Things to consider for a beginner small multifamily investor

Charlotte, NC · Member since 2018 · 124 posts · 83 votes

For those of you who invest in small multifamily properties, what are some of the mistakes you’ve made? What advice would you give a beginner interested in investing in small multifamily properties?

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Brian Briscoe

Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes

Rule #1 Keep reserves and never run out of cash. There will be expenses that aren't covered with the monthly cash flow and there will be vacancies. Make sure you can weather a long storm.

Rule #2 Do your due diligence - both physical and financial. Make sure you will actually cash flow after the bills are paid... I had one SFR that did not cash flow and it was quite a drag...

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Brian Briscoe
Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes
6y
Rule #1 Keep reserves and never run out of cash. There will be expenses that aren't covered with the monthly cash flow and there will be vacancies. Make sure you can weather a long storm.
Rule #2 Do your due diligence - both physical and financial. Make sure you will actually cash flow after the bills are paid... I had one SFR that did not cash flow and it was quite a drag...
23 Reply
Greg Dickerson
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
Originally posted by @Victoria Coleman:
For those of you who invest in small multifamily properties, what are some of the mistakes you’ve made? What advice would you give a beginner interested in investing in small multifamily properties?

The main thing is educating yourself on the business, finance and the market you are interested in. Pick one market and become an expert. Depending on your financials you may need to raise capital from investors so you will also need to learn the rules and laws regarding investors and syndication.
5 Reply
Ryan Daigle
Investor · Apex, NC · Member since 2018 · 253 posts · 215 votes
6y
@Victoria Coleman oh wow, there are so many things. I'd say to treat it like you're starting up a new business. You need to educate yourself. You need to find a team of trusted partners since you can't do it all yourself. You need to raise capital. You need to market yourself.

What do you need to know to do all that? Basically all the things :)

I'd start with self-education to at least get a high-level understanding of all the moving parts. Try and eliminate the unknown unknowns. So read books like Joe Fairless's Best Ever Book on Apartment Syndications (lots of good info not just for syndications), listen to multifamily podcasts (good list here ), etc...

