Little Rock, AR · Member since 2016 · 36 posts · 12 votes
I would like to invest in commercial multi-family properties (> 4 units). I am confused about the steps of the process. I am hearing (and reading) different stuff from different people. For example, some sources tell me to have a contract in place and then apply for financing. Others tell me to get approved for financing first and then sign a contract with seller. I am just starting out, so all this seems pretty confusing, and I am not clear where to start. Can someone please break it down into the various steps involved from the point I find a property to the point of closing the sale?
Also, under what conditions is it mandatory to have an on-site manager? Not sure if the rule changes by state, but I am looking in Arkansas.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
9y
@Pinaki M., why commercial for your 1st property? It's a lot easier to get financing on 1-4 unit. In fact, you probably won't be able to qualify for financing if this is your first deal. Lenders really want to see experience and that you know what you're getting into.
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
9y
Commercial is a big animal to take on for your first deal, especially if you plan on trying to manage it yourself. You might to better to try to connect with a property manager first, THEN start the search/loan process. Some managers are also brokers and as such will have contacts w/ banks to help as your go-between to help get the financing you are looking for.
As for on-site management - If you run numbers to have a full time on site manager you really need at least 50 units to have it make sense. From there, the larger the better. For smaller properties, you may be able to give someone a break on their rent to watch the place, clean up, do MINOR handyman type stuff, but it would be different to have them do much more. Worst case scenario is that the whole small complex gets buddy-buddy and then the environment starts slipping.
Little Rock, AR · Member since 2016 · 36 posts · 12 votes
9y
@Account Closed
Thanks. Regarding PM.. I was recently looking at a 80-unit apartment. It already has an on-site manager. In that case, what would you recommend? Continuing with the current PM (which probably makes more sense as they are already familiar with the property, unless they are doing a really bad job), or getting someone new? I mean, if I had talked to a PM first and then found this property, they will probably not be happy if I decide to go with the current PM.
Now, let's say if a buy a 16-unit apartment, I agree with you that having a full time onsite manager may not make the numbers work (that's one of the reasons I am looking for a larger apartment). That's why I wanted to know if it is mandatory to have a PM onsite. I heard that for >= 16 units, having an onsite manager is mandatory. Is that correct?
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
9y
"Mandatory" is a pretty rigid word. The numbers will tell you what's necessary and what's not. No matter what you do beforehand, unless you have a clear indication the current on-site person is not doing a good job, you're going to have to see how it goes. Ideally, you can talk with a few contractors in the area who may have done work on the place. Possibly even interview tenants too.
Think about the number of units and the likely work involved - here are two simple examples
- Maintenance - lets say 25% of the building has a maintenance request one month. For the 16 unit building that's only 4 units. A single offsite person should be able to handle that and farm it out to the right contractor to get the job done. Not alot of follow up or management. Now on an 80 unit building that same percentage is 20 units, all with potential multiple needs, follow up to make sure the work is done, all the while coordinating with tenants for access to the property. WAY more work. Not that an offsite person can't get it done, but it would require a team thus likely a larger property manager.
Vacancy - same issue, lets say each unit has 4 prospects, and lets say that there is 5% vacancy at any given point of time. For the 16 unit building that's less than 1 unit. For the 80 unit building that's 4 units vacant, which adds up to 16 prospects. Lot more work there.
These numbers are all spitballs - not real life examples, but I think the point has been made. There is a time when some presence on-site makes sense, and below a certain point the cost isn't worth it.
Little Rock, AR · Member since 2016 · 36 posts · 12 votes
9y
I meant "mandatory" as in dictated by the law. I heard that for 16 units or more, the law requires the presence of an on-site manager. I wanted to check if that's correct.
I agree with your general point. My concern was that, if I like a 16 unit apartment and the above is true (that is, an on-site manager is required by law), then it will be difficult to make the numbers work, whereas it would be much easier for a 80 unit apartment (assuming the manager gets paid a monthly salary which will be almost the same). I don't know what most investors do in such a scenario. What you mentioned earlier (having a tenant oversee the property for discounted rent) can be a reasonable solution though.
Investor · Bay Area, CA · Member since 2014 · 164 posts · 44 votes
9y
Check your state laws or local apartment association to confirm the mandatory on site manager issue.
For example, In California, if there are 16 units or more a designated ‘responsible person’ is required to live on site. As the number of units increase so does the staffing requirements. In addition, the resident manager is an employee (not an independent contractor) and therefore must be paid to meet local minimum wage laws.
If you are going to start with commerical (>4 units), I recommend networking with commerical lenders and showing them marketing brochures of properties you are interested in to see how much they could lend on any given property and make your offer subject to obtaining that amount of financing and interest rate you can live with. Most commercial lenders look to the cash generating abilities of the property first but may be more conservative if they feel you have limited experience in commercial real estate management.
If I was a newbie, I’d consider continuing with the current PM since they know the property. During the due diligence period, I am sure the current PM will be very interested in showing you why they should keep them and you should take the opportunity to talk to them about their practices as much as you can. If you decide not to use them, make sure you have gotten all the documentation and information you need before closing the purchase. If you decide to go with another PM, you will not get any co-operation from the previous PM after the sale closes.
Oakland, CA · Member since 2017 · 133 posts · 58 votes
9y
In Nevada, there is no limit for the owner to manage their own properties.
However, the owner must live within 60 miles of the rental properties; otherwise, a property manager lives within 60 miles of the rental properties is required.
All states have different laws
Real Estate Agent · Scottsdale, AZ · Member since 2016 · 63 posts · 16 votes
9y
Peter Harris has some great teaching on commercial real estate investing
https://itunes.apple.com/us/podcast/commercial-real-estate-investing-for-dummies/id838962907?mt=2
https://www.commercialpropertyadvisors.com/peter-harris-real-estate/