Multi-family buying strategy for beginner

25 Replies

I am a new investor and have set a goal to buy my first property within the next 6 months. I have only a small amount of capital to put down as a down payment, so I looked at what other assets I have at my disposal, which just happens to be fantastic parents.

They have agreed to supply the capital for the remaining 75% of the purchase price allowing me to make a purchase all cash. This will hopefully give me an advantage and allow me to buy at a discount.

Once the deal has closed, I would put debt on the property and return their capital to them.

Is this a sound strategy or are there things I might be overlooking? Is it reasonable to assume I might be able to buy at a discount as an all cash buyer? I'd appreciate any insight and experience BPers might have to offer.

Thank you!

It depends on the seller. This may not give you as much leverage as you are hoping for.

@Patrick Reilley  

 - I really advise against multi-family properties for newbies unless you have some family history and background in RE.  You can really lose your a$% in real estate, and multi-family properties compound that potential.  A lot of people on here will tell you that they are "safer" because you have multiple units to cover for a vacancy.  But what they don't tell you is this - if you make a mistake, or something goes wrong with the economy in your town, or whatever, you can be eating negative cash-flow on all of those units - even when they are occupied.  Then, the real problem sets in.  How do you sell a loser property?  If it were a single-family, you could sell it to an owner-occupant.  Not the same with MF.  Just my 2-cents worth here from a guy that has been eating negative cash-flow for about 5 years now and who knows another guy who just about went bankrupt with his MF purchase.  Sure, there are good deals, and great properties.  Just don't get caught up in the lie/trap that MF is "safer".

@Patrick Reilley  

Welcome. Grew up in Oak Square. Consider student housing see below. Time to build the foundation below.

Check out the Start Here page http://www.biggerpockets.com/starthere

Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.

Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having over 70 past ones to catch up on.

Two Great reads, I bought both J. Scott The Book on Flipping Houses,The Book on Estimating ReHab Costshttp://www.biggerpockets.com/flippingbook

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and all the cash buyers (rehabbers) you will need.

Start with the best property manager and learn go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask if they know anything coming up for sale.

Consider checking out HUD homes for small multi's owner occupied gets first crack.

You might consider Niche or Specialized Housing like student housing. Rents can be 2-4 times more. Remember you don't have to own a property to control it.

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good luck

Paul

@BryanL Appreciate your perspective and experience. Certainly critical to examine the downside risk and mitigate at as much as possible. I'm just examining what skills and assets I have and trying to determine the best strategy to take. This was one option that I was considering, but you raise some excellent points.

@Paul Timmons Good to meet another Brighton bred investor! I'm right around the corner from Oak Square near the reservoir. As a beginner, Boston seems like a tough market to crack in the current environment, but I'm determined to figure out how to make my way. Thanks for all the tips and resources available on BP. Are you aware of any REI groups in the Boston area?

Howdy, since we just met over the internet and have no clue to your abilities I won't tell you what to do.

I myself did buy a four plex in poor condition as my first rental. It's gone very well but without mentors and a solid background in dealing with people it would have been tough.

When I was looking to start I sat down and took a personal inventory of what items I had to my advantage (credit & ability to find deals) and leveraged that. Perhaps sit down and look at what makes you special in real estate and try hard to leverage that.

I did just fine w my fourplex and it had heroin dealers occupying it when I closed. So although it's a higher risk if you are truly capable or have a high tolerance for risk it can be a good option. Think it over and leverage what you have!

Hi Patrick, welcome to BP.

A few clarifying questions.  When you say multifamily are you talking a standard Boston "Triple Decker" or something like that or do you mean some larger apartment building in some other state.

If you are looking locally do you plan on living in the place or are you going to have it as a pure investment property?

When buying the property all cash you will likely have to wait at least 6 months and many banks will require 12+ before allowing you to do a cash out refinance.  Better way to set it up for your parents would be to have them lend you the rest of the money with a real note and recorded mortgage and a real interest rate attached to it.  Generally there are no restrictions on a refi out of an existing loan as long as there isn't any additional cash being taken out.

All that being said I'm not a loan officer so what you MUST do is talk to one that works with investment properties and explain what you are doing and get pre-qualified for the loan before making the purchase.  Nothing would be worse than getting the place then finding out you can't get a loan for one reason or another.

