Is it smart to have your first investment be an apartment?
Member since 2019 · 11 posts · 2 votes
I’m new to investing into real estate. I haven’t purchased any properties but I have been looking and I’m more drawn to multi unit buildings. That being said I am unsure if that is the best route to take and the other risk is that I would be investing over a million into this.
Hey @Ruslan Kotelyanets!
I'd have to agree with @Chris Coleman, @Edwin Joiner and @Cameron Tope. Before investing a single dollar into real estate, I educated myself on how to identify a good deal and maximize its value once I owned it. As it pertains, to multifamily investing, I've provided a list of some of my favorite books below:
These books will give you a solid understanding of sound investment principles which you can use to build your multi-family portfolio. Also, I encourage you to attend local real estate investor meet-up groups to establish relationships with local investors. One of the most popular groups, R.E.I.A (Real Estate Investor Association) has chapters in most major cities. Our local chapter has over 250 members, many of whom are extremely active in the market and have a wealth of knowledge they're willing to share. The investors I've met while attending these events are some of the most humble and helpful people around. Hope this helps and good luck on your real estate investing journey!
All the best,
@Ruslan Kotelyanets
Start by getting educated on real estate investing. I would not buy anything, especially not a million dollars worth, until you learn, learn, learn.
Yes, real estate investing is definitely a “learn-by-doing” sport. And yes, you’ll learn a ton on your first deal. However, you should ready, study, research here on BiggerPockets, talk to experienced investors, and learn, learn, learn before making that big of an investment.
And this is especially true for multifamily real estate. Diving in to multiple units right from the start is fine, and it’s actually probably recommend by a lot of experienced investors these days. But get educated on multifamily investing first.
I agree with Chris. Get educated! Find a mentor that specializes in your interest. Get an education from someone else’s due diligence/mistakes. Don’t try to reinvent the wheel. There are plenty of mentors out there. It’s a costly education but well worth the investment.
@Ruslan Kotelyanets I 100% agree with @Chris Coleman - you don't want to test the water with both feet.
I started small with SFRs and learned A LOT! Now I'm more comfortable making larger investments.
When you make a mistake on an SFR it might cost you a few thousand dollars up to 10's of thousands, whereas in a large multi-family a mistake can cost you 100's of thousands.
Start small and learn the ropes. Then tackle the big deals.
Best of luck!
My first investment was in apartments. However, it was a passive syndication investment, so I was not responsible for managing the deal. I've since worked up to active investments in multifamily, but I wouldn't have started that way. I would not recommend taking on an active role in apartments right off the bat. Start small and learn the ropes!
Hey @Ruslan Kotelyanets!
I'd have to agree with @Chris Coleman, @Edwin Joiner and @Cameron Tope. Before investing a single dollar into real estate, I educated myself on how to identify a good deal and maximize its value once I owned it. As it pertains, to multifamily investing, I've provided a list of some of my favorite books below:
These books will give you a solid understanding of sound investment principles which you can use to build your multi-family portfolio. Also, I encourage you to attend local real estate investor meet-up groups to establish relationships with local investors. One of the most popular groups, R.E.I.A (Real Estate Investor Association) has chapters in most major cities. Our local chapter has over 250 members, many of whom are extremely active in the market and have a wealth of knowledge they're willing to share. The investors I've met while attending these events are some of the most humble and helpful people around. Hope this helps and good luck on your real estate investing journey!
All the best,
Any investment takes education! Stocks, Bonds, Private Equity, Real Estate, Gold are all BAD investments IF you don't know what you are doing. A fool and his money are soon parted.
My advice: evaluate 100 apartment deals before buying one on your own. Do this and you'll know what a good deal looks like.
I would say go ahead with 4 plex. It is a waste of time to test water with SFH then go multi. It doesn't help that much my opinion.
@Ruslan Kotelyanets You have got some great input from everyone so far. I think the beautiful thing about the position you are in with over a million to invest is that you have lots of options and opportunities. I would just reiterate what has been said. Get educated, and network with people doing what you want to do. With that kind of capital you could easily get into the GP of a syndicated deal by being a Key Principle or bringing risk capital and that would allow you to see how a successful operator does everything from beginning to end. I would definitely partner with someone you trust on your first deal. But I think it is brilliant that you plan to go to MF right off the bat. I think the bigger the better, just dont go it alone.
Good Luck!
@Ruslan Kotelyanets
Yes. You should absolutely invest in large multifamily apartment deals. The returns are better, forcing appreciation is easier/better, loans are better, economy of scale is better and best of all YOU DONT HAVE TO DO IT ALONE! Apartment investing is a team sport, and all you need to do to be on the team is know what you’re good at.
Everyone that says no, you need an education first, you need to start small to get comfortable, you need to build up to it - this is absolutely true.... for them.
Everyone’s journey is different but when you learn how to work with and leverage other people’s skills and expertise then you will truly be able to scale into success. There are plenty of seats on this train, if all you like to do is analyze deals, or raise money, or manage rehabs, or network, then there is a place on the team for you. Multifamily investing is a team sport, just have to find others good at what you hate doing. It’s very rare that I meet someone that enjoys, and is good at everything. Some people aren’t good at anything, but guess what, there is still a spot on the team for those people too (they’re called passive investors and should be what everyone aspires to become, just using money to make money).
