Small Apartments - Finding the Sweet Spot

2 Replies

Hey Folks, 

I'm new to RE investing and currently in the process of developing my business plan.  I've decided that multifamily is the market for me and currently working through the criteria I want to use to identify the right investments for me.  Looking to buy and hold for cash flow.

@Michael Worley recently commented on BP podcast with Jeff Greenberg.  In the discussion that ensued he laid out property condition spectrum with three distinct points of reference: Fully Performing; Value Add and Rehibilitation Condition.  While fully performing seems to be perferred by lenders my take is that there isn't enough "up-side" for my taste.  From looking at a Rehibilitiion Condition property in my area the cost of the upfits (~20k per door) seem to make this investment a poor one.  This leaves the Value Add classification as the place to be.  My thought, however, is that the "sweet spot" on the spectrum is really at the lower end of Value Add (approaching rehibilitation but not there).

I'm thinking the sweet spots for my first investment should be:

1) 20 Units in Value Add 

2) 5-10 Units in Rehab

Both of these conditions would be coupled with some quick financial measure to identify properties that warrent further research, perhaps by applying the 2% rule to the sum of purchase cost + upfit cost

Questions for those of you with experience in this space

1) What is your Sweet Spot and why?

2) What other criteria contribute to the "Sweet Spot"?  Perhaps age of the property?

3) What criteria would you recommend for a first time investor in MF?  (With a full time job I'm going to be heavily reliant on a team of professionals to assist - Prop Mgr, Contractor etc)

Thanks!

Great question! My sweet spot is the 7-24 unit range, closer to 14+ so I can afford on-site mgt. But I've been doing this a while. Starting out, I may suggest a smaller 3 or 4 unit to learn the ropes a bit and to take advantage of residential lending. I know some guys in my REI group with full-time jobs. Careers, really. They do not like rehabs or older buildings with higher upkeep and maintenance headaches. They buy nice buildings from motivated sellers. They self-manage and self-repair the small stuff, at least. The costs associated with PM are much higher than the 7-10% of gross rents. For starters, you will pay a month's rent to place a tenant. In the world of craigslist and outsourcable background/credit checks, they're not that hard to find or screen. To flip a breaker they will call an electrician- $85. To assess a drain clog, they will call a plumber- $85. At least. Maybe closer to $100 a pop. Professional tradesmen will eat your lunch. I don't rehab, but contractors like your lunch even more and finding a good one is as hard as finding a good PM or a good investor-friendly realtor. Bottom line is, I would buy quality buildings built within last 20 yrs and plan on doing some of the little stuff myself if I had a full-time career. Hope this helps @Dan O'Neill.  Welcome to the site and welcome to RE investing!

@Steve Vaughan, 

Lots of good info!  Thanks a bunch for sharing your experience.  

Dan

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