Going from residential to commercial multi family
Member since 2023 · 9 posts · 9 votes
Going from residential to commercial multi family
Most Popular Reply
Investor · Member since 2023 · 4 posts · 11 votes
3y- @Kamil Kaczmarczyk
- Research the Market:
- Familiarize yourself with the real estate market in Northwest Chicago (Chicago has very stringent tenant laws), specifically focusing on multi-family properties. Understand trends, rental demand, vacancy rates, and property values in different neighborhoods.
- Keep an eye on the local market to identify potential opportunities and become familiar with the types of properties available.
- Financing and Pre-Approval:
- Meet with lenders or mortgage brokers to explore financing options for a 5+ unit property. Understand the loan requirements, down payment amount, interest rates, and any specific criteria for multi-family properties.
- Get pre-approved for a mortgage to demonstrate your seriousness as a buyer and strengthen your negotiating position.
- Build a Strong Network:
- Connect with local real estate agents specializing in multi-family properties. They can provide insights, access to listings, and assistance throughout the buying process.
- Attend real estate networking events, join industry associations, and engage with other investors to expand your network and learn from experienced professionals.
- Perform Thorough Due Diligence:
- Conduct a comprehensive analysis of any potential property. Evaluate its financials, including income, expenses, and potential for value appreciation.
- Assess the property's condition, consider any necessary repairs or renovations, and estimate associated costs.
- Review leases, tenant history, and vacancy rates to understand the current and potential rental income.
- Consider Property Management:
- Evaluate the feasibility of managing a larger multi-family property or explore hiring a professional property management company. Managing a 5+ unit property requires more time, effort, and expertise than managing a single-family home or small multi-unit property.
- Understand Regulations and Zoning:
- Research local regulations, zoning ordinances, and any specific requirements for multi-family properties in the areas you're considering. Ensure compliance with legal obligations and understand any restrictions that may impact your investment plans.
- Analyze Cash Flow and Return on Investment:
- Calculate the potential cash flow and return on investment (ROI) for the property. Consider expenses like mortgage payments, property taxes, insurance, maintenance costs, and potential vacancies. Ensure the property's cash flow meets your investment goals.
- Have a Contingency Plan: How can you exit if needed, 1031, etc.
- Plan for unexpected situations and have contingency funds set aside for repairs, maintenance, or potential income shortfalls during vacancies.
- Consider alternative exit strategies, such as selling the property or refinancing, in case your investment plans change in the future.
- Conduct Property Inspections:
- Hire professional inspectors to assess the property's condition, including its structural integrity, electrical systems, plumbing, and any potential issues. Their findings will help you make an informed decision.
- Seek Professional Advice:
- Consult with real estate attorneys, accountants, or other professionals experienced in multi-family property transactions. They can provide valuable guidance and ensure you comply with legal and financial requirements.
Remember, thorough research, due diligence, and careful financial analysis are key when investing in larger multi-family properties. It's important to make informed decisions and seek advice from professionals to maximize your chances of success. Good luck with your investment endeavors!
31 Replies
- Developer · Boulder, CO · Member since 2018 · 530 posts · 365 votes3y
@Kamil Kaczmarczyk become financially literate and learn how to conduct underwriting analysis
- Investor · Coppell, TX · Member since 2018 · 311 posts · 166 votes3y
Quote from @Kamil Kaczmarczyk:
Hi,
I want to get into the bigger multi families. I am located in northwest Chicago. I currently own a single family. Was planning to get a 2-4 unit to ease into it but if I see a good deal on a 5+. I want to be prepared. Any tips on buying my first 5+ property.
thanksAgree with Barry, become really good at understanding the fundamentals of commercial multifamily real estate underwriting and financing criteria. When I was trying to get into commercial multifamily real estate, I found local players place all kinds of barriers and try to convince me I cannot do it without them. They wanted me to believe the only way in was through syndication - but that is not true. You are on the right track, start with something small like 5-8 units. I do know that this kind of mix may not be available in your local market, so go out of your area if you feel comfortable.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Kamil Kaczmarczyk
This is like going from driving an automatic car to a tractor trailer with manual transmission.
