Should I jump right into Multi-Family???
Rental Property Investor · Katy, TX · Member since 2013 · 417 posts · 171 votes
Hi Jeff,
Just an FYI: some things I've learned about rental properties while running my property management company (small-140 doors).
Make sure you have strong positive cash flow or a good amount of income because you will have other expenses than minor repairs and cleaning.
This is what we have found:
Check the age of the hot water heaters (if they don't have an age write down the serial number and look up the model online for year built). Water heaters here usually last 15 years +-3 years. Replacing 4 hot water heaters if you have a plumber do it: $2800.
How old is the carpeting in each unit? 7 to 10 years use and then replace are good numbers for us. We figure $1.75 x the entire SF of the unit = replacement cost ($1500 to $2200)
How about the heating and air conditioning - here we us heat pumps mostly to heat and cool. They last about 17 years, and then the owner is spending $4000 to replace.
How old is the roof? Even tile roofs need the under layment replaced at about 25 years. Roof replacement is usually way more expensive than you think it will be. $5000 to $10,000? Not sure of numbers on this.
How does the exterior look? Exterior painting if hired out might run $5000 plus for a 4-plex.
How is the parking lot? Paving is expensive.
Is there any fencing? metal or plastic wonderful. Wood - bummer. If a wood fence makes it to 10 years here that's pretty good (rot and termites love wooden fences).
How old are the fridges? Renters are hard on fridges. We buy used ones to replace broken ones.
Dishwashers here only last 5 years due to our amazingly hard water.
As an example we own a mobile home used as a rental. We set aside $250/month for big expensive repairs. Probably a little more than we need but better safe than sorry.
Anyway, just our numbers for our area and the quality of the properties we manage (good quality).
Don
I went straight into multi-family (for my purposes, that means at least 5 units, not duplexes - quadplexes), and those are currently the only RE investments I own. If you have at least $75K to invest and have a longer term mindset, I'd look hard at MF. They don't typically have the cash on cash yields of single family, but much more upside potential and less hassle esp. if you're a passive. Check out Lifestyles Unlimited, they're based in Houston and are best in class at mentoring people to run award-winning properties on a national level.
Hey Jordan, welcome to BP and investing. Not sure how log you've been in the game to this point but welcome none the less.
I don't have but just a minute right now to post but......
Go for it and do Multi. I did, first deal was a triplex. Half my portfolio is MFH but the majority of my units are located in MFH.
1 roof multiple doors, several tenants in one place makes it easier to handle for the most part. Have an empty unit.... no problem, mortgage still gets paid from 2 other units etc.
No fear, jump in!!
Just make sure you have done your homework before purchase alright!!!
Hi Jordan,
I'm starting out in multifamily too, so I'm interested to hear what everyone has to say.
In Oregon, you can get a duplex - 5plex for about the same price you can get for a SFH. So, here if I was going to buy a $200,000 SFH the rents would be ~1,300 - $1,500, while a $200,000 duplex would bring in ~1,500 - $2,500 (Portland area). So for the same downpayment the duplex makes more sense, esp when considering you're also protected more with vacancy. But, the costs are higher - garbage, sewer, water is paid by the owner and you need to take care of the exterior maintenance. From what I can tell so far, the "45 - 50% rule" works for SFH, but for MF expect closer to 60% of income going to expenses.
We went straight into MF ourselves (well, except our house we live in, which we bought before anything else). Bought a local triplex first, and since then we've bought two 4plexes in AZ and one in CO. ROI is generally better than on a SFR, so it definitely makes sense.
If you don't own your current home, this would be a great opportunity to buy a MF and live in one unit and rent the other(s), so you can get in with a very small down payment.
Hi Jeff,
Just an FYI: some things I've learned about rental properties while running my property management company (small-140 doors).
Make sure you have strong positive cash flow or a good amount of income because you will have other expenses than minor repairs and cleaning.
This is what we have found:
Check the age of the hot water heaters (if they don't have an age write down the serial number and look up the model online for year built). Water heaters here usually last 15 years +-3 years. Replacing 4 hot water heaters if you have a plumber do it: $2800.
How old is the carpeting in each unit? 7 to 10 years use and then replace are good numbers for us. We figure $1.75 x the entire SF of the unit = replacement cost ($1500 to $2200)
How about the heating and air conditioning - here we us heat pumps mostly to heat and cool. They last about 17 years, and then the owner is spending $4000 to replace.
How old is the roof? Even tile roofs need the under layment replaced at about 25 years. Roof replacement is usually way more expensive than you think it will be. $5000 to $10,000? Not sure of numbers on this.
