Start with 3 unit & 4 units buildings for a newbie, or go bigger straight away?

23 Replies

Hi there, I am seeking some advice on strategy for a newbie. Should i start with 3 unit or 4 unit buildings and grow from there, or should i start straight away with commercial residential real estate and look at much bigger buildings (even apartment complexes)?

My goals are cashflow. I have spent the last 2 months doing a significant amount of research and learning about REI. I have been analyzing tris and quads in the upstate NY region (hudson valley), and am about to start looking at tris and quads in Albany, NY. So far - i have found only lukewarm deals. I don't really want to spend a lot of time with the day-to-day of managing properties, and essentially want to be a hands-off investor; this is what makes wonder if i should be looking at much bigger buildings. I do have a good chunk of capital to invest

Would appreciate any insight here?

Originally posted by @Nathan J.:

Hi there, I am seeking some advice on strategy for a newbie. Should i start with 3 unit or 4 unit buildings and grow from there, or should i start straight away with commercial residential real estate and look at much bigger buildings (even apartment complexes)?

My goals are cashflow. I have spent the last 2 months doing a significant amount of research and learning about REI. I have been analyzing tris and quads in the upstate NY region (hudson valley), and am about to start looking at tris and quads in Albany, NY. So far - i have found only lukewarm deals. I don't really want to spend a lot of time with the day-to-day of managing properties, and essentially want to be a hands-off investor; this is what makes wonder if i should be looking at much bigger buildings. I do have a good chunk of capital to invest

Would appreciate any insight here?

Hi Nathan,

Be patient and start with a smaller dollar figure as it will minimize your risk.

You can always build from there.

Upstate NY is one of the toughest rental markets across the US in my opinion.

Thanks and have a great day.

Originally posted by @Engelo Rumora:
Originally posted by @Nathan J.:

Hi there, I am seeking some advice on strategy for a newbie. Should i start with 3 unit or 4 unit buildings and grow from there, or should i start straight away with commercial residential real estate and look at much bigger buildings (even apartment complexes)?

My goals are cashflow. I have spent the last 2 months doing a significant amount of research and learning about REI. I have been analyzing tris and quads in the upstate NY region (hudson valley), and am about to start looking at tris and quads in Albany, NY. So far - i have found only lukewarm deals. I don't really want to spend a lot of time with the day-to-day of managing properties, and essentially want to be a hands-off investor; this is what makes wonder if i should be looking at much bigger buildings. I do have a good chunk of capital to invest

Would appreciate any insight here?

Hi Nathan,

Be patient and start with a smaller dollar figure as it will minimize your risk.

You can always build from there.

Upstate NY is one of the toughest rental markets across the US in my opinion.

Thanks and have a great day.


 Engelo - thanks for the reply. Would you mind explaining more why you think Upstate NY is tough. Is it that the return is much lower than other parts of the country, or that vacancy rates are higher, or that price appreciation is minimal. Would love to hear your thoughts in comparison to other markets. 
Thanks,

I am in a similar boat. While my long term goal is passive income I am starting small. If you live in one of the units that would free up your mortgage/rent. That alone will have an immediate impact on your finances. You can afford to safe more and will most likely be able to still cashflow. 

Originally posted by @Nathan J.:
Originally posted by @Engelo Rumora:
Originally posted by @Nathan J.:

Hi there, I am seeking some advice on strategy for a newbie. Should i start with 3 unit or 4 unit buildings and grow from there, or should i start straight away with commercial residential real estate and look at much bigger buildings (even apartment complexes)?

My goals are cashflow. I have spent the last 2 months doing a significant amount of research and learning about REI. I have been analyzing tris and quads in the upstate NY region (hudson valley), and am about to start looking at tris and quads in Albany, NY. So far - i have found only lukewarm deals. I don't really want to spend a lot of time with the day-to-day of managing properties, and essentially want to be a hands-off investor; this is what makes wonder if i should be looking at much bigger buildings. I do have a good chunk of capital to invest

Would appreciate any insight here?

Hi Nathan,

Be patient and start with a smaller dollar figure as it will minimize your risk.

You can always build from there.

Upstate NY is one of the toughest rental markets across the US in my opinion.

Thanks and have a great day.


 Engelo - thanks for the reply. Would you mind explaining more why you think Upstate NY is tough. Is it that the return is much lower than other parts of the country, or that vacancy rates are higher, or that price appreciation is minimal. Would love to hear your thoughts in comparison to other markets. 
Thanks,

No problem Nathan,

The lower end classed like C and D are much worse than in any other major city IMO. It is also very difficult to find a competent property manager that can manage and make the numbers work.

I have also witnessed a lot of greed in the area due to major foreign investment in low priced "high" cashflow properties and every operator is just looking at doing volume without building long term, sustainable relationships.