Also if you are looking locally have you checked out prices on small multis?  Unless you are willing to do a LOT of work you are probably looking at pricing starting around $350K for a 3 unit in a lousy area in the city.  In reality you are probably looking at $400K+ fixer uppers in so so areas of Boston as the more likely starting point, unless you want to do $100K+ in rehab for a cheaper place that might be had in the mid/high $200s.

Medium rre logo web rgb w motoShaun Reilly MBA, Reilly Real Estate, LLC | [email protected] | 1‑800‑774‑0737 | http://www.MassHomeSale.com | MA Agent # 9517670 | Podcast Guest on Show #43

Patrick, I won't give you advice on whether or not to buy a multi, but rather try to answer your actual question, which was if you should borrow money short term from your parents and if an all cash offer give you more leverage.

All cash may be important to some sellers, but not to others, so it's not really possible to know if that's an advantage until you get into the negotiation with the seller.

As for borrowing money from your parents short term, this could work out great, but only if you can get the building financed.  If you can't make the necessary down payment to finance at purchase, then don't assume a bank will later let you take out a loan with only a small equity position remaining.  If you have enough for the down, then there probably isn't a lot of value in borrowing from them just to make an all cash offer.

Good luck!

Medium logo flatWade Sikkink MBA, Sikkink Properties | [email protected] | http://www.rentmoney.biz

@Patrick Reilley  

Parents with cash = great asset.

You might want to cut your teeth on your own.  There are several options out there for getting into 2-4 unit properties without putting down 20-25%.  All of these options involve owner occupancy.

0% Down:
NACA (https://www.naca.com)
VA Loan (http://benefits.va.gov/HOMELOANS/index.asp) Rural Development Loans (Renovations MAY be included)
(http://www.rurdev.usda.gov/HSF-About_Guaranteed_Loans.html)

3.5% Down
FHA (http://portal.hud.gov/hudportal/HUD/topics/buying_a_home)

3.5% AND Renovations
FHA 203k loan (http://portal.hud.gov/hudportal/HUD/program_offices/housing/sfh/203k)

5% Down

Homepath Owner Occupied

What areas of Boston are you considering? Prices are extremely high in comparison to rental rates. I never speculate on appreciation, but rather focus on cash flow for multifamily properties. If you look North, South or West of Boston, there is a significant price difference. You could use your parents' cash to put down on multiple properties, or purchase a commercial building (5 or more units). I think that you should decide what your long term real estate goals are first and then use your resources to begin down that path.

Brian Ortins, Ortins Group | [email protected] | 978‑979‑5007 | http://www.ortinsgroup.com | MA Agent # 009530456

@Shaun Reilly Thanks for the heads up on the potential time requirements on trying to refi out. To answer your question regarding the Boston market, I wasn't viewing this as my target market for the multifamily as I think (and you stated) it would be difficult to make it work in the current environment. I was looking at doing it back in my hometown of Syracuse. That being said, I'd prefer to do something in Boston, but I'm just trying to get a pulse on what kind of deals would work here right now. Any thoughts?

@Patrick Reilley  you can absolutely find fantastic deals in Syracuse on 2-4 family homes, but you can find some real stinkers with lots of maintenance issues as well. Some of the better areas to look in would be Eastwood (13206), parts of the Northside (13203, 13208) and the Tip Hill area (13204). Before looking for deals I would recommend locating a property manager who operates here that will provide your investment with the appropriate amount of attention it will require. I self manage my property in Syracuse so I unfortunately do not have anyone I can recommend. I have seen a number of managers operate in my neighborhood and from what I've seen the majority leave something to be desired as far as tenant screening goes. A good manager would also be able to provide input on which areas are worth investing in and which are not worth your time or dollars as neighborhoods vary from street to street here.

Originally posted by @Patrick Reilley :

@Shaun Reilly Thanks for the heads up on the potential time requirements on trying to refi out. To answer your question regarding the Boston market, I wasn't viewing this as my target market for the multifamily as I think (and you stated) it would be difficult to make it work in the current environment. I was looking at doing it back in my hometown of Syracuse. That being said, I'd prefer to do something in Boston, but I'm just trying to get a pulse on what kind of deals would work here right now. Any thoughts?

