Multi Family investment

11 Replies

Hello BP,

I need some advice and guidance. I'm an investor and live in the DC/MD area. I currently own 3 single family rentals and looking to increase my portfolio. The market i'm in is very saturated with investors, not to mention very pricey. I wouldn't mind investing outside of my back yard. I would also love to get into multi families, ideally start off with 5-20 units to get my feet wet and get through the learning curve before jumping in any deeper. However, a few deals came across my path, some Detroit and Baltimore but are rehab projects. The properties are vacant or abandoned, needs extensive work but is priced low to sell fast.  If these deals were single families I would do a reno in a heart beat because the "BRRRR" method works well with the equity game. However multi family appears to be a different beast.

Can someone explain how to evaluate if a multi family is a deal or not without having access to the historical financial data?

Also as a newbie to multi family, is it advisable to take on a full renovation project or should I try to find a turnkey situation to start off? 

@Kwame Knights first off, ask yourself why the property is vacant. Are there quality tenants that can fill the space or will you be stuck renting to bad tenants that may trash the place right away. If you still want to pursue the property, then you need to figure out how much it will cost to renovate, plus all of your holding expenses. Then how long will it take to get it stable? Finally you need to look at rent and sale comps for the area. If you fix it up, what will the income and expenses be and what are properties selling for in the area (usually based on cap rate). 

Once you have all that information, you then should look at the profit potential vs putting your money into a stable or slight value add property instead. You should have substantial upside. For me in that instance I would want to be all in 2-3 points above market cap

Hey Todd,

Thanks for your response and insight. The few properties that i saw were foreclosures and one was abandoned because of fire damage. The fire damage one is a 20 unit in Detroit selling for 25k in a C class neighborhood. I was initially thinking, if this is a complete gut job, everything will be essentially be brand new and i maybe able to attract decent tenants. But I dont live in that market so i'm making alot of assumptions. I will however take your recommendation and research other multi units in the area to detail market rates. Then maybe find me a agent or property managers that may know the neighborhood.

@Kwame Knights although you mentioned that you would like to target 5-20 units you didn't mention how many units are the ones you are considering with the rehab opportunity.  are the commercial 5+ or 2-4 residential?

The appraisal methods are different. 

Residential appraisal are based on CMA, often price per units.

Commercial appraisal based on the income approach. 

-- 

If they are Residential then you need to know what units of the same type are selling for in that market. Easy to BRRRR if you buy right. same like BRRRRing a house.

If they are Commercial. then you need to figure out the cap rate in the market and buy well bellow that. on top of that you need to know what could they rent for as is or renovated. - you can have local property manager provide rental appraisal. 

You could also ask the broker to provide you with CMA and see what things are selling per units and per $sqf. do some research of the condition when it was sold.

If there are no financials and the properties are dilapidated or 100% vacant then go in with very low offer, its going to be a lot of hard work and time to get them re-positioned. 

So you better get a good payout at the end. 

Remember to ask if there are any known structural issues to the building?

and if they had any offers so far, why didn't the property sell? 

A broker have the duty if care and have to disclose if they know of any major issues.

Re Renovation project: Are you planing to do it out of state??? if yes, do you have a team on the ground that you can trust and have good track record? 

If its in your backyard, Then it shouldn't be any different managing 5 units projects then  house, its just going to cost more and take longer.

Turn Key is good option if you want the asset handed to you at market value with no upside. Basically return on capital. usually much lower then if you do the value add yourself. 

I hope that helps!

@Kwame Knights I keep going to real estate seminars and talking to commercial agents and I am hearing now is the time to exit multifamily, not enter. I kind of had the same question as I have always liked the idea. But just wanted to share some insight and responses I have gotten. But hey, I do live in California.

My first thought about your idea is the headache.  If you've got enough damage to bring the price down that low, then it is a major job, and the permitting/paperwork/inspections needed to get it back up and running could be the biggest hurtle.  Again, everything has a value.... but be sure to put a big enough value on your time/effort when dealing with the city/legal/code side of things.

