From single family to multi family
Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes
From single family to multi family
Most Popular Reply
Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
6y@Tiffany Smith As suggested, education is great. Here are some recommendations for some great books on commercial real estate of course: Crushing it Commercial Real Estate, Brian Murray ; Confessions of a Real Estate Entrepreneur by James Randel. Best Ever Apartment Syndication Book by Joe Fairless covers quite a bit on the Commercial Real Estate acquisition process even if targeted more towards people interested in syndication. Due Diligence Handbook for Commercial Real Estate by Brian Hennessy is also a recommendation.
However getting on in there and experiencing will always be the best. Start with a Duplex if needed, however really these seem to be just like a Single Family Home. Slightly less risk as now you have two tenants, yet very much same cashflow, renovations, bank requirements etc.
Until you get over 4 units, you will be getting residential appraisals(comps approach....), residential financing, etc. There are still benefits to having a quad over a single family however, the argument to economies of scale with 1 roof, more tenants to cover vacancies, etc comes into play the more units of course.
Also, for multifamily or commercial loans, helps to have a business plan yes. Also helps having other properties with equity as proof of net worth or collateral. Chances are you will be a signing as a personal guarantor on any commercial loan in early stages but as long as the deal makes sense and its a local bank(national banks sometimes tedious) willing to see the business plan or value-add strategy(usually best), the loan will be easy to come by. Having some cash reserves to show will also make it a smooth process. I find commercial financing is easier then residential. Working with people who understand investing always makes it easier. Hope that helps!
28 Replies
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Tiffany Smith:
Hello BP friends I am looking for advice. We have 3 single family investment properties. While we have been successful in cashing in the equity (brrrr), the monthly cash flow isn’t where we want it to be. I am considering multi family- apartment complexes but the idea is somewhat intimidating.
Any opinions on whether multi family is better or worse? What is the financing process like, do you need a business plan if going through a bank? Any advice would be greatly appreciated!
Multifamily has many advantages over single family. It’s much easier to scale, much more cashflow per property and often you can buy more income per door than single family. There are many economies of scale as well in regards to property management and operations.
There's no reason to be intimidated once you educate yourself on the business. The fundamentals are the same. Income and expenses just like in SFH just bigger numbers. The key is education. You need to learn the types and classes of properties and markets and the numbers and nuances of each.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Greg Dickerson I have been educating myself and reading / listening to books. I think the scariest part for me is the process of making an offer and understanding what is involved in the underwriting process. I am tempted to start with a duplex but not sure if that is what I want!
Thanks for the feedback!
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Tiffany Smith:
@Greg Dickerson I have been educating myself and reading / listening to books. I think the scariest part for me is the process of making an offer and understanding what is involved in the underwriting process. I am tempted to start with a duplex but not sure if that is what I want!
Thanks for the feedback!
I understand. We all start somewhere. Keep it simple. its income - expenses. verify all the financials and make sure you are solid on the pricing and you can't really go wrong if it cashflows.
- Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes6y
Multifamily will allow you to scale faster and increase your cash flow. The main thing is to look over the financials and run those calculations to make sure it makes sense to purchase. Not every property makes sense to own. If you can provide paperwork showing your 3 rental properties are cash flowing and you have cash reserves it shouldn't be too much trouble.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Brent Paul thanks! Our current rentals cash flow but it isn’t much. The equity we have pulled out is what has been the most beneficial. We both have good jobs too so that helps. Thanks for the response!
- Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes6y
@Tiffany Smith As suggested, education is great. Here are some recommendations for some great books on commercial real estate of course: Crushing it Commercial Real Estate, Brian Murray ; Confessions of a Real Estate Entrepreneur by James Randel. Best Ever Apartment Syndication Book by Joe Fairless covers quite a bit on the Commercial Real Estate acquisition process even if targeted more towards people interested in syndication. Due Diligence Handbook for Commercial Real Estate by Brian Hennessy is also a recommendation.