Recommend getting more experience and understanding writing a deal, understanding vacancies, absorption rates, bifurcating returns, sensitivity analysis on rent increases vs vacancies and cap rate to interest rate sensitivities and have a rockstar property manager
It’s a different animal.
7e investments53 Reviews - Lender · Denton, TX · Member since 2023 · 349 posts · 80 votes3y
I would suggest you learn how to analyze any deal that comes your way before you decide to but or not buy.
Once you decide to buy a specific property and know the potential cash flow, I would look for how to finance it. There are many lenders you could choose from. Usually, I work recommend you work with a mortgage broker. A mortgage broker usually has 50+ lenders they can call on to shop for you to find the best financing deal that would work for you.
Unlike banks who usually only have their own loan packages, mortgage brokers are able to contact multiple banks/lenders, provide you with offers and then you decide which is the best loan for you.
- Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes3y
@Kamil Kaczmarczyk I think investing in a local apartment building is a very good way to invest. Chicago has so much great inventory. The inventory on the NW side won't be "cheap", but you can get some amazing tenants. I think one important thing to point out is that 5 and 6 units are taxed like houses (residential) whereas 7 or more units in Cook County are taxed as commercial.
In terms of management, if you can pick up a nice six unit you will just need to find a local handyman to help with minor repairs. Over time, you build your relationship with your handyman and it gets easier and easier.
- Member since 2023 · 9 posts · 9 votes3yHi John,
Quote from @John Warren:
@Kamil Kaczmarczyk I think investing in a local apartment building is a very good way to invest. Chicago has so much great inventory. The inventory on the NW side won't be "cheap", but you can get some amazing tenants. I think one important thing to point out is that 5 and 6 units are taxed like houses (residential) whereas 7 or more units in Cook County are taxed as commercial.
In terms of management, if you can pick up a nice six unit you will just need to find a local handyman to help with minor repairs. Over time, you build your relationship with your handyman and it gets easier and easier.
thanks for the reply. That’s interesting. I did not know 5 and 6 units and taxed different.
I am trying to under write 6 unit buildings as that is the goal. I am still looking at 2-4 units and seeing if any makes sense right now. When it comes to financing 6 units. Do you have any tips?
Thanks - Member since 2023 · 9 posts · 9 votes3y
Quote from @Amir Khan:
Quote from @Kamil Kaczmarczyk:
Hi,
I want to get into the bigger multi families. I am located in northwest Chicago. I currently own a single family. Was planning to get a 2-4 unit to ease into it but if I see a good deal on a 5+. I want to be prepared. Any tips on buying my first 5+ property.
thanksAgree with Barry, become really good at understanding the fundamentals of commercial multifamily real estate underwriting and financing criteria. When I was trying to get into commercial multifamily real estate, I found local players place all kinds of barriers and try to convince me I cannot do it without them. They wanted me to believe the only way in was through syndication - but that is not true. You are on the right track, start with something small like 5-8 units. I do know that this kind of mix may not be available in your local market, so go out of your area if you feel comfortable.
Hi Amir,
Thanks for the reply. There’s a couple 6 units in my area that I am underwriting to see what makes sense. Any tips on approaching to finance a 6 unit? - Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes3y
@Kamil Kaczmarczyk this is going to be a local bank deal for sure. Depending on where the deal is at, there are many great banks here in Chicago that will finance your deal. The "average" term sheet I see is a 25 year amortization with a 5 year term. I am seeing 6.25% a lot from local banks, and I normally see prepayment penalties.
- Investor · Coppell, TX · Member since 2018 · 311 posts · 166 votes3yStart with a local bank that knows the area well (you can use mortgage brokers as well, but I find it easier to work directly with a lender as they'll tell you whether you can or cannot do the deal instead of wasting your time). Before speaking to the bank, read the bank guidelines regarding financing small multifamily commercial properties. Generally, you should have following available:
Quote from @Kamil Kaczmarczyk:
Quote from @Amir Khan:
Quote from @Kamil Kaczmarczyk:
Hi,
I want to get into the bigger multi families. I am located in northwest Chicago. I currently own a single family. Was planning to get a 2-4 unit to ease into it but if I see a good deal on a 5+. I want to be prepared. Any tips on buying my first 5+ property.
thanksAgree with Barry, become really good at understanding the fundamentals of commercial multifamily real estate underwriting and financing criteria. When I was trying to get into commercial multifamily real estate, I found local players place all kinds of barriers and try to convince me I cannot do it without them. They wanted me to believe the only way in was through syndication - but that is not true. You are on the right track, start with something small like 5-8 units. I do know that this kind of mix may not be available in your local market, so go out of your area if you feel comfortable.
