I am a new investor, and would like to get feedback on either investing in multi family properties 4 units or less, or partnering with experienced apartment building investors . The return /cash flow would be more as an apartment building investor, but would require the majority of my capital. The math is telling me the cash flow would take several small unit investments to match on big investment with apartments. Thoughts?

@Vincent Billera

Prior to deciding on the property size, you need to decide for yourself as to whether you can/want to be active or passive RE investor. Review this article for more details.

https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv

Once you decide on which path to take, you can then look into what you can afford and what your bandwidth allows you to do.

The basic rule of thumb is: you will earn more if you are active investor and if your properties are larger, you're making more from the economy of scale perspective. But it has to be adjusted to your personal situation.

Best of luck!

 

Two different strategies for sure. Apartment buildings are an entire different animal. With apartments you can JV, have multiple owners in LLC, syndication, crowdfunding etc

This is a huge topic, @Vincent Billera, and one to which the response has dramatically changed in the last few years.

Prior to regulatory changes, unless you knew the right people (colloquially were a 'member of the right country club'), you were shut out of the option to invest in anything but that which you can personally afford.  Now that the laws have changed, you have access to a vast array of options.  

Here are three important factors to consider:

1. Liability

When you invest in a local project using all your savings as the down payment you are risking not only that capital but setting yourself up with liability for considerably more.  Why?  Because you will likely have to guarantee the bank loan you take out which means that if you stop making payments on the loan, the bank will come after you for the debt you owe them.

I personally transacted over $1bn of these kinds of defaulted loans during the downturn and smaller investors were the hardest hit.  When tenants lose their jobs, they stop paying rent. Then you are stuck with having to evict which is a time consuming and costly process, not to mention emotionally draining as you are going to be litigating against people you may have come to like and trust and whose personal circumstances are out of their control.

Biggest issue here is that the bank will be less forgiving than you - they have shareholders and federal regulators breathing down their necks, so while you dilly dally with litigation evicting a family whose breadwinner lost his/her job, the bank is demanding you keep their payment current or they'll take the building from you.

2. Expertise

The only way to make money consistently and for the long run in real estate is to experience some hard knocks.  And if you disagree with me on this, it's because you've not learned that lesson yet :)  The real estate market is cyclical.  Values will go down and it is imperative that you prepare for that inevitability.  Here's how you do that.

* Stress test your assumptions by running best, worst, and most likely scenarios on all your projections.

* Keep your debt levels low and always take out debt with long maturity tails, even if the interest rates are higher than shorter term debt, because this will insulate you against being forced to refinance during a downturn

* Favor properties in areas with higher population density, a growing employment base, and a history of not having declined in value precipitously during the last downturn.

3. Diversification

Prior to the regulatory changes (about which I have written a book BTW, Leaders of the Crowd) you really did have to invest all your savings into one deal to get started.  Now you can invest a smaller amount across a range of projects thanks to the advent of real estate crowdfunding.

Now you can go online, research both developers and crowdfunding platforms, and invest in exactly the kind of real estate you want to buy, but instead of putting all your eggs in one basket,  you can invest a smaller amount in projects in diverse geographical locations, with different demographics, and operated by different professional development companies.  You technically become a shareholder in their development companies which brings with it the following advantages:

* You still collect profits from rents, 

* You have zero financial risk beyond the money you invest,

* You have zero management responsibility so you can spend your time focusing on your day job and family,

* If one property under-performs, it could/should be offset by others you invest in in different locations

* You can invest with [Read: partner with] the best developers in the nation whose projects enjoy the benefits of economies of scale

* All you have to do to protect your investment, is do your homework going in by evaluating the developer's due diligence - you don't have to do the due diligence yourself. (Remember, the best way to get out of a bad deal, is to not get into it in the first place).

***

There are two options for investing in real estate; become a developer, or partner with one. This option never existed before regulatory changes permitted developers/sponsors to advertise online. Either way,  you must learn what it takes to invest in real estate - the financial terms, the management issues, how to conduct proper due diligence - and the main difference between partnering with or becoming a developer is how you apply the lessons you learn. 

@Vincent Billera  I turned my nose on single family rentals for the longest time and ended up buying one because the cash flow numbers were way to difficult to argue with. Multi-Family is nice because if one unit is empty, the other units will make up for the difference and there is less risk associated. Having that said, you should run numbers on all sorts of properties and educate yourself on the area you plan on investing in. If it is long distance, I have a tool that shows good areas to invest as well as puts you in contact with the best agents in the area as a means of finding out info on properties and area itself. I am happy to send it over if you are interested. Just shoot me a DM. The home my business partner and I purchased was $65K. Our cash on cash is currently 40%. A few of these and we will have nice cash flow and will be able to sell or borrow against them for larger multis. 

Partners are everything in the beginning and throughout this real estate process. I have a partner who is a go getter like me and we work wonderfully together. I am on the sales aspect side of thing, whereas he is on the analytical side of things. We are both educated to a certain extent on each others roles as well, just in case we need to help each other out in certain instances. Partners help spread the risk and the wealth.

Hope this helps!

Best,

Ryan

Adam is right, during the last correction defaults on small multifamily were 10X more prevalent than those of 50+ units.

Your investment is more protected when it has more units / possible tenants.

Starting off try 2-4 units. Small enough to handle but still giving you a degree of economies of scale. A vacancy can still be covered by other units and you could even house hack if needed to reduce your other household expenses to free up income to pay for unexpected repairs and such.  You live in an expensive are of the country so the investment may be great even for a 2-4.  If that is an hurdle for you then start of with a small single family and grow from there.  OR invest out-of-state but only if you've lived there and have a trusted team to manage the property.