How does the exterior look? Exterior painting if hired out might run $5000 plus for a 4-plex.
How is the parking lot? Paving is expensive.
Is there any fencing? metal or plastic wonderful. Wood - bummer. If a wood fence makes it to 10 years here that's pretty good (rot and termites love wooden fences).
How old are the fridges? Renters are hard on fridges. We buy used ones to replace broken ones.
Dishwashers here only last 5 years due to our amazingly hard water.
As an example we own a mobile home used as a rental. We set aside $250/month for big expensive repairs. Probably a little more than we need but better safe than sorry.
Anyway, just our numbers for our area and the quality of the properties we manage (good quality).
Don
Kimberly T. I see that your properties are in different states than the one you live in, so I assume that you use a property manager. Would you recommend self-managing if the property is nearby? ( I have a full-time job as well)
We self manage our local triplex, so in general, yes I would recommend it (we both work full time as well). You need to know what you're doing, so research a lot about your state and local landlord tenant laws, fair housing laws (discrimination), proper forms, etc. BP is a great resource for a lot of that, and look to see if Texas has a landlord association with good info as well. Self managing will also help you really learn the ropes and help you establish your own standards (tenant screening, what class of neighborhood to buy in, how much various expenses should cost, etc.), which will help if you decide to use a PM in the future so you know how you want them to run it.
Michell Prunty How do you plan to finance your first deal?
Hi Jordan,
2 options if you don't already have funds: 1) buy a fix & flip first, which is what we did. 2) buy a 2 - 4plex & move into it, which we also plan to do. My broker was talking yesterday about new programs that allow for 3% down and the lender will pay for your mortgage insurance...
There is also the strategy of buying 1, then taking out a line of credit on the property buy another. Didn't Josh write a book on this recently? "Invest with no to low money down?" You may want to check out the podcast if you haven't already. They've interviewed a few investors with different startup strategies.
I wasn't going to reply, but all opinions are one sided here. My opinion of multi-family is low, and that is based somewhat on mutis owned for a few years in Harlingen, TX. The potential cash flow and so called management simplicity is what attracts many investors that make decisions based on an Excel spreadsheet only.
In drastically overbroad terms - apartment dwellers are typically younger, less income, non-committed, unmarried, and lack an understanding of property ownership/ responsibility. These characteristics CAN make for bad tenant experiences. These folks can be harder to manage, and there is more to manage with more units. By contrast, also in overbroad terms, house dwellers often want a stable environment for family.
Hi Jeff,
Just an FYI: some things I've learned about rental properties while running my property management company (small-140 doors).
Make sure you have strong positive cash flow or a good amount of income because you will have other expenses than minor repairs and cleaning.
This is what we have found:
Check the age of the hot water heaters (if they don't have an age write down the serial number and look up the model online for year built). Water heaters here usually last 15 years +-3 years. Replacing 4 hot water heaters if you have a plumber do it: $2800.
How old is the carpeting in each unit? 7 to 10 years use and then replace are good numbers for us. We figure $1.75 x the entire SF of the unit = replacement cost ($1500 to $2200)
How about the heating and air conditioning - here we us heat pumps mostly to heat and cool. They last about 17 years, and then the owner is spending $4000 to replace.
How old is the roof? Even tile roofs need the under layment replaced at about 25 years. Roof replacement is usually way more expensive than you think it will be. $5000 to $10,000? Not sure of numbers on this.
How does the exterior look? Exterior painting if hired out might run $5000 plus for a 4-plex.
How is the parking lot? Paving is expensive.
Is there any fencing? metal or plastic wonderful. Wood - bummer. If a wood fence makes it to 10 years here that's pretty good (rot and termites love wooden fences).
How old are the fridges? Renters are hard on fridges. We buy used ones to replace broken ones.
Dishwashers here only last 5 years due to our amazingly hard water.
As an example we own a mobile home used as a rental. We set aside $250/month for big expensive repairs. Probably a little more than we need but better safe than sorry.
Anyway, just our numbers for our area and the quality of the properties we manage (good quality).
Don
Hello Jordan,
We looked at SF and MF, and went for the multifamily. We bought 2 triplexes 2 years ago and plan to purchase another 3-4 unit shortly. The properties are within 15 minutes of where we live so we manage them ourselves. If we get to a point where we have too many to handle ourselves, I will hire a PM, but for now it is manageable.
