Starting RE investing with multi-family units? My plan.
Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes
Starting RE investing with multi-family units? My plan.
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y700 times 4 is 2,800 monthly times 12 is 33,600 a year gross rents.
Back out 30% at least operating and expense,10% vacancy,10 % management.
You are now at 16,800 NOI before debt service so on a 10 cap rate going in purchase would be 168,000.Not far off from the list price if there are no hidden surprises and the location is good (not a war zone) If it's a war zone the CAP needs to be much higher to offset the risk.
You need to look at immediate repairs to the property that have been deferred maintenance.So if you find it needs a new roof,carpet in one unit,2 new water heaters,etc. and that cost is 15,000 you would deduct from the 168,000 to pay no more than 153,000 going in.
Very basic analysis.6,000 you have is not much at all.You really need to grow this faster.
Problem with leveraging and waiting is we are in one of the best buying cycles ever.If you wait to leverage up then you might buy at the peak of the market and your debt service will hurt you when the market cycles down again after so many years.It ALWAYS cycles. Smart investors buy as much as they can in the down market to limit risk.Once the news channels pick up everything is doing good with the economy the herd mentality will drive up pricing to levels that does not justify purchasing at those numbers.
41 Replies
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Tyson, do some research... leverage is your friend.
You are far better off saving up your cash (and rent cash flow) and making additional purchases with minimum down payments (probably 25%) then paying off historically low rate mortgages.
Your plan is very low risk, very conservative, and will likely take a good long time. Nothing wrong with that, just understand that is what it is.
Beyond that, going up from small units to bigger units is the plan for most. Just understand, anything greater than 4 units becomes a commercial loan and the lending requirements and rates change.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
Are there any quality 4-unit properties in your area? Keep in mind that you pay transaction costs for buying and selling and they are quite expensive. You may reduce your costs quite a bit by starting with a 4-unit. This can still be a FNMA loan so many of the CRE loan requirements will go away.
After 2 years of landlording experience you can consider exchanging to a larger building. I would say to forget about paying down the 4-unit and to hoard cash for the 12-unit. This will give you a lot more flexibility about how to exchange up and couple cash with the exchange.
Properties in excess of 4 units are likely to have better capitalization rates because there are fewer buyers for them. Keep in mind that what is a good investment isn't always a good place to live.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
I started in the Army as well. Good Ops Order starting there, LOL.
Bryan hit on something there that you should consider too, keep them and trade up with a tax free exchange of similar properties, unless you are wanting to build an inventory and keep them, but trades can keepyou in nicer properties as the years pass, so long as we get to keep that in the tax code. Don't forget your altermate rally point.
And, solong as your dals cash flow, considering vacancy and maintenace, you might consider being a little more aggressive leveraging your purchases.....Good luck!
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
I honestly thought that was aggressive. I'm not worried about being conservative with this. I'm 26 and I have a good 13 years left in the Army, so if things don't pan out I won't end up on the streets.
So what I'm gathering is I need to find a good 4-unit and hoard the cash. I basically don't want to pay it off because I can just trade up for a bigger unit down the line to avoid taxes on the sale? I remember my uncle telling me something about this.
I'm in Hawaii now but I will be moving back to WA when I get out. Hawaii RE is crazy expensive. Should I just try to find a 4-unit in WA and hire PM? Or should I start in Hawaii? I have about 2 years left here in HI. How much cash do you suggest I start with? I know the rule is to be able to cover 6 months mortgage along with repairs.
Thanks for all the info!
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Hawaii will be tough from what I have read. Most recommend you start locally so you can get your hands dirty enough to truly understand what you're outsourcing with a PM before hiring one... unfortunately that's not possible for everyone. If you are going to go remote and trust a PM, I would go to the best place you could invest and not simply choose your next location (which again would be temporary I'm guessing). Places like the rust belt or lower east coast or cash cows but you have to learn the good areas from the bad and will have your hands full managing your PM as things can go VERY badly in those types of areas.
