Investing Timeline: When to switch to commercial
Blake ElderBusiness Member
Professional · Wasilla, AK · Member since 2014 · 35 posts · 16 votes
RMG Real Estate538 Reviews
Investing Timeline: When to switch to commercial
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Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
10y@blake
@Blake Eldercongrats on the foundation you're building with the 4plex. I purchased 4 single family homes then realized all the paperwork and individual tracking of insurance, etc combined with the relatively small profit per month (about $150 per house) wasn't going to get me where I wanted to go.
So, I learned how to buy larger apt communities with investors and share in the profits. I went from 4 single family homes to a 168 unit on my next purchase.
Ultimately, it boils down to your goals and if you think you can achieve them by taking the approach you're taking now.
12 Replies
- Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes10y
@blake
@Blake Eldercongrats on the foundation you're building with the 4plex. I purchased 4 single family homes then realized all the paperwork and individual tracking of insurance, etc combined with the relatively small profit per month (about $150 per house) wasn't going to get me where I wanted to go.
So, I learned how to buy larger apt communities with investors and share in the profits. I went from 4 single family homes to a 168 unit on my next purchase.
Ultimately, it boils down to your goals and if you think you can achieve them by taking the approach you're taking now.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Blake Elder it is going to depend on your goals and your resources. @Joe Fairless mentioned that he went from 4 sfm to a large mf. I skipped the sfh all together and my first purchase was 20 units which happened to be 5 4plexes. The next step was to a 62 unit. I think the key to both mine and Joe's move was the use of OPM. No matter how much money you have, you will run out at some point. You may as well start early learning how invest with OPM. From there you can grow at a faster pace. Again this depends on your goals
- Professional · Wasilla, AK · Member since 2014 · 35 posts · 16 votes10y
Thanks for the advise guys. Are you doing equity syndications with these projects, or primarily using loans from private investors and remaining in control? It seems like at a certain point inviting others in for an equity position in each new project would be a good way to go. What is your experience with these? I see a lot of posts on how to purchase the first or second or third property on here, but I want to make sure I am thinking with the end in mind and making sure I am paving the way for successful additions of other investors in the future. Thanks!
RMG Real Estate538 Reviews - Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Blake ElderI invest with OPM in the equity position. In order to plan for future investors build up your credibility. This may mean doing a deal with someone else with experience.
- Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes10y
@Blake ElderI do the same thing that @jeff
@Jeff Greenbergmentioned
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes10y
A lot of this is going to depend on your financial abilities as well as your comfort level. Apartments are typically more work, more turnover, etc. Apartment prices are driven by NOI. If you can purchase at a good price, raise rents, lower costs, and increase NOI you have created a greater value for the property. SFR (up to a 4 plex) prices are generally determined by comparable sales. In Lee County, prices have gone up about 12% over the past year. That is easy money...and has nothing to do with NOI unlike MF or commercial. If you want to pursue commercial, talk @Joel Owens. He is an expert on commercial and may have some expertise on large MF as well. You will find a lot of investors are very happy with smaller properties they can manage themselves. I am one of those:)
- Professional · Wasilla, AK · Member since 2014 · 35 posts · 16 votes10y
Thanks @Jeff Greenberg and @Joe Fairless, much appreciated. I know the details are going to differ deal by deal, but how many investors do you typically pull in? Do you put in your own capital as well, or typically receive your equity for putting the deal together and managing all the details after closing?
@John Thedford Thanks for your insight as well. We are seeing very similar appreciation in our area as well. I just want to think ahead and make sure I am thinking for the long run. You mentioned that there are plenty of people who own smaller properties and are happy with them. Do you know of anyone doing this on a large scale? I'm just looking for good models and systems for the future and want to base them off of good examples.
Thanks for your input!
RMG Real Estate538 Reviews - Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes10y
We are currently on the cusp that you mentioned. If all goes well we will be closing our 8 and 9th single family. My goal next year is to get 2 four plex, from there I am starting to look at commercial/apartments.
The key I am finding for the transition is money. I have the desire to scale up but it is finding the funding. At this point I have not been comfortable with OPM. Therefore everything we do has been within our funding. Therefore we have scaled up as funding opens.