As far as multi being different that SFR as far as the BRRRR strategy is concerned. I don't see much difference. With a commercial purchase you need to be aware of the qualifications for borrowing money, and the same thing would apply when refinancing it. The sources of money a little different, but once you have access, they are the same weather buying or refinancing. I'm about to do my first commercial refinance for a BRRRR, and I'm pretty sure all my ducks are in a row.


Lastly:  25k for a commercial property?  Just the fact that the price is so low has me freaked out.  If it gets down to pocket change range for the local professionals and they aren't touching it, there's a reason why.

Originally posted by @Sam LLoyd :

If it gets down to pocket change range for the local professionals and they aren't touching it, there's a reason why.

^^^ THIS

@Kwame Knights

Hi Kwame

these types of deals pose a lot more risk, especially for an investor who has yet to purchase a multifamily. It will be more challenging to secure financing, although it can be done. Unfortunately, most sellers are pricing these properties as if they are currently rented.

Try to focus only on motivated sellers.  The only way to evaluate is to look at what has traded in the area, discount the rehab work, and also discount for the fact that you will need to spend time renting the units out.  Banks will want some type of historical data if they are going to lend on the deal.

I would look more for a momentum play, an asset that is a bit more stabilized, but is still cash flowing. You want to have success in your first deal. Think big, but start small.

Gino

Originally posted by @Johnny Borrelli :

Kwame Knights I keep going to real estate seminars and talking to commercial agents and I am hearing now is the time to exit multifamily, not enter. I kind of had the same question as I have always liked the idea. But just wanted to share some insight and responses I have gotten. But hey, I do live in California.

 I would generally agree with this if we're talking about buying at retail prices for on-market deals.  But if you can get an off-market or discounted property then why not?  And if you've bought right on the way up and you're cash flowing why sell?

Hey Kwame, 

I would have to agree with @Gino Barbaro . You will be able to find the money on a more stabilized deal. Seems like a lot to take on for your first MF deal. Best of luck! 

Originally posted by @Kwame Knights :

Hello BP,

I need some advice and guidance. I'm an investor and live in the DC/MD area. I currently own 3 single family rentals and looking to increase my portfolio. The market i'm in is very saturated with investors, not to mention very pricey. I wouldn't mind investing outside of my back yard. I would also love to get into multi families, ideally start off with 5-20 units to get my feet wet and get through the learning curve before jumping in any deeper. However, a few deals came across my path, some Detroit and Baltimore but are rehab projects. The properties are vacant or abandoned, needs extensive work but is priced low to sell fast.  If these deals were single families I would do a reno in a heart beat because the "BRRRR" method works well with the equity game. However multi family appears to be a different beast.

Can someone explain how to evaluate if a multi family is a deal or not without having access to the historical financial data?

Also as a newbie to multi family, is it advisable to take on a full renovation project or should I try to find a turnkey situation to start off? 

Only way to identify the validity of a MF deal without any background on the property is intense market knowledge. Is the area good, bad or other? If you don't know the answer study the market until you do.

As for going out of state I don't recommend if you live close enough to any area of similar pricing I'd recommend you just invest there where you have more knowledge & experience.

If you do go out of state It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.
Originally posted by @Francesco G. :
Originally posted by @Johnny Borrelli:

Kwame Knights I keep going to real estate seminars and talking to commercial agents and I am hearing now is the time to exit multifamily, not enter. I kind of had the same question as I have always liked the idea. But just wanted to share some insight and responses I have gotten. But hey, I do live in California.

 I would generally agree with this if we're talking about buying at retail prices for on-market deals.  But if you can get an off-market or discounted property then why not?  And if you've bought right on the way up and you're cash flowing why sell?

 This could also be because of the area. In CA many counties have a retrofit mandate that is placing sub-standards on title for any soft story buildings over 16 units. These buildings all require steel girder retrofits to meet the new earthquake laws after the Northridge Earthquake. MF also has different markets, a 12 units isn't the same as a 20 unit and neither is anywhere near a 150+ unit. I know of a 325 unit that just sold for 96 MM a few weeks ago in Northern Los Angeles so there is still a lot of movement just have to know where you belong in the mix. 

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