As for your gathering of cash, keep amassing cash until you can make another DP... whether it's a 4unit or larger is up to you. What you have to learn to look at is the power of cash. If you have $1,000 in your bank account... would you rather pay down debt at 5% interest or invest that money and make 15 or 20% return? Paying down debt is a guaranteed return, but a very low return. Reinvesting has inherent risk but is the key to becoming wealthy. And yes, at some point you would roll smaller investments into a bigger one tax free through a 1031?? exchange I believe. Essentially you have to sell an asset and buy the same kind of asset (real estate to real estate) and you can avoid the taxes, at least that's my understanding.
As for cash reserves, I believe they are over-rated. I find it wiser to have credit available then to leave cash collect dust. You can get lines of credit at the bank, sometimes as simply as a signature loan, have HELOCs open, or even just a credit card with a $5,000 to $10,000 limit. All provide enough security, especially for the small time investor, to avoid the need to leave cash collecting 1% interest in your savings account.
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
What are some key factors I need to learn about for me to do this?
What kind of loan would I need? What do allot of these acronyms mean, like CRE loan requirement?
I understand the concept of what I'm trying to do, it's just the details that I don't understand and what I'm trying to learn.Here is an example property on craigslist I thought seemed good: 4-plex (pictures and google maps shows that it is in a group of similar 4-plexes, like a small apartment community), asking $189,000
Year Built 1981
Sq Footage 3,648
Bedrooms 8
Bathrooms 4 full, 0 partial
Floors Unspecified
Parking 4+ Uncovered spaces
Lot Size 8,714 sqft
HOA/Maint $0 per monthI like the location allot, and from my time living around there I would say the rent is about $700 per unit, so $2,800 with all of them rented out. As an example, how would you work this property?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
700 times 4 is 2,800 monthly times 12 is 33,600 a year gross rents.
Back out 30% at least operating and expense,10% vacancy,10 % management.
You are now at 16,800 NOI before debt service so on a 10 cap rate going in purchase would be 168,000.Not far off from the list price if there are no hidden surprises and the location is good (not a war zone) If it's a war zone the CAP needs to be much higher to offset the risk.
You need to look at immediate repairs to the property that have been deferred maintenance.So if you find it needs a new roof,carpet in one unit,2 new water heaters,etc. and that cost is 15,000 you would deduct from the 168,000 to pay no more than 153,000 going in.
Very basic analysis.6,000 you have is not much at all.You really need to grow this faster.
Problem with leveraging and waiting is we are in one of the best buying cycles ever.If you wait to leverage up then you might buy at the peak of the market and your debt service will hurt you when the market cycles down again after so many years.It ALWAYS cycles. Smart investors buy as much as they can in the down market to limit risk.Once the news channels pick up everything is doing good with the economy the herd mentality will drive up pricing to levels that does not justify purchasing at those numbers.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Tyson, for simple analysis... assume 50% of your Gross Potential rents will cover expenses. The other 50% is your debt servicing (principle and interest, taxes and insurance are already covered in the other 50%) and cash flow.
So you take your GOI * 50%, this gives you NOI.
Now figure out how much your mortgage payment is. NOI - Yearly payments = cash flow.
The metric most cash flow investors use is cash on cash return. How much money do I get back each year for every dollar I need to put in. To get that, take your cash flow from above and divide by your initial investment (Down payment + Closing costs & other fees + any deferred maintenance that's needed to get renters). Most strive for 15+% but some aim higher.
Generally speaking, you need to be about 1.5% of purchase price in monthly rents ($100,000 rents for $1,500) to generate a 15+% return if there's no deferred maintenance. Basically a walk in investment. If you're going to need to do work and find renters, etc etc... target 1.8 - 2.0%. If you can get higher than that, brilliant.
As you mature, you'll look at more creative ways to reduce your cash expenditure to do what Joel was saying, buy much much more. Low DP owner financing, owners carrying 2nd mortgages, buying/rehab/refi, etc etc.... ways to stretch your dollar to quickly grow your inventory.
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
So if 6k isn't enough for a unit around this price, how much would you say I need?
And with the market cycles. Is that so much of a problem that if I miss this one I should wait years before I try again?
And forgive my newness, but what does NOI and GOI mean?