So for us the limiting factor is financing. Hope that helps!
- Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes10y
Always be on the look at for a property you can create value and cashflow. Financing when you have more than 4 or so loans gets a little more difficult, that is when I went directly to portfolio loans.
I started gathered a couple commercial properties when the price seem right. The commercial properties I bought were with seller financing, on the MLS and seller financing was not advertised. So for debt it was actually easier than going to the bank and getting a loan for a single family.
1st commercial property I bought was a office/warehouse in a nice place in Fresno. Office needed repairs. Listed for $130K. Close on $115K, seller carry was $100K, interest only. Now worth around $150K
2nd deal was a 5 unit lower income area retail businesses. 2 parcels corner lot. Seller financed for 7 years.
Frank
- Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes10y
@Blake Elderthe # of investors varies depending on the deal and the investor network you have created. Also, depends on the minimum you create for the deal. My first deal I had 12 investors at an average of about 100k each. I also brought in the brokers who put in their commission into the deal of about 300k.
As far as equity, I didn't put my own company's money in the 1st deal (didn't have much to invest) but did my 2nd deal (a 250 unit) and will every future deal. In all deals I get equity for putting it together.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
All great points of view, it pretty much boils down to comments by Joe and Jeff, there is no right time that can be set as everyone is different.
OPM is definitely built on credibility and you need to be correct about your deals.
Small commercial, say under a million is usually tough on the financing side, larger down payment, if you go with non-residential such as SBA, financing can be expensive but doable. Owners usually have long marketing times, naturally everyone isn't in the market to buy a multifamily. This opens a wide door to seller financing and more creative transactions.
I take SEC regulation pretty seriously, so I don't ever take on more than two other "partners", usually none.
A great way to acquire larger properties from individual owners is by buying a fractional interest. It's the "TIC, TAC, TOE" approach or strategy.
Basically, you find your motivated seller, agree to buy part of the property in tenants in common with them, seller finance your purchase, then you have a TIC Agreement to manage and operate, cover expenses, repair, maintain, improve, share in the income and have a future buy out.
This is perfect when you have little resources or don't want to deploy capital. You'd be surprised at how often a seller will take on a partner instead of selling, especially tired landlords. When an owner can't sell the whole shooting match, this gives them an exit.
Accounting wise, the first year you carry your asset at cost, but since fractional interests are less valuable than a majority interest or equal interests after a year you can adjust to the fair market value claiming the percentage ow ownership, in other words, real equity.
Even with a minority interest you can take full charge of ownership duties, including the power to sell! Wholesalers really need to learn this as it keeps them out of all kinds of trouble. Fix and flippers can take title and go to work, hire contractors, obtain permits and do the work any owner is allowed to do. A buy and hold guy can diversify holdings quickly and at a much larger scale than trying to finance each deal individually.
Want to avoid any due on sale clause? The owner may set the property in a Trust an additional beneficiary is for estate planning purposes. Properties held in a business entity simply admit minority members or stockholders, title doesn't need to change.
Properties held with fractional interests are much less agitated by bankruptcy and creditors as minority holders are more protected and the majority owner is as well by failings of a minority holder. Risk wise you can be better of in a fractional ownership than owning it all.
So, if you have the notion of moving up with little money, but you have experience, there is your stepping stone! Good luck :)
- Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes10y
I agree with @Blake Elder it will depend on your resources. I've owned duplexes to 16 unit apartment buildings all over the country. Like buying residential real estate you will need the money for the down payment, the reserves, 680+ credit scores and good credit. The typical down payment on an apartment building is anywhere from 20% to 25%. The loan to value and rate will depend on if you are an in state investor, the loan amount size, the population, if the property cash flows and the occupancy rate. I would work from worst case scenario so that if the any problems arise, you can absorb them. This means think in terms of having to put down 25% and having 12 months PITI reserves for a cash flowing property. Commercial terms are typically a 5 year term with an amortization around 20 to 30 years. The term in a commercial typically balloons (due in full ) at the end of the term. But there are now hybrid products so the loan could adjust at the end term period.
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