This is my first post so I apologize if its in the wrong spot and for the length. I need some advice on how to proceed with multifamily investments. Any and all advice welcome!
Back in 2011 my business partner (also my longtime best friend) and I decided that we wanted to venture into the world of real estate investing. We decided we wanted to use a buy and hold strategy involving multifamilies FHA loan to purchase a fully rented 4 family property with a large 3 car garage in the Baker neighborhood of Denver that was in need of rehab.
We purchased this property for under his name at 3.5% down (~$14,000), total purchase price of $360,000. The appraisal at the time valued the house for $390,000. From the beginning the property cash flowed slightly over $1000 a month with him occupying one fo the rents. After about 2 months we decided that since this property was going to be ours for a while, we would start making upgrades to the units and the property in general.
The property has only seen vacancy when we chose do a complete remodel of the unit. Even during the construction with 1 unit vacant we were still cashing flowing (~$300). I know the popular opinion would be to just sit on it and collect cash but we wanted to get our hands dirty and rehab the property from a C level property to >= B+. Over the last 2 1/2 years we performed, with blood , sweat, and tears multiple renovations to property totaling about $50,000 (both profits from cash flow and our own money) and have turned this property into a low A property. Throughout this time we gained valuable lessons on landlording/ property management, rehabbing, and real estate in general.
Fast forward to current times. The property is currently cash flowing $1600/ month and would easily put us around $2200/ month if it was not for my business partner and I occupying 2 of the units (we are both paying well below current rent for the area). The property is now sitting in an investment loan with around $340,000 left on the note and is under an LLC. The property is appraised at $500,000 as of few weeks ago during the refi process. We have about $25,000 in cash and can also use our HELOC on the property ($111,000 at 4.25% with 3 rate locks if we choose to utilize them).
We want to stay local (greater Colorado area, specifically Denver, Boulder) but have considered looking more into midwest larger unit properties. We are a little nervous venturing outside of this area as we are familiar with the markets here and don't have experience with this type of venture. We are currently debating getting 2 more 4 plexes (1 under his name and 1 under mine) and trying to repeat the same process, albeit more streamlined and not with some of the rehabbing mistakes (bad contractors, permitting issues etc.) that held us up with with the first one.
Keeping in mind that our overall goal is to expand the portfolio and cash flow, we would like eventually get into larger apartment complexes and start a more formal property management company. I was hoping for some advice on how to be successful in working towards our goals.
Thanks for your time and expertise!
welcome! I would do the same thing again. The tough part will be finding the properties that cash flow as well around Colorado. You will need to live in a unit to get the low down payment again.
Good work on putting in the hard work on rehabbing the 4-plex. I am a strong believer in picking your investment strategy and sticking to it, especially if you are seeing success. With this in mind, I would stick to the area you know and try to find another 2-4 unit which you can put some sweat equity into and slowly grow your portfolio. Sounds like you have a commercial loan on your 4-plex currently, is that correct? Are you and/or your partner in a position where you could get 30-year conventional financing? This would lock in historically low interest rates and possibly improve you cashflow position as well.
Best of luck
Thanks for the reply. Yeah its currently a commercial loan. Both my partner and I are in a spot where we could each take a loan out individually ... we've tossed the idea of each taking out FHA loans on 2 4-plexes putting 3.5% vs 1 4 plex conventional with 20-25% down in a highly sought area of town.
The best way I know to get a cash flowing property in the Denver or Colorado Springs market is to bid on HUD homes as an owner occupant. To get a better idea of what is out there, get yourself on wholesalers lists for discounted properties for sale. If you don't want all the emails, specify that you only want to receive listings for multi-family properties.
@William Gregoire Keep in mind that you bought at the bottom of the market (or close to it) and are viewing the situation now from the top. Don't expect that sort of dramatic appreciation again that quickly. You'd have to find something at a steal to get that appreciation and cash flow again in the current market. Many Denver buy and hold investors are being very picky about what they're buying right now because cash flow is hard to come by.