Yes that paints a clearer picture of what you are looking at.

If you know the area and you have friends and family there long term then those are some good reasons to look at that market.  I don't know it well but I have the impression from what I have read on BP that there is good cash flow with the right properties there.

When talking the Boston area you have to define "what works" for you.  If that means solid cash flow at a reasonable price I would not put a lot of effort into that.  :)

Any place in or reasonably close to the city is an appreciation play.  Both in terms of property value as well as rental rates.  It isn't a bad bet but you have to be willing to be in it for the long haul and be prepared to sustain low or no (or possibly HIGHLY negative) cash flow for some time to start to reap the rewards.  You can meet people that can almost retire off the cash flow and >$500K in equity in one 3-fam they own in Somerville, but they bought it like 20+ years ago.

Medium rre logo web rgb w motoShaun Reilly MBA, Reilly Real Estate, LLC | [email protected] | 1‑800‑774‑0737 | http://www.MassHomeSale.com | MA Agent # 9517670 | Podcast Guest on Show #43

Ok, we've got the two Reillys (Reilleys) chatting here.  :-)

Patrick, @Shaun Reilly   is a good person to talk to as he makes lots and lots of offers to see what sticks.  (at the right price)  He's known locally as the guy who buys stuff no one else will, and presents occasionally on how to buy property across from a sewer treatment plant on the railroad tracks with a shared driveway.  Or any other impossible combination of apologies.  

You asked about local groups, and there are a bunch.  @Justin Silverio runs a quarterly meetup in Woburn that you just missed, but he'll jump in here and you can have him put you on his list.  One of the best REIAs is New EnglandREIA.com  in Chelmsford.  BostonAREIA.com is now in Medford I believe, and I have two meetings a month in Waltham and Worcester, Black Diamond url in my signature.  No shortage to choose from.  Go to as many as you can.  You'll meet many local people, and a bunch hang out here on BP.

I think Syracuse might have good possibilities, but have you considered buying a duplex here and renting out the other side?  A good way to get your feet wet, and very favorable financing is available.  Then you can save your folks' cash for a deal elsewhere.

Medium small logoAnn Bellamy, Buy Now, LLC | 800‑418‑0081 | http://www.buynowhardmoney.com | Podcast Guest on Show #9

Originally posted by @Ann Bellamy :

Ok, we've got the two Reillys (Reilleys) chatting here.  :-)

Patrick, @Shaun Reilly  is a good person to talk to as he makes lots and lots of offers to see what sticks.  (at the right price)  He's known locally as the guy who buys stuff no one else will, and presents occasionally on how to buy property across from a sewer treatment plant on the railroad tracks with a shared driveway.  Or any other impossible combination of apologies.  

You asked about local groups, and there are a bunch.  @Justin Silverio runs a quarterly meetup in Woburn that you just missed, but he'll jump in here and you can have him put you on his list.  One of the best REIAs is New EnglandREIA.com  in Chelmsford.  BostonAREIA.com is now in Medford I believe, and I have two meetings a month in Waltham and Worcester, Black Diamond url in my signature.  No shortage to choose from.  Go to as many as you can.  You'll meet many local people, and a bunch hang out here on BP.

I think Syracuse might have good possibilities, but have you considered buying a duplex here and renting out the other side?  A good way to get your feet wet, and very favorable financing is available.  Then you can save your folks' cash for a deal elsewhere.

Missed the question about meetings.  

The ones that Ann pointed out are all very good and the ones that I regularly attend.  There are many others as well.  Just off the top of my head I can think of like 7 others from Manchester down to the Cape, so lots of opportunity to learn and meet people.

Also since she opened the door I happen to be the speaker at the next New England REIA meeting on Wed 7/2 and will be talking about the place I flipped by the sewer plant. It is an interesting story if I do say so. :)

Hope to see you there. 

Medium rre logo web rgb w motoShaun Reilly MBA, Reilly Real Estate, LLC | [email protected] | 1‑800‑774‑0737 | http://www.MassHomeSale.com | MA Agent # 9517670 | Podcast Guest on Show #43

@Patrick Reilley Welcome. You've probably gotten the message that Owner Occupied is much easier to finance? Your job is here in Brighton?