Thanks and have a great day.

@Nathan J.:

Nathan,

What do you consider a good chunk of cash? 3 and 4 unit properties are management intensive and are hard to place with a competent management firm as they typically have a minimum size deal that they will work on. I work with a number of investors who buy NNN investment grade properties, since they have low management needs, or multi-tenant retail where cash flow can cover a reputable management firm. Typically these investors have cash to put 25% down and liquidity of 10% of the loan amount.

Mark

Thanks Angelo for the insight.

Mark  - thanks for the response. I have never considered triple net leases before. How would you advise i explore this avenue further?

@Nathan J.  As a multifamily investor that uses property management companies I favor large sized properties because the economies of scale allow them to more easily support professional 3rd party management. Most of what I've read say that to more reasonably support using a management co. you should have a minimal size of 20 units. that being said you can do it if you buy correctly, especially a property with significant upside to the rents. I have no knowledge of your local market or the management cos. available to you, but, that makes a significant impact on your success with this strategy. Good luck.

@Nathan J.  

Start off at a price point that you can easily afford to pay the monthly expenses of owning it on without impacting your lifestyle.  This way if the investment is a total bomb it doesn't financially crush you.  See if you like this type of investing and then expand from there. 

I personally would start small.  You can do all the research in the world, but at the end of the day, you really learn the most after you get your hands dirty.  Get a deal complete, take stock of what you've learned, and grow from there.  Good luck!

I own a duplex in the capital district. My family always owned rentals there and never had any problem renting or tenant issues for that matter. However it is commutable within Albany and a professional tenant duplex. Appreciation seems limited. I personally wish to get out of it since I am out of state and inherited it. I do know other areas can be tricky however. A personal friend made his empire in that area.

Thanks. I agree that capital appreciation seems really limited with multifamily buildings. Unless rental income increases then when you come to sell it will be tough to command a higher price than you've paid. 

I often hear investors say, "Knowing what I know now, I would've started bigger."  I often say it myself. You have to weigh the fact that if you start smaller you are going to be learning with little money down, and little rewards.  The bigger you get the bigger risk, but also the bigger (shorter) term rewards.  I'm in the go big or go home camp these days.

@Nathan J.   I'm in the start small camp especially for newbies.  But it's hard to go against the likes of @Michael Blank , wisdom from experience there.

For a newbie, it's probably going to be more about education than profits (but don't ignore the profits!).

At this point, you don't know what you don't know.  You may not know how to handle: tenant relations, maintenance requests, contractors, turnover, lease admin, property managers, "professional" tenants, neighbors, capital expenditures, municipal codes, federal laws, evictions, lawyers, budgets, taxes, etc. and how each one can affect the profits (or eliminate them.) What you will learn in a smaller, less financially-demanding building can be applied to much larger buildings, hopefully, in your future.

Having said that, since you are just shopping, why not shop both?  It will help your understanding, probably increase your circle of contacts and may draw you to one over the other.  More doors can equal more profits if you know how to run them correctly.

Good luck.

I am in the "go big" camp. 

I just typed out a long email of why, then I clicked on the @Michael Blank  article above and realized he said everything, but much more coherently than I can.

I think it is fine to start big as long as you have a good property manager and a real estate agent with some good experience on multifamily (5+). I like 5+ units simply because of the economies of scale that makes use of property manager more feasible, especially when you want to be hand off on the property management side.

Himanshu

@Nathan J.   I think this comes down to your comfort level and how much risk are you willing to take on.  You need to weigh the pro's and con's of both and see what you are comfortable with.  This goes with any type of real estate investing, it is all about risk management.

Thanks everyone, great advice. @Michael Blank  great blog!

Would anyone have advice on finding apartment deals say on the 12 units and bigger side? Given that NY is such a tough market because of expenses I am also considering Philadelphia, PA & Indianapolis, IN & Trenton, NJ. I would be open to other markets like Jacksonville, FL and Columbus, OH also.

One advantage i do see with single families and duplexes, tris and quands is that they are more liquid. If you wanted to liquidate a portion of your portfolio after say 5 years it seems you can do that much more easily & quickly by selling a couple of your houses, rather than selling a whole apartment building. I think with single families you could get better appreciation prospects as well if you choose the right markets. But i guess that all comes back to clearly defining your goals and sticking with the appropriate strategy for your goals.




Hi Nathan,

I disagree with the more liquid statement for 2 to 4 units . I hear it often from investors that are mainly in the residential space.

The reason they say that is they simply do not have the connections in the larger player space as they do not do most of their business there.

