How Small or Big Should You Start Out?

Question

Hey BP Fam!

For the last 12 months I have been educating myself on BP and other resources and I am currently searching for my first multifamily property.  I live in Cincinnati, Ohio and I am having a hard time finding a 4-Family that has decent cashflow without taking a big risk on bad parts of town and units that are in horrible condition.  So I decided to look at bigger properties such as 10 units, wow, what a difference.  I have found multiple that have great cashflow, and have much better cap rates, etc. and are just better deals.  My question is should I start my REI career with a bigger unit, or smaller?

All advice is much needed.  I have been stuck on this for a while and I need to make a decision soon!  Cant just think about it forever.

Thanks!

John Cohen · Answer

@Daniel Wetherill I love the focus on the larger multi's. I have a great multifamily broker who will work with newer buyer and help educate them. He also works closely with a property manager so you get the best of both worlds. I will gladly give you his info and you guys can have a conversation.

I also agree with @Joe Fairless set a #1 goal and go after that. Don't let cash flow blind you because it could be a bad tenant portfolio or just needs some work.

Welcome to BP and any questions I'm always available for a quick call.

Barbara G. · Answer

I would be inclined to think a first property is  learning process and I would go with a smaller one, a duplex or a triplex or  quad.

I would try to find one within your price range and financing range.  I would look for one that needs the least amount of renovation (just cosmetic) and also cash flows.  It is a learning process

If house hacking is part of your plan I really think that's the best first buy

Maggie Tasseron · Answer

Hi Daniel: I'd first need to ask what sort of experience you have with renovating. Are you prepared to do the work yourself or will you be hiring it out? If the former, you will probably have a good idea of what the cost will be, if the latter, you will need to find contractors who come with plenty of experience and good references. Even if you are going to hire out all the work, I believe it's vital that you educate yourself in order to minimize the risk of getting ripped off.

Depending on the answers to these questions, maybe a multi-unit is not the best way for you to start. Have you thought about doing a single-family first, perhaps living in it while you do the renovations, and getting that valuable education in the process? I wish I knew more about your situation so as to advise you better. I've been an investor for almost 40 years and have both held and flipped properties. If you would like more advice, please feel free to ask. All the best!

PS: I would advise to never buy in a questionable area; location, location... well, you know...

Bill Gulley · Answer

I generally suggest that new investors begin with smaller properties, less experience is required, less liability exposure, less maintenance to manage or accomplish, less accounting, etc.

However, that really depends on the person, their level of education, general business experience, management skills, ability to deal with the public, their learning curve.

Smaller properties, single family, are more marketable, the market is much greater, so if you find later on that landlording isn't for you, a quick exit with less financial risk can be available. 5 homes can be sold fairly quickly. Multifamily, all your eggs can be in one basket.

I learned to swim by being tossed into the lake, most don't learn that way, most walk in a pool at the shallow end first, later the may venture into deeper waters.

Where you are, there should be a landlord association or apartment association, look into that, join and attend, meet the other owners, when those in real estate have a common interest they pull together. If you're business minded, you'll learn and get more information relating to operations from a good association than taking a seminar, IMO. I'm not talking about REI groups, but owner's associations.   :)

Bryan C. · Answer

What is your plan starting out...?  Do you have cash to get started or will you be looking for seller-financing?

Joe Fairless · Answer

@Daniel Wetherillsounds like you are leaning towards 5+ then. I have a great multifamily broker who can help you find something if you want an intro.

Re: meetup, if you post and follow this thread you'll be notified when the next one is happening: http://www.biggerpockets.com/forums/521/topics/205...

(our August one is at max capacity already)

Tyler Weaver · Answer

If it matches your goals to be able to invest your money into these properties and grow over time with the market cap then go for it.  I think the real question is which of these properties can you add value to.  That is the ticket for exponential growth.

Since 4 unit's are appraised by comps rather than revenue it is probably much harder to add value to them where the 10 unit buildings might have some straightforward things that could be changed to get more revenue out of them and/or decrease costs.  That will actually increase the value of the property where on a 4plex it will not (as much)

There are quads in decent neighborhoods in Cincinnati that will cashflow pretty well.

Daniel Wetherill · Answer

Hey Joe, I actually listened to one of your interviews last night about cold calling.  My goal is to have 50 units in 5 years.  I am not planning on living in any of the properties.  I am definitely looking at everything with a cautious eye, but i am afraid I am being too cautious and might pass up a good deal.  I almost feel that if I purchase the 4 family it will set me back a couple of years before I have enough cash to leverage on other properties.  The meet-up sounds awesome, just let me know where and Ill be there!

Joe Fairless · Answer

@Daniel Wetherillthe first thing I'd identify is your #1 goal. Were you going to live in the 4 family? If so, that's going to take you a different direction, at least from a financing standpoint, than a 10 unit. Also, beware of the great cash flowing 10 units and go in with a skeptical eye because deferred maintenance, poorly screened tenants and old infrastructure can quickly turn a good deal into a nasty one.

Once you identify your #1 goal, I'd take the appropriate action. If it's simply "cash flow" then a 10 unit would be a great place to start assuming you're armed with the right knowledge, team members and it's a good deal.

P.S. I host a free meetup group in Cincy once a month for BP members and would love to meet you there sometime

How Small or Big Should You Start Out?

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