Hello everyone! I've been investing SFH and townhomes in North Carolina for a little while now and would like to take the dive into multifamily. Specifically looking at small apartment complexes (8-14 units).
For those of you that have experience in the multifamily realm, what would you wish you would have known before getting started? What are some tips you have for someone looking to do the same?
Hi @Jacob Laird , the thing that I've recently learned that has made much better sense to me is this: in many markets (like mine) these small multi-family properties are a fool's errand. They are a linear step up from a SFR, then Duplex, then Quad, then 8 and so on, but the thing that constrains the small multi class is that they struggle to qualify for any kind of advantageous financing (like a FHA loan on a 4-plex or a Fannie Mac or Freddie Mac small balance loan on a more valuable property), they don't have any sort of scale to allow much efficiency of management, and they typically experience a downgrade in tenant class.
As a result of ^^ they can trade more slowly and perform less optimally. They are less scary than jumping up to a more valuable property, but the gains to be made by qualifying for a Small Balance Loan or something similar is such a needle-mover than it may prove worth waiting for, while building highly-liquid equity in single family.
@Will Fraser Thanks for the reply Will! I’ve noticed that in my area there is a nearly no small multifamily properties available, whereas 8-14 units are much more prevalent. There a couple that are definite value-add due to poor management. One thing I wasn’t aware of was the lack of financing options for that class of real estate.
TBH the reason there tend to be more small multis than micro (2-4) or medium-large multis is likely BECAUSE of this dearth. The middle is where good things go to die (like banking, business, etc) and real estate is no different.
@Jacob Laird It seems @Will Fraser has hit on something... it means you need to decide what your end game/exit strategy is. Are you buy and hold or appreciation only, if you've done research you'll see that there is a final sale number that will make it work. Take into account all of these factors into your offer price - the longer sale time/ less interest/"worse" financing terms, then go for it. Or don't (then send it my way). Good luck!
@Will Fraser That makes a lot of sense! I really appreciate your response. I was completely unaware of the lack of financing in this area of multifamily!
@Maryanne Cameron You make some excellent points! The specific properties I am looking at are definite value add scenarios. Poor management, below market rents, distressed properties and problem tenants. These are all things I account for when looking at making an offer. Nonetheless, I greatly appreciate your response!
@Will Fraser it may be different in every market, but if the middle/small multifamilies are not so great to target, what would you recommend? 20+ units? 30+, 40+ 50+ etc? I guess what would be your minimum target?
Great question, @Tucker Cummings ! For my market 20 units is where you start to hit Small Balance Loan viability (B class, for C class you'd need 30-40 units) and you get that benefit.
You don't truly get economies of scope or scale with multi-family at our local rent rates until you have somewhere north of 70 units, but you do have the ability to roll a 20-50 unit mix into your current operations and use some of the same service providers and achieve some economies.
Hold the phone Sundance!
I just checked out the Fannie Mae Small Loans guidelines and they have updated their marketing materials to only indicate the maximum loan amounts. Through some further digging it appear they have revised the minimum loan amount to $750,000
So, at 25% down you could use this for $1,000,000 and up, or $1,150,000 if the lender required 35% down.
So, that would correspond to a 13-plex and up in my market. If a seller would be up for waiting for the speed of a Small Balance Loan this could open up a great option for sub-20 units!
Hey Jacob! My brothers and I are in Durham NC and are in the multifamily space as well. Would love to connect!
We have been building relationships with brokers, building a team, and underwriting deals. We have also been building out our investor database. We are after 100+ units so it was important for us to find roles that we enjoy doing the most and focusing on that.
I wish that I would have know that it would be easier to raise money, get loans and operate larger 100+ unit buildings than small apartments and that the effort would be nearly identical, while having a much greater impact.
So I am going to look at a 29 unit apartment complex for sale. I would like to have a bigger one (50 -70 unit)but they are few and far between when I am located.
I know that its not big enough to have a full time manager, and I live about 45 minutes away, but are there those here that would consider it?
It looks like it needs some rehab and better management. I was hoping that if it looks like a value add to do that and resell.
One concern is that there are 8 1-1 units?