How big of a multi-unit property should you procure just starting out?

Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes

I am entirely new at investing but my family has been involved in this industry for quite some time. Now that I am in a position to infiltrate this industry I am ready to jump in both feet first. How big of a property should I purchase if I am just starting out?

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Donald Hendricks

Investor · Clarksville, IN · Member since 2012 · 226 posts · 96 votes

13y

Buy the biggest thing you can get your hands on. When it all falls apart, contact me, I will take it off your hands... At a steep discount of course. :-D

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
How much money do you have to start out?? How hands on do you want to be with the property (active versus passive) ??

Do you want vacant, semi-performing, fully performing??

Do you have a full time high income job that keeps you busy or are you wanting to live off the cash flow and do real estate full time or just plan for retirement??

As you can see without more information from you this is a very hard question to even give possibilities on.
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Nick Miller
Fort Wayne, IN · Member since 2013 · 66 posts · 12 votes
13y
I recommend starting out with a single family or a duplex to test out being a landlord before getting involved in a property that would be more difficult to liquidate if you don't have the skin and the experience to stay in the game.

My first property was like an introductory college class... Going into it I thought I knew everything, after a few weeks I learned I didn't know what I didn't know, coming out of it I couldn't believe how much I "spent" to lean the simple lessons I learned. Much better to do and much less expensive with 1 or 2 units than 50.
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Joel: Currently, I just purchased my first house in MD which has blown my savings of 30k, but I am in the process of selling a house in Los Angeles that was left to me and my brothers (about $40k) which will put that back in my checkings. I would like my first property in MD or DC to be very hands on. I do not want to pay for management right now until I understand the process in and out. As far as vacant it would be easier to rehab and get prime rentals, but I am open to purchasing something fully occupied at the current rates. Which do you propose? Currently, I work as a Contract Specialist for the government making 92k and after this sequestration ends possibly move up to 110k a year. I have plenty of time on the weekend and I get off everyday at 4pm. Eventually, I would like to make investment my full time job but I've got to start somewhere. I'm a 1/4 owner of four muti units (each fouplexes) in Nevada but I want to start something on my own here.

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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Nick:What are some issues you had with your first duplex? It is easy being a part owner of several, but this would be the first one I've done on my own and I'm trying to get all the information I can get.

Thanks,

Benaiah Grimes
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Donald Hendricks
Investor · Clarksville, IN · Member since 2012 · 226 posts · 96 votes
13y
Buy the biggest thing you can get your hands on. When it all falls apart, contact me, I will take it off your hands... At a steep discount of course. :-D
4 Reply
Kelly N.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
13y
Hi Benaiah,

You'll have to figure out for yourself if it is best for you to go with single family or multifamily first- there are benefits to both.

As far as number of units if you go the multifamily route, you will have an easier time getting financing for the 2-4 unit properties. Anything 5 units and above is considered commercial, loans are more difficult to come by especially for a newbie, and insurance is harder to find as well. Not saying it can't be done, but with $40k seed money I'd look at the 2-4 units. You should be able to get a conventional 30 yr fixed loan with 25% down (20% for SF) and you'll want to have some reserves for any issues that may come up.