While an area closer to the city holds stronger values and has higher appreciation, I'm sure most investors will tell you not to count on that. Consider it an added bonus if it becomes a reality. Personally I don't think considering a low or negative cash flowing property is necessary. Decent cash flowing multis can be found on or off market in or right around boston.. its just not easy and more likely to find off market. Usually they'll require really knowing how to maximize the rents by adding value (adding bedrooms and/or smart renovations), using multiple leasing companies to find highest market rents and to show/rent the units. As others have pointed out your cash position is always nice to have but may not be necessary with some sellers. I would encourage you to research different neighborhoods and run numbers on what has sold and what they are cash flowing for based on the market rents. You'll find that some of the up and coming neighborhoods actually come out pretty good

@Patrick Reilley

Welcome to BP!

Since you asked about real estate groups, it depends on how far out you are willing to go (I mean if you have a car or willing to zipcar it). I'm new too and I've been going to the groups that are listed on meetup.com. Just search for real estate for Boston, there's quite a few listed there.

Originally posted by @Bryan L. :

@Patrick Reilley  

 - I really advise against multi-family properties for newbies unless you have some family history and background in RE.  You can really lose your a$% in real estate, and multi-family properties compound that potential.  A lot of people on here will tell you that they are "safer" because you have multiple units to cover for a vacancy.  But what they don't tell you is this - if you make a mistake, or something goes wrong with the economy in your town, or whatever, you can be eating negative cash-flow on all of those units - even when they are occupied.  Then, the real problem sets in.  How do you sell a loser property?  If it were a single-family, you could sell it to an owner-occupant.  Not the same with MF.  Just my 2-cents worth here from a guy that has been eating negative cash-flow for about 5 years now and who knows another guy who just about went bankrupt with his MF purchase.  Sure, there are good deals, and great properties.  Just don't get caught up in the lie/trap that MF is "safer".

I respect that opinion and disagree with it. If you only want to invest in multi-family, don't waste your time in single family, you will not be satisfied. To me it is the same as telling a kid that wants to be a doctor that he should study nursing because it is easier.

Don't strive for mediocrity. Don't let anyone convince you to dilute your dreams. There are just as many people who have gone bankrupt trying to invest in single family. 

When I decided to start investing in real estate, I knew that I had to have razor sharp focus of my goals in order to succeed. I knew that I wanted to invest in apartment complexes. I read over a dozen books on the topic. i built custom excel spreadsheets to help evaluate deals. I went and talked to people who invested in the area that I was most interested. Finally I leaped in and made the purchase.

[email protected] | 402‑965‑1853

@Anthony Gayden  - My point is this:  There are many newbies on here who think that MF are "safer" because you have other units to cover a vacancy.  Yes, you have other units to cover a vacancy.  But I also know some very intelligent people who used a lot of spreadsheets and still bought losers.  And here's the worst part.  A loser MF is harder to get rid of than a loser SF.  So, IF you get into a loser MF, your losses will be multiplied on the way out of the thing.

Yes, there are plenty of people making good money in both MF and SF.  But this newbie thought process that is out there that MF are "safer" is just flat out wrong.  Not necessarily "riskier" either, but if the **** does hit the fan, it stinks a lot worse with MF.

Originally posted by @Bryan L. :

@Anthony G. - My point is this:  There are many newbies on here who think that MF are "safer" because you have other units to cover a vacancy.  Yes, you have other units to cover a vacancy.  But I also know some very intelligent people who used a lot of spreadsheets and still bought losers.  And here's the worst part.  A loser MF is harder to get rid of than a loser SF.  So, IF you get into a loser MF, your losses will be multiplied on the way out of the thing.

Yes, there are plenty of people making good money in both MF and SF.  But this newbie thought process that is out there that MF are "safer" is just flat out wrong.  Not necessarily "riskier" either, but if the **** does hit the fan, it stinks a lot worse with MF.

Nothing is 100% safe and nothing is guaranteed. We have all experienced failure, and in my opinion that is the best way to learn. Am I saying that someone should fail just so that they learn? Heck no, but I am saying that I am not going to encourage anyone to dilute their dreams because of fear of failure. 

