Should I roll my SFHs into a Multi-Family apartment building

25 Replies

I have been reaching out to investors in my local network in order to gather equity for doing an Apartment syndication deal but it has been slow going. Therefore I was wondering if it would make sense to sell-out some of my cash-flowing SFH in order to generate the capital for the first deal. I am a bit hesitant to do this because several are completely paid off and with very good tenants.

Should I just be patient and continue working gathering passive investors or jump start the process with more of my own capital?

Has anyone else been in this position? 

Thanks,

TMG  

@Travis Gibson Let the math tell you what to do. Compare your current ROI on the existing properties vs. your projected ROI for the apartment complex.

Maybe you could sell your lowest performing SFHs to get the capital you need and keep the rest since they are paid off.

@Travis Gibson

It sounds like you are in a great position. Another thing to think about is the opportunity cost of selling those properties. You will be giving up the returns that you are currently generating on your properties while you work to identify opportunities which will potentially provide a higher return. 

An alternative to selling could be to refinance those properties which you currently own outright, and then use the cash from the refinance for the down-payment on a multifamily property. That way you won't get hit with the tax from the sale, will keep your cash-flowing rentals with great tenants and will generate the capital you are hoping to deploy into multifamily.

It’s all about the numbers, your skills, abilities and goals. If you want to grow and scale the most efficient way is flip and develop properties and grow your cash or do larger rental properties and grow your can flow.

@Travis Gibson , depends on how fast you want to scale up? Building relationships with investors in your network can be a timely process. But definitely can be worth the wait if you have the patience. Is it possible to lump the SFRs together and 1031 into a bigger asset? 

@Travis Gibson

Why do you want to jump to MF? Is this your career, or do you have a day job? Do you have the skills and experience to do your own syndicate?

A million more questions could be asked. Don't jump to MF just because it's trendy. Plenty of money can be made in SFR-land.

@Jassen Bowman I have worked as an engineer for almost 25 years and invested in SFH for almost as long. At this point I am looking to begin a new career where I have more control over my possible upside and schedule. With that being said the challenge of being able to force appreciation in MF deals is super attractive.

I would suggest the opposite of Colton. To sell and then redeploy, you are triggering a lot of costs which you would not have if you stayed the course. Normal when there is a change of direction. The short term costs are an investment. The question becomes why make the switch?

If have reached the end of the road in your growth, a pivot to a different strategy could be in order. It might be best to spend the money and get started rather than wait while you attract passive investors. Having a track record for apartments is more important when raising funds for a future investment in apartment

@Travis Gibson I think the question you should be asking is what are the pros and cons of selling and redeploying (or taking out a mortgage and redeploying) rather than asking people what you should do. There are hundreds of ancillary reasons to choose one avenue over another, that no one but yourself can take into account. For example, do you want to have control or give up control? Do you want partners or be the lone investor? Do you have the balance sheet to secure larger loans? Are you comfortable with increased risk with mortgages over being in all cash? Do you want to be within driving distance of the property or can it be farther away? etc.

Maybe too, the question should be asking for potential routes to go with the properties you currently have, and what are the pluses and minuses of those routes. That way you can start to narrow down and eliminate options and find the best ones that work for you.

@Travis Gibson

I got up to 11 turnkey rentals back in 2015. Then I went into mfh syndication after.

Do the math here… with 300 dollars per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers.

Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

If your net worth (income minus expenses) is under $200,000 or barely save $30,000, syndications are not for you. Stick with these Turnkey rentals despite what Gurus (who are trying to sell you their program) tell you for now. They have a little higher gains (a lot more volatility) but a syndicator who is willing to put you in a deal with more than 10-20% of your net worth is asking for trouble.

@Travis Gibson I have been in this position and what I can tell you is that raising capital gets easier after you have gotten a few syndication deals under your belt. This means that the first few deals may need to be self funded so that you can develop a track record. Very few investors will want to take a chance on you on your first deal.

@Lane Kawaoka It is interesting that you mention being close to my first syndication deal because that is part of the reason that I asked this question in the first place. I live in the area of Sacramento CA and we are definitely in a seller’s market right now.

Generally speaking you could buy a 30 unit in the Houston area for what a 10 unit will be sell for in my area.

Therefore my question is for my 1st syndication deal would it better to buy something smaller locally or go out-of-state for something that will give me more units for my money?

Originally posted by @John Corey :

I would suggest the opposite of Colton. To sell and then redeploy, you are triggering a lot of costs which you would not have if you stayed the course. Normal when there is a change of direction. The short term costs are an investment. The question becomes why make the switch?

If have reached the end of the road in your growth, a pivot to a different strategy could be in order. It might be best to spend the money and get started rather than wait while you attract passive investors. Having a track record for apartments is more important when raising funds for a future investment in apartment

 I agree with John.

You need to establish a track record first.

MF investing is a different animal than SF investing.

Another way to "short cut" the track record is to "borrow" the track record by partnering with an experienced apartment operator. 

If I were in your shoes, this is what I will do:

1. Talk and vet several experienced apartment operators in your area. @Brian Burke is one of the more credible one who comes to mind

2. If you like your SFHs and they are in great areas, you can refinance to pull some cash out and invest it with an experienced apartment operator with you as one of the GPs

3. Once you do a couple of this, now you have the track record and raising capital WILL be much easier

@Michael Ealy Thanks for the advise I never really considered partnering as a GP with an experienced operator. I just assumed that most experienced operators only wanted LPs who would bring capital.

How does this normally work? Would I be bringing the experienced operator into my deal as the GP or would they be bringing me into theirs?

Originally posted by @Travis Gibson :

@Michael Ealy Thanks for the advise I never really considered partnering as a GP with an experienced operator. I just assumed that most experienced operators only wanted LPs who would bring capital.