Good luck!
Kelly
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Al Williamson
Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
13y
Benaiah Grimes how much of a fix-it lady are you? If you really enjoy tackling projects - then go for the biggest thing that cash flows after you contributed to reserves.
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B Lewis
Real Estate Investor · District of Columbia , Washington D.C. · Member since 2013 · 5 posts · 0 votes
13y
Really depends on the deals that come across your table and if they work for you fiscally. In our area (D.C.) there are quite a few multifamily properties out there fully occupied for sale. How much spare time do you have? What type of tenants are you willing to deal with? Are you ready to handle any conflict that will go on in a multifamily say 3 + units. Because when people don’t get along you will hear about it every time you go to the property if not receive a phone call. Just some things to keep in mind outside of the standard upkeep of said property. I see a lot of single family homes available right now (in our area) which might help generate some cash for that multifamily.
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Donald Hendricks what do you do exactly? Thanks for the laugh I needed that today.
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Kelly N. so as long as I have 20% down of whatever the property costs I will be approved? So basically cash is king is what you're saying and I don't really need to worry? If I put down a large amount I would like to start with a fourplex. Is it better work with a realtor or a broker?
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
B Lewis I have spare time after 4 and on weekends. I don't mind paying a good team for rehab but how does that work when tenants live in the building? Do it while theyre at work? If I buy something I would want to do a few cosmetic changes, but many people say to leave it as it is and recoup money before making it "pretty" so to say. Do you agree? I just feel like anything I own I'd like my tenants to like. Everywhere I've stayed (renting in undergrad) was nice. Even if its not in the best area, I would like the interior to be decent. I've heard so many stories about slum lords and I don't want to be like that but I also don't want to pour all this money into properties and not get my ROI. What is your opinion?
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Kelly N.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
13y
Hi Benaiah,

Yes, cash is king. You need 20% down for a single family (SF) investment property, 25% for a multifamily (MF) investment property. Plus closing costs for each and the banks like to see that you have reserve cash in case you have a vacancy or need to do some repairs. You'd have to talk to somebody local about closing costs, it varies by state, but here in MI we have the usual fees associated with closing, plus we have to prepay property taxes and insurance (15 months and 18 months worth I believe) so closing costs can be quite a chunk of money. For reserves, they will consider your retirement accounts as 'back up' money, but only 75% or so b/c of the tax penalties for early withdrawal.

We started off looking for MF properties, are closing on our second one next week. So far it hasn't been too bad time wise but then we've only been landlords for 3 months now :)

I found myself a buyer's agent and have been working with him.

Hope that helps,
Kelly
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B Lewis
Real Estate Investor · District of Columbia , Washington D.C. · Member since 2013 · 5 posts · 0 votes
13y
The first thing you need to realize is that you aren’t going to live there. Or are you? As far as rehab do it whenever. Take a day or two off before the weekend pull a 24 or 48 hour shift and do all the loud stuff before 8 or 10 pm. Depending on the location of the property your client base, etc, etc depends on how “pretty” the property becomes. Let’s face it there is I make 30k a year pretty and there is I make 100k a year pretty. Determine that first then everything else will fall in line. You might be able to pick up something that is at 100% occupancy. In that situation you might not have to fix or do anything. You don’t want to give tenants the impression that you will fix every LITTLE thing because they will call you for every little thing. But do you want your investment to be safe and secure.
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Paul Timmins
Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
13y
Benaiah,
Stay away from vacant (unstable) properties. Hire a management company and manage them. There is no benefit sleeping with the golden plunger.
Consider going in with someone who has a smokin deal under contract. Working with an experienced owner is a great practical first hand experience, It also provides instant credibility as part owner.
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
B LewisKelly N. so basically build a good reputation with a bank here and find out the qualifications to finance properties. I would like to get a MF by the end of the year. I will have the 25% down and closing but I am trying to find out how much of a property to buy and where. In Baltimore, MD you can buy $50-$70k and rent for $1000-1200 per unit, but in Washington, D.C. you can purchase fourplex for $500,000 but charge anywhere from $2000-$2500 per unit. Almost doubling your investment but the mortgages are soooo ridiclously high out here. Paul Timmins ok so don't worry so much about fixing everything, fix what needs to be fixed cosmetically to make it look preesntable but no need to go all out. How would I find someone that has something under contract and why would they split proceeds with me if they already have it under contract on their own? What do you consider an experience owner someone that already has a property or someone thats been investing for year? What is the standard for experience?
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Kenneth LaVoie
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
13y
I will throw this in: My first 11 unit allowed me to make some really stupid mistakes and still stay in the black simply because it cash flowed so well (78k per year gross, paid 220K ARC). Sure, 11 units are much harder to get rid of, but a duplex, if the "wrong things went wrong" would be in the red for years, literally. Maybe not the best reason to buy an 11 unit vs. 2-3 but something to consider in your "pros and cons" list if you have one.
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Tim G.
Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
13y
I just dove in head first with a four plex that contains a heroin dealer!