Point is find the team, network with people of like mind and different skill. Don’t think small because everyone else does. A year ago we had no deals, today I’m negotiating a 21 unit, a 30 unit and a 48 unit college housing apartment complex. All in separate cities. But I’m only able to do that because I have the team in place to do what I suck at so I can pursue what I’m great at, and most of all, what I enjoy.
Massive dreams require massive action. “Everything you’ve ever wanted is on the other side of fear.” - George Addair
Hope that helps, best of luck.
This has been extremely helpful! I have considered doing small investments like a duplex, triplex, and even fourplex but they are priced very high in the area I live. It makes sense to invest into an apartment because of the price and the return they bring. I am definitely not trying to test waters with both feet, this is a big venture for me and i am trying to learn as much as possible. The feedback I have received has been amazing! Thank you for everyone’s input!
I would say go ahead with 4 plex. It is a waste of time to test water with SFH then go multi. It doesn't help that much my opinion.
And technically, a 4plex is still a residential property so not MFR. 5 units and above for MFR. Why? Because you can not obtain owner occupied financing at 5 or more units. Only commercial financing then.
This has been extremely helpful! I have considered doing small investments like a duplex, triplex, and even fourplex but they are priced very high in the area I live. It makes sense to invest into an apartment because of the price and the return they bring. I am definitely not trying to test waters with both feet, this is a big venture for me and i am trying to learn as much as possible. The feedback I have received has been amazing! Thank you for everyone’s input!
To somewhat duplicate a prior reply I posted, you will not be able to obtain owner occupied financing for 5 units or more. Hence the reason that 1-4 units tend to be priced at a premium compared to MFR (MFR starts at 5 units).
So, depending on your ability to fund a deal, you might want to start with a MFR or you might find a 1-4 unit property lines up better fo a first purchase. Your access to credit, your cash and if there is any seller financing can tip things one way or the other.
If you buy an apartment, do your homework on the building and ensure it is well run. Watch out for lots of special levies and see what major repairs they have coming up and if they are budgeted for. I've had a few condos and the first one, which I bought in grad school, was not well run and we kept having special assessments. That being said, condo fees use up a good chunk of money that could go towards other things.
@Theresa Harris
Yeah I definitely will have the building inspected prior to the actual purchase. My lender also mentioned that he would personally go out to the building with the inspector to make sure everything is looked over.
@John Corey
A poor condition four plex in my area is 800k plus an additional 100k or more for repairs. That loan is massive for a residential property and I would probably never get approved for it. With the research I have done it has become clear that commercial loans have less red tape.
@John Corey
A poor condition four plex in my area is 800k plus an additional 100k or more for repairs. That loan is massive for a residential property and I would probably never get approved for it. With the research I have done it has become clear that commercial loans have less red tape.
I have no idea why you think red tape is involved.
Think of it this way. You want a car and you want an expensive piece of office equipment for a business. Both where chosen because they offer good value for what you are doing. When it comes time to secure a loan for each, the what the lenders care about is very different. It is hard to compare the two.
A 4 unit building can be purchased by an owner occupant (OO) on OO terms and conditions. Potentially for a tiny down payment. The income from the three units will be a factor in the total income the person has available to pay the monthly mortgage. The risk of default is statistically lower for OO loans. The property would be the OO's home so they might be willing to pay more than they would if it was 'just an investment'. In some markets, the OO can live for free because the rent from the other 3 units covers all of the monthly costs associated with owning the property. When you sell an OO property some or all of the profit can be tax free.
For the commercial property, 5 units or more, the lender can not and will not make a loan based on OO criteria. The building has no premium as someone's home. It is a commercial property for all intensive purposes and the value is determined by discounting the net operating income (rents mines expenses). Commercial financing is generally higher than the cost of OO financing given the higher risk factor. In addition, the terms and conditions can be very different. Technically, a commercial loan can be called by the lender if the NOI drops. You need to check your loan agreement before signing. Expect there will be a restriction against you living in a unit.
So, my point in all of this is you can not easily compare one with the other. Apples and oranges? You need to do what is best for you. Just be careful about the details. I have seen people think a commercial loan works like a residential loan and get caught out when the lender calls the loan or takes other action.
@John Corey
Red tape was just a figure of speech not actual red tape. I understand where you are coming from but like I said it does not make any sense to buy these units in my area they are over priced and need a complete rehab.
@Ruslan Kotelyanets I don't think the number of units or asset class is as relevant as what your goals are and who is on your team. I know people who have started out with 1 single family home and others that have purchased a 250+ unit apartment building for their first deal. It's all about what your end goal is, how you have planned for that and the team you have built to get there. If your goal is to own large multifamily then my suggestion would be to start there but team up with someone who is already in that space and educate yourself through that partnership. You don't need to start with 30 units to learn, you just need to surround yourself with others who have already been there to help guide you through the process. Good luck!
@Kyle Mitchell
That’s kind of the hard part is finding reliable team mates. I had one candidate but when we started talking about a apartment complex I found he started going off on getting a building that’s 4 times the price. Which is why I joined this network of people who have similar interests and goals.
@Ruslan Kotelyanets It takes time to find a good partner and I would say to be patient and be picky. A partnership is like a marriage and if your goals and values do not align then there will be trouble ahead. You'll find someone but you have to be active and get out there.
@John Corey
Red tape was just a figure of speech not actual red tape. I understand where you are coming from but like I said it does not make any sense to buy these units in my area they are over priced and need a complete rehab.
A bad deal is a bad deal.