However getting on in there and experiencing will always be the best. Start with a Duplex if needed, however really these seem to be just like a Single Family Home. Slightly less risk as now you have two tenants, yet very much same cashflow, renovations, bank requirements etc.
Until you get over 4 units, you will be getting residential appraisals(comps approach....), residential financing, etc. There are still benefits to having a quad over a single family however, the argument to economies of scale with 1 roof, more tenants to cover vacancies, etc comes into play the more units of course.
Also, for multifamily or commercial loans, helps to have a business plan yes. Also helps having other properties with equity as proof of net worth or collateral. Chances are you will be a signing as a personal guarantor on any commercial loan in early stages but as long as the deal makes sense and its a local bank(national banks sometimes tedious) willing to see the business plan or value-add strategy(usually best), the loan will be easy to come by. Having some cash reserves to show will also make it a smooth process. I find commercial financing is easier then residential. Working with people who understand investing always makes it easier. Hope that helps!
- Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes6y
I've been in your shoes before. What I've found comforting is utilizing partnerships. Leveraging other people's connections and talents and the partnerships were developed through my thought leadership platform on Instagram. I can't forget that I picked up a mentor btw to fill in the gaps.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Chris Levarek thank you! I am actually listening to Crushing it in Commercial Real Estate now and have learned a lot, especially in regards to finding ways to add value and creative financing.
I have a good relationship with a local bank so hopefully the financing will go well once I am ready to move forward. I will need to do some research on writing a business plan for investment property.
I agree duplexes are pretty much the same as single family so I would like to find something local with 5-10 units to start. We’ll see what happens! Thanks for the feedback and book suggestions! This is why I love Bigger Pockets!
- Investor · New York & TN · Member since 2019 · 325 posts · 219 votes6y
Here are some advantages of going from 3 single family homes to ONE 3 or more family bldg.
- Only one roof rather than 3 to worry about
- Only one location to go to for rent collections, checking on property etc
- Depending on the setup, only one boiler (heat source) rather than 3
- One mortgage
- One tax bill etc etc
Nothing to be intimidated by. I would sell each home (one at a time) and use the proceeds to buy a larger multifamily bldgs. If you could sell all 3 at once and use the proceeds to buy the largest number of units, that would be best. As long as it's more units, more profits or more potential for growth, you can't go wrong.
Just keep in mind there are lots of closing costs associated with changing over.
- 6yCory CarlsonBusiness MemberReal Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
Your situation you are describing is PRECISELY the niche I work in - scaling small residential or multifamily portfolio's accordingly. You will see increased cashflow, better financing terms, lessened tax burden and a higher overall return with multifamily. I would hire a broker who specializes in multifamily in the market you are interested. Depending what your debt and basis is in your current investments, depends if you do a simultaneous disposition (1031 exchange) and move your funds into an investment that meets your goals and improves your position.
1. Do an analysis on each property you currently own. Is there one underperforming or are all three just average? Look at those numbers cumulatively.
2. Account for estimated cash at closing assuming you sold ALL three. This includes broker fees, taxes, 1031 costs, title/escrow, etc. Subtract loan amount on each too determinate how much working capital equity you will have.
3. With that $X if you bought property A, B, C currently for sale in the market does it improve your situation from current? I would recommend for first time multifamily investors to stay away from the inner city 4-5 CAP buildings and look for a better value. In my market, this often 3X's my clients total return (After-tax cashflow + principle pay down + appreciation-3%).
This is how you take the pragmatist approach towards real estate investing.
Constant Commercial Real Estate Inc543 Reviews - Rental Property Investor · Charlotte NC · Member since 2019 · 306 posts · 183 votes6y
Originally posted by @Tiffany Smith:
Hello BP friends I am looking for advice. We have 3 single family investment properties. While we have been successful in cashing in the equity (brrrr), the monthly cash flow isn’t where we want it to be. I am considering multi family- apartment complexes but the idea is somewhat intimidating.