I believe in dreaming big and having big goals, and I also believe in having focus. One of my friends who I work out with at the gym's first real estate investment was a 100 unit trailer park he bought 3 years ago and self manages. Now some would say that is way too big of an investment for a beginner, and he admits that he struggled at first, but over the last few years, he has learned a lot and become quite successful.

[email protected] | 402‑965‑1853

Originally posted by @Bryan L. :
@Patrick Reilley
- I really advise against multi-family properties for newbies unless you have some family history and background in RE. You can really lose your a$% in real estate, and multi-family properties compound that potential. A lot of people on here will tell you that they are "safer" because you have multiple units to cover for a vacancy. But what they don't tell you is this - if you make a mistake, or something goes wrong with the economy in your town, or whatever, you can be eating negative cash-flow on all of those units - even when they are occupied. Then, the real problem sets in. How do you sell a loser property? If it were a single-family, you could sell it to an owner-occupant. Not the same with MF. Just my 2-cents worth here from a guy that has been eating negative cash-flow for about 5 years now and who knows another guy who just about went bankrupt with his MF purchase. Sure, there are good deals, and great properties. Just don't get caught up in the lie/trap that MF is "safer".




I tend to agree here. You need to have a solid understanding of underwriting, assemble the right team (PM, CRE attorney, brokers, bankers, etc), be good at capital raising (which will be no easy task since you haven't done this before), have a strong personal financial statement to qualify for the loan, and finally, have enough of your own capital invested (at least in the first few deals) to convince others you have skin in the game. Multifamily investing (apartment buildings with 60+ apartments) is not an ideal starting place for newbies, unless you are OK investing as a limited partner in the first few deals and try to understand the process that way.

Medium psg landing logo 01Paul Khazansky MBA, PSG Lending, LLC | 410.864.6062 | http://www.psglending.com

Originally posted by @Bryan L.:

@Patrick Reilley  

 - I really advise against multi-family properties for newbies unless you have some family history and background in RE.  You can really lose your a$% in real estate, and multi-family properties compound that potential.  A lot of people on here will tell you that they are "safer" because you have multiple units to cover for a vacancy.  But what they don't tell you is this - if you make a mistake, or something goes wrong with the economy in your town, or whatever, you can be eating negative cash-flow on all of those units - even when they are occupied.  Then, the real problem sets in.  How do you sell a loser property?  If it were a single-family, you could sell it to an owner-occupant.  Not the same with MF.  Just my 2-cents worth here from a guy that has been eating negative cash-flow for about 5 years now and who knows another guy who just about went bankrupt with his MF purchase.  Sure, there are good deals, and great properties.  Just don't get caught up in the lie/trap that MF is "safer".

 Thanks for this advise.  A broker brought a deal for an MF in a rural area (outside of Fort Worth).  My first concern is "where do these people work" and what if that/those employers downturn?  Your 2-cents is worth a lot!  Hopefully it's not your property he's pitching to me ...lol  :-)

@Patrick Reilley  I completely disagree with Bryan L. 

If you buy the property right, multi-family is always the way to go. It offsets any vacancies. I believe this is very important. If you buy a SFH and lose two months rent...it will hurt. If one tenant moves out of a fourplex you can make it work. You will still be collecting 75% of your income.

Also, multi-families for the most part are strictly valued by their income potential. SFHs not so much. It's a different clientele. SFH appreciation is nearly impossible to predict and should not be taken for grant it. MF appreciation is much more predictable. If the economy takes a dip you can always add nice features or amenities to a MF property to differentiate yourself and your property from other competing landlords and apartment communities.

For me, MF properties take the emotion out of the purchase. I am a numbers guy and while I do LOVE real estate and I love the properties I currently own, I purchase on numbers first, location second, and building type third (I live in Florida concrete block is MUCH more enviable when termites are your state's bug). My first purchase was a 5 plex and while I ate it in 2014 (major renovations, updates, and turnover) 9 months later I am living in a 1,000 sq foot house and the 4 plex is collecting $2400. I could rent the house out for $1,000 conservatively. So, my initial investment of $140,000 plus the $30,000 I put into the property takes me to $170,000. It could generate $3400 a month. I am at the 2% rule AND three of the four apartments are new. It all depends on the deal but MF investing to me is the way to go.

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