Multi or single family for first time investor?

Question

Hello BP family!

I am a first timer from Nor Cal. I have talked with several turnkey providers and have settled on Norada real estate investments going forward. Originally, I was interested in sfh's to build my wealth and cashflow but, recently I have become interested in jumping into mfh's instead. I have looked at a few deals in the smaller apartment building range of 4-8 units. The cashflow is much better than the sfh's and it seems like a major shortcut to my goals. Am I foolish to buy a turnkey multi-family as my first investment?

Thanks for your help!

Torrance

Jeff Schechter · Answer

Where is this property located?  Here in Indianapolis, we stopped providing (or buying for ourselves) anything bigger than a duplex.  We do very well with a portfolio mix of 80% SFH's to 20% Duplexes.  We found that anything 3 doors or more just came with more headaches and worse tenants.  So, even though they ALWAYS look better on paper, they never work out that way in the real world.

Matthew Bennett · Answer

Torey - I agree with James as he mentioned success in OOS investing depends largely on the neighborhood. I would do a little bit more research/due diligence - once you settle on a territory, you could build a "team" who's on ground locally to help you become more successful instead of utilizing the TK company. Reach out personally to people on here and Linkedin. Easy to do. I know you mentioned you run your business full time, but worth it to ensure a good ROI. Just my 2 cents.

Brent Coombs · Answer

"Looks much more realistic" might still be very subjective, if given by the Seller!

When I wrote: "if the cash flow (as a percentage of your outlay) can be proven to be better with multi", I of course was asking you to already take "the type of tenant, vacancy and repairs (you) might have" into account! So far, I'm not convinced that you'd get $1,717/m net cash flow.

Thanks for sharing the figures you did, but, we also need to know other pro forma assumptions: (Rent per month, PITI payments, Interest rate/terms on your mortgage, vacancy allowance, repairs and cap ex allowance, and property management cost. I also like to see all those figures expressed as a percentage of its gross income per month). Thanks...

Abdul Shishi · Answer

You are Foolish to buy TK. I don't care how reputable the company you buy from is.

The business model of TK works fine for the provider. For the investor-not so much.

Ned J. · Answer

I'm with Caleb....if this is your "cherry", then doing a MF out of state turnkey seems like a bad plan to me. Turnkey in itself has some big concerns for the long term....yes the paper cash flow looks nice, but when/if you ever want to sell it off, those years of "cash flow" disappear with rehab and closing costs etc etc since they often don't appreciate much if they aren't a value add deal at the start

Then add the out of state.....

Then add this is your first deal.....

Then add the extra cost since its a MF vs a SFR....

But that's just me....some people like to dive in the deep end right at the start.....and some do pretty good....

James Wise · Answer

The biggest risk factor in investing out of state is the neighborhood quality. The level of risk in one area to the next is much larger than the change in risk level from a single family home to a small apartment building like what your targeting.

In short, make sure you are comfortable with the neighborhood and tenant base and you should be just fine.

Torey Chumbley · Answer

@Brent Coombs,

Thanks for your advice! I know I am giving up the cream but, I am not an experienced investor plus I run my business full time . Maybe after I have a few under my belt,  will try my hand at finding and rehabbing myself.

The reason I have concerns about multi is that I am worried about the type of tenant, vacancy and repairs I might have. Are the extra headaches worth it?

I am looking for cashflow over appreciation at this point because I plan to retire in the next 4 years.

The proforma they gave me was slightly off, but Amy with Norada did a full analysis that looks much more realistic.

8 unit: Purchase price 525,000, 141,750 down, cap 8.9, cash on cash 14.5% , cashflow 1717.00 per month