Multi-Family and Apartments

8 Replies

Several questions!

I see a lot of posts about investing in duplexes to four-plexes but not bigger than that. 

 I understand that part of this is probably due to commercial financing. If someone were to have cash to buy a complex would there be that hesitancy?

 Are property managers hesitant to take on an apartment versus a four-plex?

 Is insurance on an apartment building different than a four-plex

 Is the owner put into a different category for taxes based off owning a complex versus a four-plex?

Is it because they can be more of a headache, complaints of "upstairs neighbor stomping, dog barking, baby crying!"

Is there a different sort of liability with the different properties?

Taxes?

Not sure if this should have been in the starting out forum or not.

@Madison Holbrook  Hello Madison.  You have a lot of great questions.

1. I think investors get into the small units to get there feet wet and get familiar with investing.

2.  Investors spread their capital out to get more deals

3. Yes insurance is different based on liability 

4.  Taxes are based on property value 

5.  Yes there is different liability issues.  That is why there are A,B, C, D class properties 

There is no bad place to start.  Here or there.  You will get great information either place.  2-4 units is the small stuff that you can get regular financing on.  Once you hit 5 units it is time for commercial lending and different parameters.  Have fun learning.

Originally posted by @Christopher Hunter :

@Madison Holbrook  Hello Madison.  You have a lot of great questions.

1. I think investors get into the small units to get there feet wet and get familiar with investing.

2.  Investors spread their capital out to get more deals

3. Yes insurance is different based on liability 

4.  Taxes are based on property value 

5.  Yes there is different liability issues.  That is why there are A,B, C, D class properties 

There is no bad place to start.  Here or there.  You will get great information either place.  2-4 units is the small stuff that you can get regular financing on.  Once you hit 5 units it is time for commercial lending and different parameters.  Have fun learning.

 Thank you for the information! 

When owning an apartment complex that doesn't make the individual taxed differently though. Just income and property taxes? Or does it make you a type of business owner?

The income from a duplex is taxed the same way as income from a larger apartment. Both are rental income. I think there are more posts on smaller properties than apartments because it is where more people start investing, and those people are more apt to post on BP than more experienced investors who are involved with larger properties.  

@Madison Holbrook typically large apartment buildings cost more then 2-4 units. smaller buildings offer easy entry point. 

The financing for 2-4 units is residential financing, one person can obtain 10 loans with very low interest rate fixed for 30 years and long  30 amortization, these are very favourable terms. 

In saying that, one can buy large communities with Agency debt that offers good terms too.

Small Multifamily buildings are widely available in most markets, and often owned by Mom and Pop owners, that makes them much more easier to buy. 

Most property managers that manage houses can manage 2-4 units buildings, when you pass 10 units things can get more challenging if the PM have no systems and capacity in place to manage them. 

As far as i know the insurance is pretty much the same, actually when you are larger you will be paying less per door.  taking in account when you hold a larger property with so many tenants you would want to be properly covered. nothing out of the ordinary, it is just another line item (cost) that will be factored in when you analyzing the deal. 

In regard t the liability, you will need to seek independent legal advise, but as far as i know, if they are owned by LLC then its an LLC = Same rules apply.

Note: many of these "Conventional loans" are only made to individuals and not LLC - but thats a whole different story....

@Christopher Hunter very thorough answers. @Madison Holbrook My company only targets 150 unit plus apartment communities and have found this size/scale to be the best for us. Everyone has different goals so figure out what your goals are and then find the property type that will meet your goals.  

All good points above.  I recommend people who are starting out to look at 2-4 units because it's an introduction into multifamily and you can get into the property for 3.5% if you will occupy one of the units.   Outside of that, I think bigger properties have way more upside.  You probably see more conversations about smaller units because of volume not because smaller properties have an inherent advantage. 

If you have the cash to invest and are comfortable with the space you should go as big as you can. 

There are several ways to get started with larger complexes.

Do your own deal with a mentor advising you, Partner with an experienced operator, Invest passively in a deal.