Investing in multifamily properties the right way

[Remone R.]

So me and my fiancee' purchased a fourplex back in february for about 500,000 as owner occupied. Since purchasing we've completed a number things maintenance etc. including raising rents--Unit 1 $1300 Unit 2 $1300 Unit 3 1100...The plan is to wait another 5 to 6 months and then do a cash out refinance and take that money to purchase another property. Dilemma~ If lenders designate 1 to 4 units as residential and residential properties mainly gain value according to comps and capital improvements, should i not focus on raising rents and decreasing expenses and focus on capital improvements i.e. painting, roofing etc? My plan with this property was to raise rents to market rate and install submeters to have tenants pay for utilities all in all to increase NOI. BUT I've read that increasing NOI in a residential '1 to 4 unit' property doesn't increase equity as it does in a commercial '5 + unit' property. So I'm confused as to what i should do. Its more cost efficient and easier for me to raise rents and install submeters, but if its not going to help why bother. right?

Again my goal is to purchase another 4 unit, but preferably 5 + unit and increase NOI to build equity then refinance and repeat the process. 50 units in 5 years..im determined

[Mike Roy]

@Remone Randolph - As an investor, I personally would rather buy 4 units instead of 5 for the simple fact that I can finance with a conventional loan. If I'm going to go commercial, I want a much larger building for the economies of scale to make the less attractive financing terms, and inherent risk, worth it. I think you were right to buy a 4 unit, especially as a live-in.

As far as adding value, my guess is that you are more likely to sell to an investor than not. Investors want NOI, so I would definitely focus on rents if there is immediate upside. That will obviously be good for you too while you own it. Increasing gross rent is never a bad thing.

Improvements are nice too, but all investors really care about is that the building is clean, functional, safe and competitive within the market. The best improvements you can make will be those that increase income, such as adding rentable storage; or reduce operating expenses, such as separating utilities or making efficiency upgrades if you pay for heat/ac.