Moving from owning single family to multifamily

Buying & Selling Real Estate
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Moving from owning single family to multifamily

Nicholas P.
Investor · Saint Paul, MN · Member since 2017 · 3 posts · 3 votes

So I'm in the process of selling a few single family homes and am trying to prepare for my next investment in a multifamily. I should have about $1.5 Million to invest and am trying to consider all the options. At this investment level, I feel like I have a lot of options, but I don't want to complicate the scenario overthinking. I'm hoping the responses to this post will help narrow my focus and develop a plan.

I have rented out single family home for several years now. Thanks to the booming market in Denver, Colorado and Sydney, Australia, I have gained significant capital. I want to simplify multiple single family homes to one, or multiple multiplexes.

Denver (or Colorado) is too expensive so I'm researching other areas. I have heard mixed opinions on whether to invest out of state if you aren't familiar with the area. My first question is am I crazy to invest this amount in an outside state? I currently handle my own tenants, but I plan to have a property management company handle the tenants with a multiplex.  

$1.5Million is a large amount for myself, but I understand that it's relative. Would it be smarter to invest in a 3 multiplexes in different areas, or would it be wiser to invest all of it in to a single location?


With my single family homes I shopped many places by myself before involving my realtor. Should I be involved with a realtor early, or another party, to help with my shopping?

I'm trying to cram my brain full of information, so come August, I can move things along quickly.

Thanks for your input

Nick

Denver, CO

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Jonathan Twombly
Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9y

@Nicholas P., Congratulations on your success so far!  

We are in a similar situation.  We're based in New York, where investing simply makes no sense.  For $1.5 million, you could buy a three-unit deal in a marginal neighborhood that probably barely cash flows if its full all the time.   So, investing out of state makes the most sense, and we followed the population growth to South Carolina, where deals were not as expensive.

The incredibly important factor that cannot be overstated is to find a very qualified PM company.  Fortunately, at the level of funds you have, you are into a higher quality of PMs.  But you still must be wary.  On our first deal, we hired a large regional company with thousands of units under management, and they proceeded to put the wrong people in charge of our asset, which nearly destroyed the deal.  Do extreme vetting with any PM company, and then make sure that when they staff your property, the onsite manager and everyone he/she reports to has extensive experience managing exactly the kind of asset you own.  (This advice really applies regardless of how far away your property is.)

As for the size of asset you can buy, it will be limited by your net worth.  In my experience, commercial lenders will not lend you any more than your net worth, and the money you put into the deal does not count, because if that goes to zero along with the mortgage, they cannot collect anything from you.  This situation applies even if the debt you get is non-recourse, because even non-recourse debt comes with "good guy" guarantees, which make the debt become full recourse if you commit certain enumerated bad acts.  So, unlike residential, just because you have X dollars on hand for the equity downpayment doesn't mean that you can purchase a property worth 4X, unless you have 3X in other assets, with 10% of that liquid.  (And the closing costs are also significantly higher with commercial debt, so you will probably need to put in about 30% of the purchase price all together.)

The workaround here is to buy 3-4 smaller assets, deploying ¼ of your equity funds in each deal, which allows you to count the equity you have in the other deals as part of your net worth when you are applying for the mortgage for any particular deal.

This, of course, will make it harder to do a 1031 exchange.

Another workaround is to put up a higher percentage of equity. The "good guy" guarantees often go away if you get below 55% LTV, so there is no possibility of recourse against you and the lender may not care about your net worth as much in that case.

Hope this helps!  Feel free to reach out by PM if you want to discuss more.

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  • Chris LopezPro Member
    Real Estate Agent · Denver, CO · Member since 2015 · 1k+ posts · 858 votes
    9y

    @Nicholas P. are you moving all of your capital and properties out of Denver? Or just part of your portfolio?

    If you're seeking more cash flow, perhaps just move some of your assets out of state? It would seem risky to me to move all of your properties and capital of out an area that you know, treated you well, and has good long term prospects.

    Have you considered the option of refinancing your SFH's and taking the cash to buy more properties?

    I had a couple months of experience working commercial (MF 15-100 units) in SoCal. The apartment investors out there stopped selling and doing 1031's because the market appreciated so much, they could refinance, pull out cash and put 35-40% down on another apartment building.

    Podcast Guest on Show How to Use Equity in Your Home to Reach Financial Freedom Faster
    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Nicholas P. So you have $1.5MM to invest which should yield the ability to buy something for maybe $6MM.  I don't know the Denver market as well as you do but I would have to think there would be options in the $6MM range that could appeal to you.  Maybe not in Cherry Hills or Boulder but you'd still have the suburbs.  Still, you know your market better than me.  I do invest outside of my state (California) so I can't knock it and I don't love the idea of 4-caps here in San Diego.  So, for me, it makes sense to look out of state but I don't cross the line of blindly running towards cash-flow (no thanks, good people of Detroit).  There is more risk (finding a PM, knowing the neighborhoods, etc.) but also more reward.  What I don't know is the risk/reward ratio for you.  Are you trading off a 6-cap property around Denver for an 8-cap property elsewhere?  Is Colorado Springs an 8-cap market but your out-of-state deals are 9-cap?  Most importantly, how much tangible money (post-tax) does that represent annually?  What does that look like after you factor in a couple of round-trip plane tickets for periodic visits?  Are you risk-adjusting returns for being so far that you can't drive by it on a weekend?  My point is that there's a breaking point of all of these things.  