How does this normally work? Would I be bringing the experienced operator into my deal as the GP or would they be bringing me into theirs?

 You need to figure out what you can bring to the table and who needs what you have. At the same time, think real hard about what you want to see in a partner. This is a bit like marriage with a divorce agreement lined up. You still will be together for an extended period of time.

Originally posted by @Tj Hines :

@Travis Gibson, depends on how fast you want to scale up? Building relationships with investors in your network can be a timely process. But definitely can be worth the wait if you have the patience. Is it possible to lump the SFRs together and 1031 into a bigger asset? 


Actually I just spoke with my CPA and a 1031 exchanger today about doing just that. I also have meeting with my primary lender tomorrow to discuss refi options. Once I have that info I will crunch the numbers and make a decision.

Great suggestion for @Travis Gibson , @Tj Hines .  The key to doing a "consolidation exchange" like this is to follow one of three tracks.

Either

1. Sell all as a portfolio knowing that you'll take a  haircut on the sale but will save quite a bit in 1031 fees (since we could consider a portfolio sale like that to be one exchange).  The other benefit is that since it is one exchange it has one exchange calendar and might be easier for you to manage logistically.

2. Sell all individually but try to cluster them so that all sales fall within the 180 days of the sale of the first one.  Each sale will be one exchange.  Your replacement property will need to be on each 45 day list.  So there are a couple of challenges but this would let you maximize sales price.  You can do a lot contractually to get those sales clustered as closely as possible.  And as far as the purchase goes it is common to have much longer due diligence, inspection, and finance contingency dates.  So you can use that to your advantage also.

3. Try to accomplish #2 but set some personal limits.  Leave yourself enough wiggle room finance wise that if you only sell a portion of those SFs in a good cluster you use only those to purchase your MF.  Then you try to cluster the other sales to purchase a second MF.  Later you can then sell those two MFs and purchase a larger MF using another 1031 if you choose.  You're basically taking your transition in stages.



@Travis Gibson

I have mostly multifamily. Most of the multifamily is priced way too high and it seems like a better return to go after SFH that meet the 1% rule now. When the economy turns or interest rates rise, cash in on the SFH and start buying MF again. I think the value of moderately priced starter homes (good rentals) will go up as people are priced out of the upper price ranges.

@Travis Gibson, I would say it depends on your goals.

If you're have tons of equity and you want to scale, you should ask if you want to small MF, syndicate bigger deals, or invest passively.

One word of caution...if you're new to MF, it won't be as easy as you think to partner with an experienced MF investor. You really have to look at what skills/resources you can bring to the table.

You can network with other MF investors, see what they're lacking, and bring that to the table. For instance, you could: learn how to analyze deals, find a deal, and then partner with an experienced MF investor.

There are many other ways, but it depends on your time, goals, etc.

Let me know if you want chat and good luck!

Thanks everyone for your words of wisdom. For the time being I am going to keep my SFH portfolio in place and look for smaller MF deals that we can acquire with the amount of capital(around $500k) I can currently raise.

However that leads me to some additional questions.  

1.) How many doors do I really need to gain the necessary MF experience?  Would something as small as a Four Plex work?

2.) What are the pros/cons to getting a smaller MF unit in my area vs more doors out of state?

@Travis Gibson - you sparked a great thread, here. thank you for stirring up insightful discussion! A couple thoughts:


Step #1 - keep the rentals and harvest the equity for redeployment - both @Kevin Dean and @Michael Ealy mentioned this approach. This would be my preference, if I was in your situation. In our case, we focus on multifamily (passively investing and actively closing on deals)... but we have decided to hold on to our modest residential portfolio, longterm. They are cash flowing and we don't see an urgent need to sell them. If they were paid off, like yours are, we would be refinancing right now to take advantage of the rates currently available.

Step #2 - set goals (long term) and specific investment criteria - to your question directly above "1.) How many doors do I really need to gain the necessary MF experience? Would something as small as a Four Plex work?"

  • I wouldn't necessarily recommend focusing on this question, initially. But since you asked: No, a 4-unit deal would not be considered relevant experience if you approach potential partners and lenders if/when you decide to take down a 100+ unit apartment building.
  • At a bare minimum, you would have to target a 5-unit... but if we're focusing on 'how many is too many,' we're kinda missing the point: the first step should be to set goals and then let those goals drive you toward clarity on next steps and property size/type.

Regarding investors: I think it's always a good time to build new relationships and strengthen your network, but until you have either a 1) real deal to talk about, or a 2) a model/mock deal that reflects a similar deal you expect to find... then it sounds premature to approach investors about equity capital.

Recommend heeding the wisdom from @John Corey @Lane Kawaoka @Chris Grenzig , above. Amazing guidance.

Good luck taking next steps!


Originally posted by @Travis Gibson :

@Michael Ealy Thanks for the advise I never really considered partnering as a GP with an experienced operator. I just assumed that most experienced operators only wanted LPs who would bring capital.

How does this normally work? Would I be bringing the experienced operator into my deal as the GP or would they be bringing me into theirs?

 Travis, either way is fine. I recently used JVs as a way to get another GP into a 346-unit portfolio I've acquired so that they do the management. Here's a post I wrote on it:

https://www.biggerpockets.com/forums/432/topics/744841-joint-venture-and-how-to-buy-more-apartments-actual-experience

@Travis Gibson

please retain your SFR portfolio. There are no economies of scale in multifamily unless you are buying hundreds of units type complexes. When you invest in Multi family, the value add or forced appreciation is only if you move the category from C or D to a B or A.

i have just finished reading a great book Multi Family Millions about repositioning the apartments and reaping value add benefits. I would recommend for you to read that before investing in multi family.