Any opinions on whether multi family is better or worse? What is the financing process like, do you need a business plan if going through a bank? Any advice would be greatly appreciated!
Tiffany, congratulations on the SFR portfolio. I would highly recommend moving over to MF. I left the single-family world to get into MF. Numbers make a lot of sense, Multifamily in my opinion is safer than single-family during a market correction.
I would highly recommend to read books, listen to a podcast, and watch youtube videos. That will help a lot. Feel free to listen to mindful multi-family podcast.
Good luck! Looking forward to your success.
- Rental Property Investor · Twin Cities, MN · Member since 2019 · 122 posts · 150 votes6y
@Tiffany Smith
Small banks in Saint Joe would most likely require you to personally guarantee the loan, even if you are buying as an LLC.
Best of luck to you, maybe find a partner who is willing to take the leap with you.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
Thanks @Chris Salerno! I will check out the podcast. I love listening to podcasts and audio books, really anything where I can learn more about real estate. I am definitely leaning towards multi family, just trying to make sure I know what I am getting into and waiting to finish a renovation on another property so I can hopefully pull some equity out to help finance it! Thanks again, looking forward to listening to the podcasts.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Cory Carlson I haven’t really considered selling any of the single family homes. That is definitely something I should consider, however we just refinanced one and pulled equity out. We just bought our third at below market price and are almost done renovating. The plan was to refinance it and use the equity to reinvest aka the brrr strategy. The only downfall is the more you pull out the less monthly cash flow you have which is what led me to multi family. I kind of wish I would have invested in a multi family instead but I have learned a lot so I can’t complain.
All of that to say, I don’t know that selling is the way to go at this time but it’s definitely something to consider. We do have one that doesn’t really perform as well as we would like. So much to think about, thanks for the response!
- Rental Property Investor · Charlotte NC · Member since 2019 · 306 posts · 183 votes6y
Originally posted by @Tiffany Smith:
Thanks @Chris Salerno! I will check out the podcast. I love listening to podcasts and audio books, really anything where I can learn more about real estate. I am definitely leaning towards multi family, just trying to make sure I know what I am getting into and waiting to finish a renovation on another property so I can hopefully pull some equity out to help finance it! Thanks again, looking forward to listening to the podcasts.
Sounds great! Let me know if you have any questions! I am always here to answer anything!
looking forward to your success. - Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes6y
@Tiffany Smith scaling up is great. If you could buy one SFH for $400,000. Why not buy a 30-lot mobile home park on seller financing for $235k? I know this because that's exactly how I bought my first mobile home park.
- 6yCory CarlsonBusiness MemberReal Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
Originally posted by @Tiffany Smith:
@Cory Carlson I haven’t really considered selling any of the single family homes. That is definitely something I should consider, however we just refinanced one and pulled equity out. We just bought our third at below market price and are almost done renovating. The plan was to refinance it and use the equity to reinvest aka the brrr strategy. The only downfall is the more you pull out the less monthly cash flow you have which is what led me to multi family. I kind of wish I would have invested in a multi family instead but I have learned a lot so I can’t complain.
All of that to say, I don’t know that selling is the way to go at this time but it’s definitely something to consider. We do have one that doesn’t really perform as well as we would like. So much to think about, thanks for the response!
This is why I perform what we call an "Investment Portfolio Analysis". This generally outlines two-to-three scenarios: A current snap shot of your portfolio outlining current pre-tax cashflow, after-tax cashflow, after-tax + pay down and total return (add appreciation), a combination of cash-out REFI's and simultaneous exchange out of all three properties.
Despite your recent refi, the numbers don't lie. If your projected returns are higher after selling one, two or all three EVEN after you refinanced, why wouldn't you execute that strategy? Theres no telling what it will do until you perform a thorough analysis looking at your properties cumulatively. I see it all the time, clients who start moving money around without taking the big picture approach to what it's doing to the portfolio and if it is scaling the portfolio accordingly.