We can get higher cash flow in our area with multifamily but there is more work involved. I am taking care of lawns and handle the snow removal (pay one tenant and trade services with a neighbor of the other house), and occasionally I have to handle disputes between tenants. When we have a vacancy it isn't a big worry- the other two are paying the bills in the meantime. Insurance is a little higher per house since we are dealing with 3 kitchens and at least 3 baths per house.
Kelly
I've partnered w/ fellow Lifestyles investors, many of whom have become friends. Regardless, every potential outcome is spelled out in the operating agreements, including death, divorce, bankruptcy, etc. Total acquisition cost on these deals has ranged up to ~$30M, so w/ a lot of investors' money at stake nothing should be left to chance or oral agreements/understanding.
i have sf and mf, so I'll give you both sides of the story. The apartments are higher turnover, so you will be advertising more often. If you have a pm, they charge 50-70% first months rent + 5-10% monthly. You should use the same ratios to pay yourself if you will manage.
Apartments also default at a higher rate. I can't remember every having to evict a tenant in a single family home. I've had probably 3/12 apartments default on their lease in the last year... Just keep the deposit and moved on.
all in all, the apartments make more money, but it's more time and energy. If you have more time than money, go multi. You will make more. If you have more money than time, go singles. You can leverage your time much better. If you have even even more money than that, develop, which is riskiest but the most profitable.
Hey @Don Glasgow , I see that you are a new BP member. Welcome! I hope you'll hang around, because experienced investors who are willing to share their knowledge are extremely valuable to the community.
Hey Jordan,
How to find a good property manager:
I hate to say it but most property management companies suck big time. They are horrible.
If I had to find a good property manager in another town I would make a list and call 10 property management companies. If they don't answer their phone or call right back, scratch them off the list. If you can't talk to the owner or they are hard to get a hold of, scratch them off the list. Phone tree? scratch them off the list. Get a hold of a live person but they are ignorant or rude, scratch them off the list.
At this point you might have five companies that you can interview over the phone. Once you've got the owner of the company on the phone ask them the following:
1. Do you pull and use FICO scores to qualify tenants? What are the numbers they want to see from a potential renters. For us they are credit scores of 630 or higher for apartments and 650 or higher for Houses, condos, townhomes. If they don't pull an actual score or their standards are too low scratch them off the list. This is by far the most important thing that you are looking for.
2. Do they do criminal background checks? We don't put people with a criminal mind set or a arrest filled life into our rentals. If they have multiple impaired driving arrests or they have a domestic violence arrest they don't rent from us. Who needs the drama.
3. How does the property management company treat their tenants and owners? Do a Google search on the company and see what the reviews are like. How many stars? Property management companies will always have a few bad reviews from past tenants. You're looking for bad owner reviews or a bad over all score.
4. A small investment business might feel better with a smaller property management company.
5. When you go to their office to meet with them don't be fooled by a big fancy office with a lot of employees. You're looking for honesty, high ethics and (in my opinion) at least a small sense of humor. Someone who you mesh with.
6. For goodness sakes make sure you can easily cancel the property management agreement with them. If our clients are unhappy with us (doesn't happen very often) they can cancel the contract by giving 30 days notice. Other companies here only allow you to cancel if the property is empty and it has to be on the anniversary of the day the contract was signed. Any company that has to lock you in so tight that you can't hardly ever leave is not a company you want to do business with. Obviously they don't trust themselves to make you happy. In fact that are certain that you will be unhappy with them.
To me those are the most important items.
Don
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I jumped in the deep end with 33 units in a questionable neighborhood. I was literally shaking at the closing!! I stayed on the heels, literally, of the PM and that's when the learning began. I haven't looked back since.
Partnering? That's a question best answered by another, maybe. My partner was broke, which was why I had to take over ownership or lose my equity in the bldg to foreclosure. But I would partner again for sure! With the right person. And networking has introduced me to a few right people with whom Ive done syndicated multi fam deals that have been working out fine.
I Eva,
Can I ask how you financed the purchase? Did you save for the down payment?
Thanks, Don
I wish I had read this, (I was so green) when I first signed with my PM for my first time out of state SFR (she had been my realtor who managed as well). Well, everything she did or lack thereof was starting to really cost me a lot of money! I had to stay on her (team), in which, she totally resented me (had she been doing her job right, I would have gladly let her taken the reins). Finally, she asked to break contract and when I took over managing my cash flow immediately went north. As a newbie in REI, I was lucky in that it was a class A property too. Had I known that class A property is a lot easier to manage I would have managed it from the beginning, but it taught me a lot about what I should expect from PMs!