When is an investor "ready" to jump into commercial multifamily?

Question

So I've got a couple SFR's so far and would like to eventually, someday, own an apartment building or two. In my area a SFR of good quality can be found around $300k, while an apartment building is going to run well over 2 Million... From what reading and asking around I've done I've learned that commercial loans for first timers typically want something like 30% down payment just to come to the table, and then there's the higher interest rates, and balloon payment to add to the worries. So it sounds like the financing portion is completely different, what else makes it a challenge to get into? What's it take to make the leap successfully?

Uwe G. · Answer

Hi @James R. Copeland,

I am in the same boat as you in wanting to jump into a larger apartment complex at some point in the future.  Right now I am cautious on multi-family because of the large amounts of supply that have come online and are continuing to come online in Vancouver, WA.  Seek out the best locations and stick to that thesis for multi-family.  Also, think about liquidity across all of your investments and use a 1031 if possible if you are selling your existing SFHs.  We are nearing the end of the business cycle so make sure whatever you pick up is at the appropriate risk adjusted cap rate (especially with rates rising 2-3 more times this year and another 3 times next year).  I personally want more cash flow but will probably stick to the SFHs because I feel they are more liquid then apartment complexes and I don't like the cap rates on multi family right now when I compare them to SFHs in Vancouver, WA.  I find the supply is better in the right locations for single families.  I do admit this strategy is for people starting out or having a handful of properties.  This is advice is more for the smaller investor like myself that wants to continue to grow profitably for the next 20 years.  I hope this bit of advice helps.  Best of luck!

Bjorn Ahlblad · Answer

Two mil for 18 doors is over 100k per door; it might be hard to get a decent cash flow. In my case I worked the numbers 70% financed, and a PM. In the end we paid cash and my wife manages the property, so I have no idea about the loan process. A local independent bank could be the best way to go-they have a lot more freedom. Go talk to one beforehand and let them know what your plans are, they might even offer you a lead or two; often they are in the know. All the best!

Ken Breeze · Answer

Once you enter the commercial multifamily level, the game rules change - in my mind for the better.

More leverage through access to capital and people.

The gradual shift needs to happen in the mind. 80% of MF RE is the mindset.

Caleb Webster · Answer

Have you looked into other RE markets? You can buy a 10-15 unit MFR in the $500k to $750k range in many cities in the Midwest. The ROE would be relatively similar once you have all your systems in place and a team that you can trust.

James R. Copeland · Answer

Thanks Bjorn! Here in Vancouver 2 Mil can probably get you between 10-18 doors I would guess. The market has appreciated considerably in recent years. I could go a little further out to Longview, Kelso, etc for some lower prices, but I'm not as confident in the demand and quality of tenants having spent so little time there.

When you got started with your 12 unit did you find the loan application much different? How much of a down payment did you need?

Bjorn Ahlblad · Answer

James I applaud your desire to get into MF on a bigger scale. 2 million is an ambitious commitment for the first one and is likely 25-30 doors? Apartment buildings offer the advantage of having all your tenants (issues and opportunities) in one place. If 2 million is a reach why not get something smaller-10-15 units? To me it is all about the ROI and the ROE (effort) I bought a 12 unit last year and intend to get another one that size or more as my next project. I did not feel ready to take the plunge for 30-40 doors as my first one. SFR is easier to sell if the need arises and may offer more market appreciation. However an apartment building will offer the opportunity to improve the units, raise the rents, and force appreciation fairly quickly. Hope this helps and all the best.

When is an investor "ready" to jump into commercial multifamily?

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