- Evanston, IL · Member since 2012 · 4 posts · 0 votes14y
I too am starting my search for multi-family units. Joel - thanks for the break down and details. I found that very helpful. If you can provide any additional ways to 'compare' properties, what you look for, 'red flags' that you have discovered over the years that would be great too.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
John there are commonalities but also differences based on the size of the building you are taking on.
What number of units (your target) would you be looking at with your purchase??
This makes a difference in what additional items to look at.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Tyson Bumgarner:
So if 6k isn't enough for a unit around this price, how much would you say I need?And with the market cycles. Is that so much of a problem that if I miss this one I should wait years before I try again?
And forgive my newness, but what does NOI and GOI mean?
If it's going to be Non Owner Occupied (NOO), you'll typically need 25% down. There are a few programs such as the VA Vendee program (va.equator.com), and some Fannie Mae type things which go outside of that but the typical "conventional" mortgage won't go above 75% Loan to Value (LTV).
Now if you go Owner Occupied (OO) living in one of the units and renting the rest, you can get in for 3.5% down through FHA. I would urge you NOT to play a game saying you'll OO when you have no intention of it. It's fraud, not a good way to start your career.
As for the market. Haven't you listened to the news? A market like the one which exists today hasn't occurred before. The home prices are at levels not seen since like the 1920s and interest rates are at levels never seen before. It is very unlikely that scenario will occur again in our lives. House prices may go up and down and economies cycle, but the combination of the huge pull back we've had and the free money... well, it's the opportunity of our lifetime most likely.
GOI is Gross Operating Income. If I have 4 units and market rent is $500 a month, my monthly GOI is $2,000 or yearly would be $24,000.
NOI is Net Operating Income. This is income after expenses. Do some research on the 50% guideline (rule) and you'll see why most just assume NOI to be half of GOI.
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
I took the advice about not paying down my low interest debt. I was just about to put $7,500 from my tax return on my car. But the rate is only 3.2%. So with that extra cash I have 13,500 in saving right now. We average 1,200 saved every month. So by August I should have $20,700 saved. I'll work on having more than that, but that should be a good start right?
The OO won't be an option because I won't always be able to live there due to the Army. Would you suggest just plugging away with the saving and try to get my 4-plex or should I be looking for a duplex that I might be able to afford with 20k down? Keep in mind; I will be using a PM so I can buy in WA state.
- Evanston, IL · Member since 2012 · 4 posts · 0 votes14y
I'm looking at starting off with a 2 unit property in Chicago. The purchase price would be in the $180-280K range depending upon the site and condition.
- 14yJesse PollPro MemberReal Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
@Nathan on the FHA loan you were talking about. I am getting ready to put this kind of deal together, searching for property now. My plan is to live in one unit for at least 3 years while my wife does an internship. At the point that I move out will I need to refinance it and have the 75% equity in the property?
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Jesse Poll:
@Nathan on the FHA loan you were talking about. I am getting ready to put this kind of deal together, searching for property now. My plan is to live in one unit for at least 3 years while my wife does an internship. At the point that I move out will I need to refinance it and have the 75% equity in the property?My understanding, and realize I don't do this professionally, is that as long as you "intent" do live in the house for at least a year (maybe 2), you qualify for FHA. Intent is the big thing. After that year, you are free to move.
That said, you can only qualify for 1 FHA loan at a time. You can either refi the FHA loan you have on the 1st property into a conventional loan which depending how far below market you bought, how much the market has changed, and how aggressively you paid down the mortgage may cost you money out of pocket to hit 75% LTV... OR you simply get an 80% LTV conforming mortgage on your next OO primary residence.
You don't need to refi, but you won't qualify for another FHA loan unless you do.
- Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes14y
Tyson:
I started with multifamily and have done well with it,but, I read a lot to know what I was doing before making any offers. Get some books to establish a knowledge base. There are a lot of them available. One I found helpful was "ABC's of Real Estate Investing" by Ken Mc Elroy. It's easily found on Amazon. Good luck! - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
John I understand the need to want to start small.I would say however we are seeing increased activity in purchases.I am having meetings weekly with local,out of state,and even talking with investors who are out of the country.