Finally, be patient! It can be hard to want to get that first deal under contract, but don't make that move until you feel qualified and ready to take on such a responsibility.
10 Reply
Rick MartinPro Member
Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
6y
@Victoria Coleman are you looking to self manage? If so, buy lots of books and listen to lots of podcasts on the subject. If you are looking for a property manager, a good one is worth their weight in gold. Meticulously vet them, and remember that cheaper isn't always better.
6 Reply
Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Victoria Coleman, no mistakes here, only learning opportunities.
Cash flow is typically very lean. Even on my properties bought in 2011, with very small mortgages (about 30-35% LTV), I am only making about $200/door if I account for reserves, vacancy, management and leasing, on top of PITI. Again, that is $1250/mo in rent, and a $376/mo mortgage payment. I am in a high tax jurisdiction.
The only way to make real money off a small portfolio is to self manage, since you can add back 18.33% of your gross, but then you also bought a job versus an investment. Not to say it is a hard job. I spend maybe a couple hours/month, max on my 6 units, but I also have my preferred electrician, plumber, appliance repair, HVAC and handyman to call, when issues arise.
I have yet to find a good manager. For the 15 months I had management on my properties, I had several long term tenants leave, my repair costs more than doubled, and generally none of them performed. At least in my market, the professional companies have all gotten out of single family management.
Finally, as mentioned, set a balance in your account and try to never go below that. You will have expenses (I had two roofs in the same month and cost $11k). This amount will depend on the properties. Thankfully you will generally know about how long you have for roofs, HVAC, appliances, water heaters, etc and can generally plan for that. Unit turns can be a huge range.
Last piece of advice I have heard over and over here: try to buy vacant. It lets you control the whole process and not inherit someone else's bad tenant. Not always possible, but especially if you are going to self manage, it lets you meet them and get a sense of who they are before you sign a lease with them.
16 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Brian Briscoe Will do! Thanks for the insight Brian, always helpful!
0 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Greg Dickerson Thank you for the help Greg, I appreciate it!
0 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Ryan Daigle Thank you for the advice Ryan! I’m currently educating myself, doing some research/reading every day. Thank you for the book recommendation as well, I’ll look into that!
0 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Rick Martin Thank you Rick! I would like to house hack my first property and self manage. I would then like to move to property management once I move out and rent out the other unit.
1 Reply
Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
6y
1) Underestimating cost of turnover
2) Adequate Reserves
3) Excessive expenses if not self-managed
4) Loan terms (no balloons if you can help it, if no other option, make it as long as possible)
5) Master metered property = excessive utilities
7 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Evan Polaski Great advice Evan, I appreciate it! I actually haven’t heard anyone say to buy vacant, I’m glad you mentioned that. You never know what you could be getting yourself into with existing tenants. Thank you!
0 Reply
Joseph CacciapagliaBusiness Member
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y
Look at the rental trends and economic drivers, not just the most recent rent comps. A lot of the deals that appear to provide the best cash flow, are actually in areas where rents are declining or going sideways. They're also often in areas with significant turnover. Some of the best "cash flow" deals I've bought have significantly under performed compared to properties where I focused on rent growth. I always try to at least break even, but I'm much more concerned with long term performance of the location than CoC year 1.
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Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Ellis San Jose Thank you for the insight Ellis! I have a question regarding the master metered property, since I’m not familiar with how this works. I’m assuming, in this case, the LL is responsible for paying the utilities? If so, do you think sub-metering is a good idea or possibly too expensive?
0 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Joseph Cacciapaglia Thank you for the advice! I don’t think I would have thought to consider the rental trends if a property seems to have a good cash flow. I’ll take that into consideration, thanks again!
0 Reply
Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
6y
Originally posted by @Victoria Coleman:
@Ellis San Jose Thank you for the insight Ellis! I have a question regarding the master metered property, since I’m not familiar with how this works. I’m assuming, in this case, the LL is responsible for paying the utilities? If so, do you think sub-metering is a good idea or possibly too expensive?

Water is typically paid by property owner. However, electricity is a different story. If the building is master metered for electricity that is a potential black hole of expenses. Depending on the configuration of the property, the expense of sub-metering should be considered to determine the ROI.

3 Reply
Victoria Coleman
OP
Charlotte, NC · Member since 2018 · 124 posts · 83 votes
6y
@Ellis San Jose Okay, makes sense! Thanks again for your help!
2 Reply
Steven Aguirre
Rental Property Investor · Las Vegas · Member since 2020 · 10 posts · 38 votes
6y
Victoria; dont let people scare you. Within a few months you will have a huge variety to choose from as far as properties. Alot of already rich people will dump their multi units.
your absolutely on the right track from reading your previous comments. The only way to truly educate your self is using real data from potential properties.
if you can install individual water meters for each unit that would be best for you. The less monthly expenses you pay is the best. Thats where profit is made.