    For what it's worth, I'd try to end up with one apartment complex.  Yes, it's not diversified at all but it does make things simpler.  If you can't go that route I'd recommend buying them grouped so you have one PM to maintain a relationship with.  Again, just for keeping things nice, clean, and simple.  Others will disagree (they perspective will be correct as well) because they might value diversification over simplification.  Maybe I'm just lazy.  I'm also too lazy to want to handle D-properties, chase apartments in warzones, etc.  Only you can answer what kind of investor you are, how hands on you want to be, how much diversification you want, etc.    

    0Reply
  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    9y

    @Nicholas P. In your post, you didn't really state what your goals are. What is your motivation for selling everything in Denver and investing in another state? That will help answer some of your questions. Saying that Denver is "too expensive" is a bit generic because it really depends on what you are trying to accomplish. There are many people investing in Denver and the surrounding area who don't feel it is too expensive.

    0Reply
  • Jonathan Twombly
    Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y

    @Nicholas P., Congratulations on your success so far!  

    We are in a similar situation.  We're based in New York, where investing simply makes no sense.  For $1.5 million, you could buy a three-unit deal in a marginal neighborhood that probably barely cash flows if its full all the time.   So, investing out of state makes the most sense, and we followed the population growth to South Carolina, where deals were not as expensive.

    The incredibly important factor that cannot be overstated is to find a very qualified PM company.  Fortunately, at the level of funds you have, you are into a higher quality of PMs.  But you still must be wary.  On our first deal, we hired a large regional company with thousands of units under management, and they proceeded to put the wrong people in charge of our asset, which nearly destroyed the deal.  Do extreme vetting with any PM company, and then make sure that when they staff your property, the onsite manager and everyone he/she reports to has extensive experience managing exactly the kind of asset you own.  (This advice really applies regardless of how far away your property is.)

    As for the size of asset you can buy, it will be limited by your net worth.  In my experience, commercial lenders will not lend you any more than your net worth, and the money you put into the deal does not count, because if that goes to zero along with the mortgage, they cannot collect anything from you.  This situation applies even if the debt you get is non-recourse, because even non-recourse debt comes with "good guy" guarantees, which make the debt become full recourse if you commit certain enumerated bad acts.  So, unlike residential, just because you have X dollars on hand for the equity downpayment doesn't mean that you can purchase a property worth 4X, unless you have 3X in other assets, with 10% of that liquid.  (And the closing costs are also significantly higher with commercial debt, so you will probably need to put in about 30% of the purchase price all together.)

    The workaround here is to buy 3-4 smaller assets, deploying ¼ of your equity funds in each deal, which allows you to count the equity you have in the other deals as part of your net worth when you are applying for the mortgage for any particular deal.

    This, of course, will make it harder to do a 1031 exchange.

    Another workaround is to put up a higher percentage of equity. The "good guy" guarantees often go away if you get below 55% LTV, so there is no possibility of recourse against you and the lender may not care about your net worth as much in that case.

    Hope this helps!  Feel free to reach out by PM if you want to discuss more.

    3Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    9y

    Nicholas,

    You have $1.5m and you are new to multi family.  I'm not sure if that is all your nest egg but certainly would ponder a few alternative thoughts.  I like the MF idea since that is where I spend most of my time.  I also like diversification and learning from other more experienced MF investors by being their partner.  Here are some ideas:

    1) Active / Local - Take some of the capital and designate that as active capital.  Active means you will learn by either doing this on your own but better, seek out a more experienced partner or two in the MF game that need some capital and would allow you to learn w/them (locally preferred).  You find roles you can play on the team.  The other portion of the your capital you designate as passive by investing w/experience partners in a syndication outside of your area.  

    2) Syndication + Geographic Diversification in MF - I like syndication for out of state investing.  You find an experience operator who has been doing this for some time / has a solid track record and is in strong markets, has access to solid deal flow, underwrites conservatively and is open to educating their more serious and sophisticated investors who "with intention" want to earn and learn.  You could easily take $500K and get yourself in 3 - 5 solid deals.  

    3) Syndication + Niche Diversification (+MPH/SS) - Do 1, 2 above and add a third component by diversifying into a few alternative niches w/very solid histories and strong future trends by investing in pools of mobile home parks (MPH) and self-storage (SS).