Just like residential investors have databases so do commercial investors and brokers. The buyer for a 50 unit apartment building for the most part isn't looking at a 4 unit property. You can easily sell these properties when you want to IF,IF you bought correctly.

I will say it is easier to find a sucker on a 2 to 4 unit if you bought wrong and need to resale as there are more newbie investors looking at those. You get to the larger multifamily or commercial assets and either the investor has been investing for decades, they have sold businesses in other fields and are already astute with money and due diligence, or they are leaning on a professional that knows how to screen and buy right for that asset type.

You buy property with the exits in mind and your expected time horizons. 

The 2 types of properties are very different. The larger properties are income and cap rate driven with the income approach. The smaller properties of 2 to 4 units are the comparable sales approach for an appraiser.

So these are just two different worlds by miles. A lot of it has to do with regenerating capital and how fast you can do it. If it took you ten years to save up 300k and you spend that on a property and you make 60,000 a year then it will take you much longer to buy the next one then a doctor who is saving 30k to 40k a month after expenses.

This is really situation dependent. I usually have to talk to people on the phone and see net worth and liquidity to give my opinion of what they might look into. Nathan nothing is passive about small multifamily buildings. It all depends on how much money you have to start. If it's a few hundred k it's going to be very tough for you to find anything passive in that range as a direct owner.

My advice for you is to hold off buying anything. Your first objective is to gain prospective and education. 

To do this you must, 1) Join your local real estate investment group. 2) Ask around and find the most successful investors in the group. 3) Take them out to lunch and see if you could develop a mentoring relationship. 4) Shadow your mentor(s) for some time and learn how they produce their results. And if I could add a final step, it would be to partner with your mentor(s) or other successful investors before you do it alone. 

Buying investment properties is not the same as purchasing stock. It's not about which is better Large Cap or Small Cap. To be successful, you must have a good understanding of financing, management, rehabbing, taxes, law, etc., especially when you are able to spend a sizable amount. I'm not saying it's difficult, I'm saying that when you have a large amount of money to spend, there will always be someone there to help you spend it. 

Learn the business first, and then you when you look at those lukewarm deal again, you will have the knowledge and experience to pull out the gems.

Good Luck.

Knowing what I know now, I would have started bigger. However, I had to learn, I had to grow, I had to cut my teeth somewhere.  You want to learn in an environment where a mistake will not be your financial ruin.  If some of the same issues that I dealt with and learned from on my 4-plex's came up on a 20 or a 50 unit complex, I simply would have been financially crushed.  I would take the time to learn by starting small and growing from there.  I started with a town house, then a single family then on to 4-plex's and going up from there.  Growing in this way also proves your track record to lenders and potential investors.

I had a financial adviser who always advised me to risk a little to learn before I go all in, or at least go big on something.  When I asked her about doing tax liens, she wasn't overly familiar, so she advised me to work with someone who knew the ropes, give it a shot and see what happens.  Did that, got the system down, now I do it on a bigger scale.

I agree to an extent that starting small has less risk in certain situations.

The key is working with someone whether that is an experienced investor for a mentor or a commercial broker or someone who is an investor and also a broker. This person needs to value the long term relationship they create with you versus selling you  a bad investment to make the quick buck. A relationship where your interests are put front and center.

I tell all my clients I work with that I am about the long term relationship and not a one off deal. I would rather have a core group of clients with a great relationship for the long term that I connect with as friends as well as business.

Going small also can have it's disadvantages. One being you get the best loans and terms on the larger properties as more lenders are competing for the business and you can land non-recourse. Local banks wants the smaller loans of 2 million and under and they want full recourse against you and amort. schedule isn't as good and not long on the length of the loan term.

Also where we are at in the investment cycle.  Interest rates are really low right now compared to a historical 50 year average and assets are priced well as some asset classes are at the bottom of the recovery cycle and just starting to go up.  If you have the cash now you do not want to start small in a cycle for that asset that has already peaked and then spend a few years to go bigger and by the time you get there that segment has recovered and interest rates are much higher. I would say there is more risk in taking on a larger asset in a top cycle and high interest rates even if you have some knowledge.

So again this varies based on goals. You really need to find competent people who know what the market is doing and can give solid insight into where you might want to place capital to take advantage.

Hope it helps.  

Originally posted by @Nathan J. :

Thanks. I agree that capital appreciation seems really limited with multifamily buildings. Unless rental income increases then when you come to sell it will be tough to command a higher price than you've paid. 

 I guess it depends on the property.  One property I have is a duplex on 1.5  acre with new homes being built adjacent on large acreage lots. I would expect this to appreciate nicely.    It is also on the guilderland/Rotterdam line where values are better.  But again that is not the typical duplex.  in the capital district area.  A friend of mine has the older commonly seen apartment buildings and is trying to get out.  

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here