Also stay away from providing amenities, fridge, stoves, dish washers, washer/ dryer units and even garbage disposals. The repair costs on anyone of these appliances will wipe out profit for months. Let the tenant provide their own appliances.
landlords provide these amenities just because other landlords do. Not because it attracts renters.... A renter will only pay what the market value is. Supplying an appliance will not allow you to increase rent to account for use and devaluation of the appliance. These amenities don't provide value just liabilities for you.
Also, if your not handy, find yourself a handyman that will charge you super low cost. One that will maintenance the yard. Snake the drains when clogged. If you have clogged drains bill the tenant! Thats all you really need. Also, an hvac tech they are very important.
appliance techs are expensive and useless! They will only piss off ur tenant. And cost you lost profit.
if your looking at multi unit property with tenants already in place. Before you buy request each tenants basic info. Actually call their employer and verify employment and wages. Thats the must important. If for whatever reason the sellers refuse to furnish current tenants info. Then something is wrong. Warning sing! Negotiate a discount on price and stay firm. If they dont budge on price and wont supply you with tenant information then walk away.
You will have many more opportunities that will soon hit the market. Also, if its your first investment stay away from Sfr or even duplexes. They dont make sense and are very expensive. Start with 4 unit property. And immediately cut off your unnecessary expenses! I did and have not had any issues...
7 Reply
Kevin Manz
HVAC Tech · Fort Wayne, IN · Member since 2015 · 423 posts · 223 votes
6y
@Steven Aguirre
I gotta say, that's an interesting thought, not to provide appliances, even if ur competitors are. Your not concerned about loosing applicants? Do you provide anything that makes a tenant say, "even though Steve does not supply a fridge or range, I want this apartment/ house because _____.?
2 Reply
Steven Aguirre
Rental Property Investor · Las Vegas · Member since 2020 · 10 posts · 38 votes
6y
@Kevin Manz
Great question. Honestly I refuse to look at it as "what do my competitors offer"
Reason being; I don't offer a service. I provide a basic living necessity.
If a potential tenant refuses to move in because I don't provide a fridge and stove; they are not a good tenant. They most likely move around a lot; taking advantage of landlords that follow trends and lose money by thinking they need to "compete with competitors."
The amenities I provide do not affect potential tenant applications. The 2 major factors are: My marketing of a vacant unit and The construction and design of the actual unit.
1. Update the property with durable and stylish and low cost materials.
2. Constantly advertise your vacancy. Using all mediums, especially word of mouth. However, with this one. What I refuse to do is; I wont charge an application fee to a potential tenant I know wont qualify based on their stated income they disclose in the application process. Also, potential tenants that meet my income minimum; I immediately verify employment status and income. After compiling a short list of potentials, then I charge the app fee to look up credit report and criminal background.
If your not receiving an overload of potential applications the issue there maybe; 1. The geographical location. 2. Your marketing isn't sufficient enough and 3. The property has not been adequately maintained and looks outdated. Providing amenities will not compensate for issue number 3.
2 Reply
Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
First question: what do you mean by “small multi family” there is a huge difference between 4 and under and 5 plus. So that is my first question..... next question: are you buying cash or financing? If financing are you doing this by yourself or wanting to get other in with you?
0 Reply
Marlen Weber
Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes
6y
@Ryan Daigle great response. Being patient is absolutely a virtue, especially when it comes to that first deal.
1 Reply
Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Fwiw In some locations you must provide basic items like a fridge, range and toilet, running water, utilities, etc
0 Reply
Michael Ibekwe
Investor · Austell, GA · Member since 2016 · 44 posts · 11 votes
6y
@Victoria Coleman another thing to consider when purchasing a deal. Find out HOW the tenants currently pay rent! In small multi family tends to attract a certain type of tenant (which is ok). But some may not have a bank account and if they don’t have a bank account they more than likely won’t be paying online. If you’re self managing to improve cash flow then it it something to consider so you don’t create more of a job for yourself. They will have to mail a rent check in, or drop it off at your office.
1 Reply
Steven Aguirre
Rental Property Investor · Las Vegas · Member since 2020 · 10 posts · 38 votes
6y
@Mary M.

Don't want to sound confrontational by any means.

However, your general statement of your reply stating "some places require fridges, stoves, toilets and running water."

This is what I mean about landlords simply follow trends because of what they see other landlords supply. Putting new investors like @Victoria Coleman at risk by legally binding herself to supply amenities that her local laws don't require and making her financially responsible for a bill she could have avoided. Of course we need to be location specific due to laws and ordinances. Specifically cite what state law or city/county ordinance states you must provide a "fridge and stove."

A toilet yes I agree. Basic hospitability issue.

However as for running water. If you mean landlord must provide functional pipes for water flow yes. That does not necessarily mean landlord must pay the water bill. Two very different issues completely.

1 Reply
Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
@Steven Aguirre i meant either a well or a connection to city water. In some places the owner must pay for the water too.
Basically what i am saying is : read your local laws and abide by them.
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