@William Gregoire Nice appreciation play. Just curious - what are your rents? I'm having a hard time seeing the cash flow you're claiming after payments, tax, insurance, mgt, etc on a 360k note along with (2) units being rented below market. I want to make sure you're accounting for all of your expenses before you go after another one.
As others above me have pointed out, you knocked it out of the ballpark with buying at the low of the market. Things have obviously changed drastically since 2011 and you want to make sure you're viewing the current market for what it is (along with true cash flow expectations, etc).
@Mark Ferguson .. Thank you for the warm welcome! We are hoping to both get out of this property and into 2 additional owner occupied situations if the right opportunity arises.
@Darren Smith ... Any good recommendation on wholesalers list in the area? Thanks!
@Adrian Tilley ... Yeah I know we got in at the right time. The things we have currently been seeing would cost us more 30-60K and would, flow very minimal amounts <$300 total. I feel like we could put some sweat equity into the property and get some equity out of what we have been looking also ... but overall I agree with you 110%
@Sam B After you post I went back and looked at the numbers a little more. I didn't take out the monthly insurance or tax. Since we both live in the building and have done the majority of rehab ourselves, I just figured the maintenance and repairs into the 50K number above. With the taxes and insurances taken out it would put us right around $1340 before I adjust anything else to market. Based on the condition of the place and the demand of the area (actually had a tenants bid up the rental price on unit 2 to get the place from what I was originally asking ... crazy I know) I figure when it bring everything up to market I should be at $2100 conservatively. Below is a better breakdown. Let me know if I am leaving something else out
I do the property management and don't take anything for doing so. Debt plus interest is slight under $2200/ month (less than $340K was financed on the refi). insurance $167/mo. No PMI. Tax was right around $180/ mo. Utilities are individually metered. Water $90/ mo. Total expenses right around $2650 give or take a few dollars.
Numbers are as follows:
Unit 1 - Studio: 650/ mo (market for quality/ finishes is 750, business partner occupies currently)
Unit 2 - 1 bed/ 1 bath: 1350 month (currently at market high end finishes throughout)
Unit 3 - 1 bed /1 bath: 850 (I live in unit ...market for for unit 1250)
Unit 4 - 1 bed /1 bath : 850 (could rent up to 950+ but doing another friend a favor)
Garage - 3 car 600 sq/ft +: 290/ mo (rent could easily be 450-550/ mo ... space will be in greater demand as more meters come into play and the parking becomes permited over the next year)
That's good what you guys did, A lot of work pays off sometimes if you can afford it. My first rental was in a poor area, nothing to write home about, lower to lower middle class. I was very confident about turning the rental into something it could not be at the current time. So Im glad your rehab paid off.
One thing I that I am adamant about is keeping things in the realm of being "rent ready", I do not change places into where I would want to live. I make the place clean, safe, and BARE BONES BASIC. If someone doesn't want to live in one of my units, Oh well, because there is a line of people out there who do.
Now this is my philosophy here in Pittsburgh, but I am sure it is true in other parts of the country. Once you start getting into the double digits of rentals, get into a pattern of how you like your places to be. I buy all the same tile, carpet, toilets, etc. I know exactly what product im going to buy and how much it costs (and to install).
I am not saying you cannot have an empire of pristine rentals, you can do anything you put your mind to, but so your not constantly spending more time and money, take the rentals on a case by case basis. For every rental unit, there is a renter that will live there. Hope this helps, best of luck man.
I would be inclined to try to repeat what is working very well. In a higher market you will have to be very selective and probably make offers on multiple properties to avoid overpaying.
It looks like owner occupied financing would be the way to go. One thing I would recommend if possible would be to have the units rented out before moving into the new place. I would definitely not abuse the flexibility, but there usually is some flexibility in occupying for owner occupied financing.
@William Gregoire sounds like a nice biz model - congrats on the success so far!
Amazing first purchase! Congrats to you both!
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