For a long term hold debt service is rarely talked about but the absolute key piece of a puzzle.You can find the greatest property in the world and for the rents would be worth every penny but if you can't get reasonable debt service on it there is a no go.
Benefit to a 4 unit and below is long term debt 30 years.Anything over 5 units is commercial lending and most are giving 30 year amortizations in with 10 year balloons.
The benefit to 5 units and above is generally the value is placed on the income approach versus the comparable sales approach.
They are talking about dissolving Fannie Mae and Freddie Mac.They have talked about it for years but are now getting serious.They want to make the private lending market take more of the risk and loss.This is likely to put the borrowing cost and rate of money higher than it currently is.This is why if you are not locking in deals now you could lose out.
You can typically handle up to a 20 unit by yourself if your good and the building is in good shape.For a 2 unit I would be concerned with any connecting buildings and surrounding buildings that investors own.
For instance if many bought at the height of the market I would check to see what kind of loan or debt service they might be carrying and also look at foreclosure notices for the area.If a lot of foreclosures are happening you could get hit with rental rate resets which will affect your cash flow.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Jesse just like HUD usually you will have an occupancy rider that you sign at closing which is a legal document that states you will live in the property.
If you do not then lender could claim mortgage fraud against you.FHA is 3.5% down for a reason.You will fight harder to save a place you live in and lenders know this.With investments you do not occupy they want more down to limit the risk you will walk away and default.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
I didn't follow this whole thread, but it appears the OP decided to keep some cash. A good next step would be to contact a lender that has experience with financing 4-unit properties and figure out what the terms are for money. If you can't find suitable 4-unit properties in your locale that cash flow you may need to rethink your strategy if you aren't willing to buy product elsewhere.
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
My plan is to buy a 4-plex in Washington while I'm in Hawaii. Multi-family homes in HI are crazy expensive so that will never happen.
I expect to have at least 20k saved by August for a DP. My concern is getting the loan and then finding a PM to deal with the property. I am also anticipating 15k worth on work to get any unit up to rent levels for the area.
It's just hard to know what the right amount of money I need before I start this investment. I could just keep saving until I have enough, but I want to try to get something as soon as I can as long as it will have some kind of positive cash flow.
I guess I'll just tell you my new plan and see what you think.
I have 2 more years left in Hawaii. I would buy my first 4-plex outside Ft.Lewis in WA before that 2 years was up. I would then do my last 3 year re-enlistment in Ft.Lewis (God willing I get it). Using some cash from the first unit along with my own cash, I would attempt to buy 1 more 4-plex a year until my last three years were served. Then I would be out of the Army with 4 4-plexes to my name.
unrealistic?
I also started out in the military. Do you still have your VA loan eligibility? VA allows you to buy up to a 4-plex with a VA mortgage and no money down, as long as you intend to live in one of the units for 6-12 months (depending on the bank). After that timeframe you're free to move. I believe VA will fund up to $700k in HI. The seller may even cover the closing costs/funding fee if they're really motivated, allowing you to get in with no money down.
- Real Estate Investor · Ft. Benning, GA · Member since 2012 · 36 posts · 6 votes14y
Wow! That would be great! I will have to look into that. That could be the break I was looking for to get this ball rolling.
BAH(basic allowance for housing) in HI is $2,100 an month. And if I didn't have to pay rent, it could go towards all types of things, like upgrades, or the mortgage. Hmm, new opportunities!
I was going to mention VA. There's some basic information on their site about how to qualify and the restrictions. Here's 2 you should know you have to sell if you move ... unless you refinance under VA. It's not that hard but being aware of that can help you to not sell your property when you get moved. Research this stuff and you will come out ahead. A word of caution, you cannot get a 700k multifamily unless the rent roll justifies it (bank only counts 75% of the gross rents) So aim for less expense ones ... maybe you can find a 400k or 500k that will cashflow. 700k is going to be to high rent for you to secure a loan on unless you can find an real gem that nobody can finance. I live on the big island you might want to check other islands too it's cheaper but beware coquis here. They are causing vacancies on the Hilo side.
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