Multifamily right off or SFH flips?

Question

So, just starting out, LLC Set up, 90k cash, 750 credit score. No w2s last 12 months so bank finance not happening. I ultimately want to own multifamily. Question is, do I do flips to build capital and business financial history? Or do I jump right into buying duplexes and or quads? If you were in my shoes knowing what you know now, how would you get started? Could really use help, analysis paralysis.

Mark Cruse · Answer

There is no right or wrong answer. It depends on what you wish to do. I do know flips are very very very high risk and if you have limited experience, you can lose big time. For me, I started off with flipping just like you mentioned. This is how I built up my capital. It went pretty good but it's not easy. Real Estate happens to be my passion, and I have project management experience. Also, I don't shake easily, and I had others doing the same that I learned from.  All of this helped. I don't know your level of experience, but many people come at it like its easy. Flipping can really wear on you because it's so many moving parts and many opportunities to fail. If I were in your shoes, I'd do one flip and see how it feels. Many of the people I mentor get in, and within a few weeks they say to hell with all of it. Just see if you feel if it fits you.  If so, keep going. If not, get that multi and keep for the long game. It's not the quick up-front money but it will come if done correctly. One thing you need worked up upfront is a decent deal source. If you can't find anything where the numbers work, none of this really matters.

Bill B. · Answer

Unfortunately for your plan, duplexes and quad plexes are the same as SFR in a bank’s eyes. If you can’t borrow for SFR you can’t borrow for SFR.

You can look at DSCR which will require a lot of cash to work or you can look at 5+ units. That’s the point where commercial financing kicks in.

Some people have reported success in the 5-12 units space.  Just big enough for the bad financing but too small for economies of scale to kick in. But you need the discount a lack of buyers provides. Personally I much prefer the quadplex or even the duplex for the same reason. You’ll have a boatload more buyers if you ever want to sell. And they won’t all be investors looking for the best deal. So you may have to find a partner with a job or a local bank/credit union willing to take a chance on you. Try asking the bank about financing on the four plex if you moved in and made it your primary, that should be the easiest financing. If that doesn’t work almost nothing will.

Evan Polaski · Answer

@Chad Dowell, a GOOD rental will yield you 10%, maybe 12% cash on cash returns.  Is 9-11k/yr going to be helpful in anyway?  You mention no W2, but I assume you have other sources of income to cover your living expenses.

To me, rentals are okay sources of passive income, but they are "extra money" investments, just like investing in S&P or crypto or money markets. To me, starting out, if you are trying to make the most money possible, and are willing to work for it, flips will always beat rentals.  The biggest risk to me, with flips, is having a good pipeline of deals to roll into.  A rental, you can generally assume you will find another tenant, so the rents keep coming.  A flip, your income source is gone as soon as you sell.  But, if you can build a steady stream of projects to move from one right into the next, then you will be making far more in flip returns over time.

A lot of variables go into this, but I would say you should typically see about a 20-25% return on investment in the typical flip. So if you invest 90k, into a $150k property and $50k rehab, I would assume that $200k total capital investment will sell for $250-260k.  Your $90k equity becomes $120-130k (pre tax) in 6 months.  Repeat again, and you made $60k-80k profit in one year.  Compare that to a $200k rental, that netted $5k in rental income, $6k in appreciation, and maybe $1k in principal paydown.

Chris Breaton · Answer

Have you talked to any lenders? If you park the 90k or say 70-80% of that capital into the llc, based on property values near you; if you can purchase in the $175-$200 range . Make a business plan as a flip and present to lenders you should have no problem finding funds, look into dscr products and products you can roll from construction into long term debt, so you can profit off the flip, or flip it to your llc and hold as rental if the numbers suit your hold strategy

Parker Schultz · Answer

I went on zillow for 2 minutes and found this listing in your area. I live in San Diego so my knowledge of market comps in Louisville, Kentucky is next to none. But this is a start (also my most successful clients dont even need to buy listed properties) of something that requires value add and would sell to a broad audience. Get it under contract at $140k, put $20k into and sell it for $200k? IDK you tell me if those are more realistic numbers but you could a run a deal like this with 20% down and possibly 100% reno financing for qualified flippers. You would probably have to pay renos out of your own pocket since you are new.

https://www.zillow.com/homedetails/6918-Bowen-Ave-Louisville...

Arman Ahmed · Answer

@Chad Dowell

Great question, Chad — and sounds like you’re off to a strong start with solid credit and capital. Since you’re aiming for multifamily long-term and bank financing isn’t an option yet, doing a couple flips could help you build liquidity and a financial track record for future loans.

That said, if you find a solid duplex or quad with seller financing or creative terms, jumping straight into buy-and-hold could get you cash flow and landlord experience right away.

I’d say look at both paths — whichever gives you the best deal with the least friction. I invest in Columbus, OH and happy to share how I evaluate opportunities creatively when traditional lending isn’t an option. Let’s connect!

Bill B. · Answer

@chris

@Chris Breaton No. It can’t be in a LLC, but that shouldn’t matter. There’s no reason to purchase the 1/4th primary 3/4ths rental in an LLC. There’s no upside, only downside. You don’t get anonymity, liability protection, or tax advantages. What you get is more expensive debt and tax prep for no reason.

Personally I moved primary to primary 5 years in a row renting out my previous home. I didn’t do it for the lower down payment. (I still put down 20% to avoid PMI.). I did it to save almost a full percentage point in interest. This alone could be worth $4k/year ($330/mo) for the life of the loan. Do it 4x in a row and you’ve got an extra $16k/yr coming. Better than owning an extra property.

Joseph Bui · Answer

Hi Chad, there are loan products tailored to investors that don't need W2s. The most popular one is the DSCR. I've helped many investors close on investment properties with this type of loan. Let me know if you have any questions, happy to be a resource and help answer questions around financing your investment property.

Parker Schultz · Answer

actually this one is better i think

https://www.zillow.com/homedetails/2612-Franklin-Ave-Louisvi...

Chad Dowell · Answer

Thank you Evan. My concern is taxes, federal, state and small business is like 45%!!!! That is just theft! Ill be converting to s-corp after the first of the year. Looking to aquire as many rentals as possible by the end of my 5 year +/- run. Retire comfortably ya know. I'm living off cash from my home sale. Kept back about 20k to live on while im getting my REI business up and running.

Multifamily right off or SFH flips?

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