in your journey.

Good luck!!

Hi @Senia E Cuevas I’m new here myself and also trying to figure out where to jump in. I was just listening to BP episode 126 the other day and picked up a few tips as there’s a 7 unit in my area I’m evaluating.

The tips were to:

- close on the 4th or 5th of the month and you could get a credit at closing for the balance of that months rent

-since it’s a commercial deal the security deposits are different than in a standard residential deal and could offer you some leverage

-ask for reserves of deferred maintenance and see if you can use that to your advantage

As mentioned I’m new so I’d recommend doing more research, listening to multi family podcasts to pick up more tips or finding someone with experience to help understand those tactics first. Best of luck!

https://www.biggerpockets.com/bpp126-brian-murray-podcast-transcript-value-add-investing

@Senia E Cuevas I've only found lenders that will do 25% down on investment property. They also require 6 months of reserves and since you're a new investor with no properties they won't count the projected rental income and will only evaluate your W2 income and DTI. Luke someone else already mentioned, you need significant reserves for repairs and maint day 1 when you acquire the property. Typically seller's don't leave you with brand new HWT's, Furnaces, appliances, AC units, roof, etc. so you have to be ready for that right away. Not trying to dissuade you, but maybe start with a SFH, duplex, or a reasonably priced 4plex to get your feet wet. House hack if it's an option and you could save a lot on the down payment. If you do have other investors/family members who could buy a stake to help with everything I mentioned above then this 8plex is certainly possible, but you have much to learn and it's easy to get burned in this business if you're not experienced and educated. You can learn as you go, but for that reason I highly recommend starting smaller.

@Anthony King

Granted this will be a commercial deal so the terms will be different, the down payment may depend on the bank. The first bank that I spoke to about an investment property loan mentioned they could do 20% down and would include $300 of the monthly rent towards my income. 20% was with 3/4 of a point though.


great point on the expenses as most people don’t consider that.

 @Dre N. : when they ask how much I want to put down I always say as little as possible and almost every bank I've talked to lately always says they can do 20%, but it may come with a higher rate. Then when they type in the quote they say, "sorry, you're right 25% is the minimum. They've really been tightening up during covid" or something along those lines. Just this week I was getting quotes from multiple banks for a duplex I have under contract and they all are saying 25%. They may tell you one thing when you're inquiring about a preapproval, but when you try to lock in a rate on a specific property everyone has told me 25%. If someone knows of places doing 20% right now I'd love to know. I can't find them.

 

Hi! @Senia E Cuevas .. welcome to REI! I am excited to see you accomplished your goals. That is what i am praying as well to have at least 40 doors in my portfolio in 5 years. I just close this January an 8 plex. I want to share my experience if that helps you. I started with conventional loan but then in the process 1unit is reported not paying then another unit will be vacated and when we close 3 units are not paying. I ended up getting the loan from hard money lender. Luckily we get sort of cash back through our contractor to cover 20k repairs and 10k discount to help us with closing cost. We updated 1 unit, painted and fixed plumbing. I spend 10k but expect to spend another 5k next month. It is going to be bumpy at the beginning but I expect that once i refinance next year i will expect cash flows.

@Brenda Yogyog

25% down payment for commercial loan from fund.me, hard money lender, 30k inspection, appraisal fee and closing related cost. Hope this information helps. As long as you do your homework, starting with 8 plex is same sa duplex.

@Senia E Cuevas Go for it if you can tolerate the risk. I would check out Peter Harris’ Commercial Real Estste for Dummies book. He lays out evaluating commercial real estate, unit by unit, and all the due diligence you need to do, financial hurdle rates, etc.

Educate and dominate.

I would start smaller on a duplex, triplex or fourplex just to get some experience under your belt before jumping into an 8 unit.  once you have a rental property or two under your belt, then i would go up to the commercial side.  Less risky this way and you can learn as you go.  That's what I'm doing at least. 

@Senia E Cuevas

Well I have read most of the advise posted and you should do what you are comfortable with.

Best advise is talk with someone that is a successful in the city/area you are wanting to investing in and has proof to back it up.  

As that person is going to know best as that is how they got to be a success. 

Also get on the phone with that person, post and text are not match for a real chat or in person meeting in a safe place.

Hope that was of some help.

Will,   

Is $2k net after PM fee or before PM fee ? If it's after PM fee, it's decent number. But 8 unit with only this return is actually not too exciting. You can have the same with duplex/triplex with the same return profile.

Just want to add the property management point of view on a property this size. This property is starting to border on the size where a building superintendent would provide value. You likely will need a quote for common area cleaning and even taking the garbage out to the street depending on the asset class and set up. These are not traditional PM items covered on the x% of gross rents contract. Giving a tenant a break on a lease (assuming you are not doing a value add play) to handle some of these items could save you money over the course of a year. 

I am not too concerned with the challenge of managing as much as having no reserves after paying all the costs up front.

And if you need a new roof or plumbing or bunch of water heaters? Do a real thorough CapEx inspection and make a timeline on how much you need and when.

How about if someone decides not to pay and you can't evict?

I'm not saying you can't stretch yourself thin and I think you're aware of the issues, but you need to look at this in the cold hard light.

@Damaso Bautista - Thank you for saying that - I am not sure I will have any cash reserves without dipping into my 401k - especially after @Anthony King   and @Dre N mentioned they want 25% down AND closing costs - I am not sure I want to put myself in that position. I have spoken with 2 individuals who want in, but not sure if I want to deal with a new first property AND investors!