Hi Amir,
Thanks for the reply. There’s a couple 6 units in my area that I am underwriting to see what makes sense. Any tips on approaching to finance a 6 unit?
1. Property financials (T12, rent roll, P&L)
2. Your personal financial statements (Income statement, balance sheet)
I've had success by adding following document:
- Strategy statement: Simply state what you plan to do with the property. Think it through before writing this, as this will be crucial for you to find and work with a bank/lender that is willing to work with your strategic play.
Hope that helps. - Investor · Member since 2023 · 4 posts · 11 votes3y
- @Kamil Kaczmarczyk
- Research the Market:
- Familiarize yourself with the real estate market in Northwest Chicago (Chicago has very stringent tenant laws), specifically focusing on multi-family properties. Understand trends, rental demand, vacancy rates, and property values in different neighborhoods.
- Keep an eye on the local market to identify potential opportunities and become familiar with the types of properties available.
- Financing and Pre-Approval:
- Meet with lenders or mortgage brokers to explore financing options for a 5+ unit property. Understand the loan requirements, down payment amount, interest rates, and any specific criteria for multi-family properties.
- Get pre-approved for a mortgage to demonstrate your seriousness as a buyer and strengthen your negotiating position.
- Build a Strong Network:
- Connect with local real estate agents specializing in multi-family properties. They can provide insights, access to listings, and assistance throughout the buying process.
- Attend real estate networking events, join industry associations, and engage with other investors to expand your network and learn from experienced professionals.
- Perform Thorough Due Diligence:
- Conduct a comprehensive analysis of any potential property. Evaluate its financials, including income, expenses, and potential for value appreciation.
- Assess the property's condition, consider any necessary repairs or renovations, and estimate associated costs.
- Review leases, tenant history, and vacancy rates to understand the current and potential rental income.
- Consider Property Management:
- Evaluate the feasibility of managing a larger multi-family property or explore hiring a professional property management company. Managing a 5+ unit property requires more time, effort, and expertise than managing a single-family home or small multi-unit property.
- Understand Regulations and Zoning:
- Research local regulations, zoning ordinances, and any specific requirements for multi-family properties in the areas you're considering. Ensure compliance with legal obligations and understand any restrictions that may impact your investment plans.
- Analyze Cash Flow and Return on Investment:
- Calculate the potential cash flow and return on investment (ROI) for the property. Consider expenses like mortgage payments, property taxes, insurance, maintenance costs, and potential vacancies. Ensure the property's cash flow meets your investment goals.
- Have a Contingency Plan: How can you exit if needed, 1031, etc.
- Plan for unexpected situations and have contingency funds set aside for repairs, maintenance, or potential income shortfalls during vacancies.
- Consider alternative exit strategies, such as selling the property or refinancing, in case your investment plans change in the future.
- Conduct Property Inspections:
- Hire professional inspectors to assess the property's condition, including its structural integrity, electrical systems, plumbing, and any potential issues. Their findings will help you make an informed decision.
- Seek Professional Advice:
- Consult with real estate attorneys, accountants, or other professionals experienced in multi-family property transactions. They can provide valuable guidance and ensure you comply with legal and financial requirements.
Remember, thorough research, due diligence, and careful financial analysis are key when investing in larger multi-family properties. It's important to make informed decisions and seek advice from professionals to maximize your chances of success. Good luck with your investment endeavors!
