4plex vs 10 plex

13 Replies

Hello,

I am pretty comfortable evaluating deals up to 4 units and have a have some experience with how the expenses run for these.

A great 10 plex just came up for sale by the bank, and I am curious how my analysis might need to change to take advantage of a larger property like this. What kind of extra expenses does everyone take into account for the additional units, are there any economies of scale, how do your factors change?

Im pretty excited about taking the plunge on this one, and would love some insight about how to make it to this next level of larger complexes!

@Chris A.  I'm in a similar boat. It seems my agent has reached her limit on knowledge of commercial properties and hasn't been much help. I'm interested to see what responses you get here.

Hi Chris, 

I am a newbie investor so I don't have much input at the moment to add here but would love to see what advise the other BP members provide. 

Good luck and looking forward to see whether or not you close on this great deal. 

It should not be too different than a 4 plex with a few basic assumptions like similar age etc.

Are the units individually metered or is it all bills paid?  I big building or 2 or more buildings totaling 10 rentable units?  Is there a laundry facility or hook ups in the units.  If there is a facility, you will have a higher electric or heating bill....both to heat and cool the facility and to operate the units.  This is in addition to whatever you will have to pay to light the grounds, parking lot, water bill etc.  How will it compare with revenue from the machines?....depends what you charge.

What is required in terms of snow, ice removal etc.  I see Tuscon but am clueless about whether you get any cold weather or not.  In my parts, the landlord tenant act treats 1-4 unit properties one way....very landlord friendly....and treats 5 unit or more in a much more commercial, landlord is liable for more sort of way.

Financing will have to be commercial.  I am not aware of a 30 year fixed rate type product you can get on this type property unlike what you can do with a quadplex.  Same with insurance.

but outside major things like this...it really is not much different.  It just tends to be more, smaller units that will have more turnover but still great cash flow if managed properly. 

I would love to hear more from the pros as well. The only thing I can contribute (since I have been trying to go through all the podcasts...) is that in a few of the podcasts when the question came up the consensus seemed to be that the 50% rule was more like the 60-70% rule for larger apartment complexes. But don't quote me on that :)

@Chris Simmons -

Thanks for your reply.

The complex is made up of 3 buildings in a 'U' Shape with parking in the middle. Units are individually metered except for water and sewer which would be paid by landlord. There is a laundry facility. Will need to investigate this arrangement further.

No snow removal, thank 'insert deity here'.

Great tip on the distinction of landlord tenant for larger units. Will investigate that.

Ok...3 buildings = 3 roofs 3 water heaters....I have a 10 plex. Uses 2 water heaters. 

Another thing to keep in mind is the acquisition. If you are going to finance it, the majority of banks will not lend if you don't have experience no matter how good the debt service is. Getting a commercial loan is a different process than a conventional loan. So make sure you can get the financing first.

Start interviewing property managers. As mentioned above, investors, which includes banks, will want to know how you're managing the property.

I don't know your background, but I'm going to assume you haven't managed this many doors before, and you probably have a day job.  While you could do it yourself, I take it you're an investor and not a property manager. unless you're trying to buy your way into a job, farm it out.

Deal math is the same. Get insurance quotes, tax estimates. Demand a property survey if one isn't provided. Check if high speed internet and cable service includes a royalty to the landlord. Live in middle America? Oil and gas royalties are real.

I might add... you will probably be required to get a dumpster for the garbage. Large recycle bins too. Our waste management requires this for properties over 4 units. Don't be surprised if outside people who do illegal dumping are attracted to your dumpsters. Sometimes you can find a zealous tenant who thrives on being a lookout or will monitor the use of the dumpster/bins.

The parking lot also becomes more to deal with, as there will be more traffic. Everything becomes exponential. Be clear about your expectations about parking. Get a contract with a tow company so you can post signs too. You can still have the arrangement that towing only happens when you call it in. Automatic tow contracts can cause you more headaches and are not customer friendly, so try to avoid those.

The more people that live in close proximity to one another, the more the potential for drama. Be sure you have a good rental agreement and enforce it.

Conventional financing would probably go smoother if it was "owner-occupied" and indeed you actually moved into the property for 1-year minimum.  Being on-site every day, even if it was professionally managed which I would budget for, would give you piece of mind and you would know what it takes to "run" such a complex.  This would be your building block for a larger complex.

Call around to Property Managers and have them tell you what they think of the location and the property.  Actually, you can give them just the general area.  Believe me they will know if there are any issues.  ***Why is this a bank repro?** would be my first question.

Do you own any other rental property that you can sell and do a 1031 Tax Free Exchange?  This would definitely increase your cash flow position and you would have more skin in the game for the mortgage lender.

A couple years down the road, you could do a HELOC to pull cash out for your next wealth-building purchase.

Good Luck!

Hey @Chris A. , on 4-units and less you can get residential loans under Fannie Mae / Freddie Mac programs, with 30-Year Fixed rates, which is pretty sweet... you can lock in a low rate right now and it won't change until the loan is paid off in 30 years if you wish.

On 5-units and up, the only loan products I've found so far are commercial loans that are fixed for 5-years and then vary with prime.  (There may be longer fixed-rate products, I'm just not aware of them yet.)

One advantage of 5-units and up, is that the appraisal will place more weight on the Income Approach.  This means you can build in value to your property by getting more income.  Residential properties of 4-units and less tend to weight the Comparables Approach more strongly, so there is less opportunity to create equity through intelligent management and maximizing the gross monthly income.

Good luck and go for the glory! :)

The only thing I would add is if there are local regulations like fire alarms and such. They are required in 5 units and up here and also require quarterly inspections. Don't assume the owner has complied with such laws or that their system meets regulations. 

For financing , it is a commercial loan which will go a little different then a residential loan. For 10 units they will judge it on the property numbers. You may also need to personally guarantee the loan.  Good luck.

Wow! I am grateful for all the wonderful and detailed responses. 

To address some of your questions: the plan would be to come in with a substantial down payment. I've worked in the private lending and flip worlds for years and got a lead on some good interim financing from a private pension plan. Its high rate, interest only, two or three year term, but the property would still generate a generous return compared to my smaller properties. During that next two years we would work to turn the management around. I have some smaller rentals under owner carry back, and would look to refinance all the properties under maybe some sort of umbrella or commercial loan (still talking to lenders, but would be curious to hear your experiences). 

I have an experienced property manager who manages my other properties and believe we could be effective with this property. As @Jeremy Jones and @Colleen F. mentioned, the goal would be to provide an exceptional product, increase the cash flows, and therefore our value. 

@David H. , you mentioned cable and internet royalties. This is a new concept to me and would love to hear more....