    I would not advise taking $1.5m by yourself and say I'm going to go into MF and learn the ropes. Don't confuse success by riding the wave that lifts all boats w/your SF rentals and confuse that w/expertise.   Be smart, patient, and selective.  Couple blogs to get you thinking.

    https://www.biggerpockets.com/blogs/9145/59865-div...

    https://www.biggerpockets.com/blogs/9145/62927-6-r...

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Nicholas P. first off, welcome. 2nd I don't really have too much to add to what has been already said except you need to figure out what you want to do before you sell your property here. A 1031 exchange has a very short shelf life and the commercial RE market is also very hot. You don't want to get caught and have you money tied up or buy a bad deal because you have to.

    1Reply
  • Kevin Grinstead
    Realtor · Denver, CO · Member since 2016 · 499 posts · 129 votes
    9y

    Hi Nick, welcome to BP.  If I was in your position,  I would take your assest and look to purchase a few 4 plexes where I could be close to them and have separate assets. You can have diversification and economy of scale together. You would also learn a lot from the MF sphere while still being in your comfort level.  

    After working with the MF's you can get now then your net worth would increase and give you more opportunity for a commercial deal down the line. 

    Another strategy here in Colorado would be to see if you could find an apartment building that could be converted to Condos and then you can rent some and sell some for a profit.

    0Reply
  • Jennifer BeadlesPro Member
    Rental Property Investor · Phoenix, AZ · Member since 2016 · 424 posts · 261 votes
    9y

    @Nicholas P. There are some fantastic advice in this thread so I will only add my comments about my experience in investing outside of my local area (Seattle). 

    You're not crazy to want to invest that amount in an outside state. Like you, I handle all of my own properties (18 units) and it takes me no time and is highly efficient. I found that it was not so efficient when I brought in a property management company for my out of state properties, but no ones treats your properties or watches over your money like you would. 

    I found myself having to do a ton of research on the out of state cities and it took a lot of time, so instead I focused on finding an investor savvy realtor and made sure they were only sending me good deals. This saved time and was much more effective. I verified rents through the property management company before I bought, and worked with a contractor who would also give me an honest assessment of the property before I bought. So I think checks and balances within your investing team is important. 

    I would also buy one property at a time, be super picky and make sure each deal is solid before investing more. Maybe not the most efficient way but I want to be careful in a new market. 

    For cash flow and a stable market, I like Indianapolis. For cash flow and appreciation I like Nashville. I've built investing teams in both areas so if you find yourself wanting to explore there let me know. I also have people in Dallas but haven't purchased there yet. 

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    @Bill S. is right on the money.  1031 Exchanges can present challenges due to the 45 calendar day identification period and the 180 calendar day exchange period.  You should plan carefully when contemplating a 1031 Exchange to ensure that you can make sure that you meet your requirement exchange deadlines.  

    You can also consider a Reverse 1031 Exchange where you can take all the time you want to locate suitable replacement property, close on the replacement property acquisition first, and then you have 180 calendar days to sell your relinquished property.  Reverse 1031 Exchanges are more complicated and costly, but can take a lot of the risk out of structuring a 1031 Exchange. 

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    0Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    9y

    Hi @Nicholas P., there plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.

    If you get in a time crunch and are an accredited investor, I might recommend you learn about DSTs (Delaware Statutory Trusts). I have had no issues at all in placing my clients into replacement property within the 45-day guideline.

    https://www.biggerpockets.com/blogs/7993/48972-set-your-financial-life-free---with-dst-investments

    0Reply
  • Nathan Click
    Lender · Morrisville, NC · Member since 2015 · 610 posts · 131 votes
    9y

    @Nicholas P. Lots of good points here. As has been said with $1.5M cash on hand you have $6M buying power. In that price range you can do very well buying out of state, if you choose. Are you looking to cash flow or do you want value adds and re-positions? Cash-flowing properties have the advantage of security and stability, so they tend to be safer for out of state buyers who my be buying site unseen. There are tons of financing products for these types of acquisitions as well. Property selection is key. A CRE broker, who is an associate of mine, works with investors to help them buy out of state. I would not mind introducing you if you are looking to move forward soon.

    0Reply
  • Adam Adams
    Podcaster & Multi-Family Apartment Investor · Denver, CO · Member since 2016 · 273 posts · 138 votes
    9y
    Nicholas Pelham-Clarke I am moving more and more from flips to Apartments, and would like to network with you or just have lunch. Also, congrats on building all that capital up! Adams Adams Denver Metro Area
    0Reply
  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    Any apartment/plex here in the Metro area will come at a premium. I would personally leverage what you have and buy additional here in town. I'm working on 2 fourplexes to flip and they will be around the $800k mark each. I'd be interested in taking a look at your portfolio if you are going to sell it. 

    As @Bill S. mentioned, you will want to do that 1031 and set it up correctly.

    0Reply
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