Balls to the wall baby.
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Benaiah Grimes is you head spinning yet. As Joel points out many of your questions will depend on you experience, goals and resources. Keep reading here and it will gradually become more clear.
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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Kenneth LaVoie that actually makes sense but for 5+ the financing is harder and id have to go conventional which means 25-35% down correct? If you paid 220k that means you put down $55-77k which is how youre yeilding big returns right? What stupid mistakes did you make. I can come up with the money between my brothers and I, but I just wanted to make sure I invested wisely for my first purchase. Tim Gordon are you joking or serious? Ned Carey I see this is going to be a strong learning curve but I am up to the challenge. I guess there are no clear cut answers I just have to jump out there and see and ask questions along the way. Ok next question pertaining to rehab. What is the best way to find a decent crew? It seems like everyone and their grandfather claims they do efficient rehab but I am definitely type A and if I pay someone to do something I want it done right and neatly the first time. Does everyone agree to do the minimum and standard? Stark white walls, regular appliances (nothing top tier like stainless steel), redo carpet and paint is all I need? Or to get prime rental rates I should do a nice rehab with sterlnig silver appliances, and good cabinets? Buying an 11-15 unit would be costly to rehab each unit so what did you do to keep costs down Kenneth?
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Tim G.
Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
13y
No joke!
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Kenneth LaVoie
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
13y
Stupid Taxes Paid:
Because I don't know construction skills, I hired others. But I hired cheaper people who needed my direction (blind leading blind), so I ended up spending more on repairs than needed. that is probably the biggest "tax" - not having a good team, always finding that "next" handyman/carpenter, getting pissed off at him, offending him, rinsing and repeating!
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Originally posted by Benaiah Grimes:
What is the best way to find a decent crew?

Networking and trial and error. Also good management of your contractor is important. I constantly keep my eye out for contractors when I am out and about. I stop in at proprieties being renovated. Either I find an investor I can network with and add to my buyers list or I meet a contractor. Someone suggested showing up at Home Depot at 6AM. That is when the good contractor show up!

You need to know your market. In Baltimore city Section 8 tenants demand top quality. If section 8 will pay a premium price for granite counter tops and newly renovated homes, why shouldn't they ask for it.

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Benaiah Grimes
OP
Landlord · Silver Spring, MD · Member since 2013 · 23 posts · 2 votes
13y
Ned Carey I agree that I would like my renters to feel as if this is a place they can stay long term. I would like to begin in Baltimore and I plan to purchase within the next 30 days. I now have some cash (about 10k) i can use for a downpayment or to buy a shell and finance the rehab. Who do you suggest to use to finance rehab if the house is paid off but not habitable until after rehab? Is it impossible to do this? Private lending would be the best way to get this done?

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Benaiah Grimes there are three basic options

Traditional lenders - very tough to get financing for fixer uppers right now.

Hard money lenders - this is a good option for the right deal

Private lenders - the best option but tough to get without a track record or an existing great relationship.

Another option is a partner, some people who won't lend may be willing to invest if they are an owner. Sometimes using a combinations of all of the above is what it takes to get a deal done.
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Mat Lewczenko
Investor · Lenexa, KS · Member since 2010 · 215 posts · 121 votes
13y
You may also want to talk to your local small branch lenders. I am closing on a 6plex today which was a portfolio foreclosure. The small bank is providing the financing with only 15% down, for 15yrs at 8%, no PMI, appraisal already done - while the rate is a little higher, all the numbers work incredibly well even with management. Yes, insurance was a little more challenging and more expensive than I was hoping for, but like a prior post, the economy of scale helped make it still work.

Look for small banks (a few branches in your metro) and see if they have any foreclosures or troubled assets.
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