What if the numbers showed your on track? GREAT, do nothing and keep at it. What if the numbers showed your missing out on $X (X%) return by performing strategy X,Y, or Z.
Constant Commercial Real Estate Inc543 Reviews - Rental Property Investor · Phoenix, AZ · Member since 2015 · 222 posts · 126 votes6y
@Tiffany Smith To each his own, but MF is going to scale much better.
My advice: keep learning and running rental scenarios thought the BP calculator. Then sell one of your properties and take the money for a down payment on a 2-4 family.
- 6yCory CarlsonBusiness MemberReal Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
Originally posted by @Tiffany Smith:
The plan was to refinance it and use the equity to reinvest aka the brrr strategy. The only downfall is the more you pull out the less monthly cash flow you have which is what led me to multi family.
I also wanted to make a comment on this statement. The dollar amount may be LESS after performing a cash out refinance, but the calculation is based on your invested equity. So after pulling equity out, your actual "invested equity" is less. Therefore in the return calculations so is the denominator of the equation. It may from a percentage standpoint actually improve and scale your portfolio as needed. After moving that money into another property it likely IMPROVES your overall situation. This is the FOUNDATION of using leverage as a tool and not a crutch. This is how you BUILD WEALTH in real estate is doing this in accordance with your real estate goals and risk tolerance.
Constant Commercial Real Estate Inc543 Reviews - Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Cory Carlson you make some good points! I have considered selling but based on comps that I have seen I don’t think I could make much money. I should do a more thorough analysis though. On top of this I would have to pay capital gains unless I was able to sell and reinvest relatively quickly. Another thing I like about the homes we have is while they don’t cash flow as well as an apartment complex, we have long term renters paying down the debt and increasing our equity. In theory, we could have one or all of these properties pay for themselves and other investments if we continue using refis but this takes a long time. All in all if I knew I could make enough money I would sell, I just don’t think it would be worth it right now.
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Cory Carlson and thanks for all of this information. It is helpful to get other perspectives!
- Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes6y
@Matt McConkey thanks Matt! The more feedback I get the more I consider trying to sell the property we are renovating. Originally we were going to rent but maybe I should sell.. I am concerned about capital gains but I think if I reinvest within a certain time frame I can avoid paying. Also the repairs and renovating I did were with the intention of renting not selling.. Decisions Decisions!
Thanks for the advice on the 2-4 family. I am hoping something will be available in my area when I am ready!
- boston, MA · Member since 2019 · 45 posts · 6 votes6y
@Tiffany Smith in the same boat! My wife and I are on our third property in an expensive market with another SF rental in florida and would love to get into multifamily. My issue is it seems you need 25% down once you jump into multifamily. Is this typical or am I just going to the wrong lender?
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes6y@Tiffany Smith My wife and I had 40+ cheap rentals before we ever thought we wanted to buy a smaller multi family. We bought a 24 plex and an 8 Plex from an individual. D+to C+ Multifamily properties are a pain. Unless you can afford A-B class properties, don't expect your cash flow to be great. We have barely cash flowed, built quite a bit of equity over the last 5 years. But it is one aggravation after another. A lot of hands on management. Very difficult to turn over to property management.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes6y
Originally posted by @Tiffany Smith:
Hello BP friends I am looking for advice. We have 3 single family investment properties. While we have been successful in cashing in the equity (brrrr), the monthly cash flow isn’t where we want it to be. I am considering multi family- apartment complexes but the idea is somewhat intimidating.
Any opinions on whether multi family is better or worse? What is the financing process like, do you need a business plan if going through a bank? Any advice would be greatly appreciated!
You can scale up and build a much bigger business using multi family. One thing to note though as exiting the property limits you to other investors as your buying pool. Whereas with Single Family Homes you can remove your tenant, do a rehab and sell the home for top dollar to owner occupants when the markets hit all time high points.
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