Multi family investing questions
I have never bought a rental property. I own my current home and am looking to buy another home to either rent this one or the new one. I found a multi family for sale and don’t know the best way to educate myself on how that process may work. Its 6 Units with 2 car garages. Total 18 bedrooms and 12 bathrooms. The postings don’t say unit sizes. But what are the places to look for financing? What down payment is required? I don’t plan on living in any of the units but that’s not off the table. Is there a recommended place for me to learn about multi family investing for beginners?
If it's 6+ units it most likely will be a commercial loan that you will be accessing in order to purchase it. This process is different than residential mortgages. How they underwrite the deal is the major difference.
For financing they are usually concerned about the Debt Service Coverage Ratio. Basically what will be the total income on the property after what ever value add is done and does that cover the mortgage payment enough for them to take the risk and loan you the money.
Also, looking like 5%, 10%, and more commonly 20-25% down payment.
Get in touch with a commercial lender and a commercial agent. They will be able to guide you with more experience than regular residential professionals.
A commercial property will be quite the challenge for a first-time investor. Will you be hiring a property manager? Do you have landlord experience? If not, may I suggest "The Book on Managing Rental Properties" By Heather & Brandon Turner. You can purchase it here on BP. I just purchased it because I will be renting out a duplex soon. All the forms you need are included and information on the laws and regulations applying to each state. Good luck on your endeavor.
#2 Starting Out Contributor
- Specialist
- Mendham, NJ
If your questions about multifamily investing are that basic, you should not be looking to buy a 6-unit at all. If you don't even know how to finance it, what makes you think you can rehab units, manage it, evict and maintain, etc. Don't get in over your head. If you like the idea of moving on to bigger go from a single to a two-family first and house hack that.
I agree with Mr. Greene. I almost decided on a quadruplex that needed rehab for my first investment, then realized I was about to bite off way more than I can chew. I've now decided on house-hacking a duplex, while I network, try to put together a team, and learn the ropes!
Greene, my questions are that “basic” but there are a few reasons to this. In my town, multi-family homes are so rare to come by from what I have seen. Almost all are owned by companies. So this one I have been trying to dig up more info on, so I could post here and use as an example so when I asked more experienced people questions, I would have a subject to reference with real info. If I didn’t have the info, I would know to go find it.
Beltran, I haven’t looked at this property in person yet. Which adds to some of my frustration. One sight suggests it’s 4 units, while another says 6. Both show 18 rooms and 12 baths but also 12 garage spaces. So traditional thought would suggest 3 bedroom 2 bath units with 2 car garages. But the satellite images show 3 2 car garages so does that mean 3 units don’t have garage? I want to do a drive by to see if I can answer that question/ confusion. But also try to get an idea of the property condition. It was built in 1980. I’m familiar with the street. The rest of the block is duplexes.
Yes a commercial property/ multi family might be a lot to take on. But I’ve been trying to learn all I can on options in expanding my portfolio on single family homes and hadn’t thought about multi family too much. But if I’m going to take the next step I need to take a step. This property is in a nicer neighborhood, and like I said before it’s very rare to see multi family homes come on the market. Maybe that’s why I hadn’t put much thought into it before. As far as managing it, forgive me if this sounds simplified, but I would imagine you carry home warranty on the properties and when something comes up, I would just coordinate through them to get it handled. As far as updated, I’m confident in my own ability to do minor upgrades and I have contacts for electrical work if needed. As far as funding, I have some friends/ family in mind that may be interested in making a contribution for their own investment. What I’m getting at is, I think there are options there. Without seeing the property in person, and just basing off of assumed unit square footage, and rent pricing in the area both for apartments and townhomes or even regular homes compared to for sale pricing, I do believe the property is about 25k over priced. But I could be completely wrong.
@Andrew Schafer, the reason commercial multifamily properties are owned by companies is partly because multifamily ownership is a business, not a part-time avocation, but primarily for liability reasons. You don't want to own real estate investments in your own name because a claim against one property then exposes all your properties plus your personal liability. Or the alternative, which many people don't think of...if you or your family unfortunately causes a lawsuit to be filed, the personal suit can go after all properties owned in a personal name.
It's good that you have friends who are willing to invest with you. Are they going to be doing work on the property, too? If not, then you are raising capital for a security which is governed by the SEC and you will have to register for a securities exemption with a syndication using an SEC attorney. That requires filing for a 506b or 506c exemption. If they are doing work on the property, then you may need to form a JV. An attorney experienced in commercial real estate can help. And be sure to ask about asset protection for your properties.
I am not an attorney, accountant or financial advisor so I am just offering information to ask of professionals to be sure you are successful in your investment.
Please consider joining up with an experienced investor in your town that you trust and learn with your partner's help. Have them guide you for a small percentage of the deal or, better yet, have an experienced partner provide part of the equity as well as advice and guidance.
I admire your willingness to move ahead on ownership and that is absolutely the best way to learn, but not by yourself and not without professional advice. The basics of commercial real estate investing are deceivingly simple. Investing in commercial real estate is fun, rewarding, a lot more work than most people realize and has a ton more details that you don't learn about until you actively acquire, operate and dispose of properties yourself.
As many say about it, it is a team sport and you need a team of professionals who are experienced in commercial real estate themselves to guide you along. Look for them in your community or nearby. Find an attorney, accountant, real estate broker, lending broker, and property manager who are experienced in commercial real estate and who are willing to help you get started. Lots of professionals are willing to help you get started hoping that you will become a long time client. Good luck!