- 3yBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
@Kamil Kaczmarczyk You received some great information above from @Benjamin Matthews above. I would add to that, as soon as you are seriously considering a property or two, get a no-cost engineering based cost segregation pre-analysis/estimate. Two properties can look equally attractive until you find out one will give you far more in tax benefits and the resulting cash flow than the other. This can have the effect of "go or no-go" decisions.
- Member since 2023 · 9 posts · 9 votes3y
Quote from @Bonnie Griffin Kaake:
@Kamil Kaczmarczyk You received some great information above from @Benjamin Matthews above. I would add to that, as soon as you are seriously considering a property or two, get a no-cost engineering based cost segregation pre-analysis/estimate. Two properties can look equally attractive until you find out one will give you far more in tax benefits and the resulting cash flow than the other. This can have the effect of "go or no-go" decisions.
Thank you for the reply.
My understanding was that I have to be in real estate "full time" to get the benefits of a cost segregation. Am I mistaken?
- 3yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
@Kamil Kaczmarczyk While having real estate professional status (REPS) definitely makes it easier to utilize the benefits from a cost segregation study, you can still benefit from the study without it. It's really dependent on your specific situation so as Bonnie mentioned, I'd recommend getting the cost seg study cost/benefit analysis quote to help you decide if the study would be worth it or not.
- 3yBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
@Kamil Kaczmarczyk You are not alone in your misunderstanding. Whether an investor has REPS status or not does not determine whether you can benefit with cost segregation. The benefits of cost segregation are available whether you are an active or passive owner of RE. Some investors who have full-time W2 jobs can benefit as well and some who own STRs and materially participate in those rentals, can use the tax benefits against their W2 income. Again, you need guidance and a no cost estimate.
- 3yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 503 votes
Lending can be more difficult for over 4 unit deals. If you're looking for an option for a 30 year fixed mortgage (or something like that), 5+ units require 30% down versus 20% down for 1-4 units. Generally rates are higher for 5+ units compared to 1-4 units and they require a longer and more detailed underwrite.
Bright Skyline518 Reviews - 3yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Kamil Kaczmarczyk
Probably going to need to own some small multi-family first. With a 5+ unit, you would be getting a commercial loan. If all you own is a single family that would hurt your chances of getting approved.
I am not a commercial lender, but some chime in and give their thoughts. I have had clients turned down on commercial loans because the lender wanted them to have more experience owning and managing multi-family. - Member since 2023 · 9 posts · 9 votes3y
@Bonnie Griffin Kaake and @Julio Gonzalez Thank you for clearing that up. I was aware of the STR route and its benefit with cost segregation, but I was not aware of any possible benefits while being a full time W2 employee. I think a cost seg study cost/benefit analysis is a great idea.
thanks for the help
- Member since 2023 · 9 posts · 9 votes3y
@Stacy Raskin Thank you for the insight. Was not aware it could be 30 percent. how much higher are rates, typically.
Thanks
- Member since 2023 · 9 posts · 9 votes3y
@Patrick Drury Thanks for the insight. Having some 1-4 I think will definitely help. I thought about getting a duplex or a 3 unit. 4 units are harder to come by in Chicago(With the price making sense). And I think the experience will be valuable as well.
Thanks
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes3y
Hey hey @Kamil Kaczmarczyk - Congrats on jumping into the real estate and preparing for the commercial space.
I recommend one of the two simple paths below:
1. Find a partner who has done larger deals here in Chicago
2. Do a 2-4 unit yourself to get the experience you'll need for bigger deals
If it were me, I'd partner because I believe you can go fast alone, but far together.
Quality Builders4.966 Reviews - Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes3y
@Kamil Kaczmarczyk great idea. Build your team first. Hard to do solo AND depending on how many doors a lender might not consider you without a qualified partner
- Member since 2023 · 9 posts · 9 votes3y
@Jonathan Klemm Thanks for the comment. And i agree with your second point. How would I go about finding a partner?
Thanks
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes3y
Hey @Kamil Kaczmarczyk - You're welcome! I'd say just keep doing what you are doing. Educate yourself, network, and ask questions.
Set up calls with people from Chicago BP investors, ask if they know anybody, and continue to expand your sphere.
See who you vibe with and then Bam! You found a partner.
Quality Builders4.966 Reviews
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