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?
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...
@Victoria Coleman I think you're brilliant for deciding to house hack first. It will be a nice, safe way to find out about tenant screening <insert scary face emoji>. That was the thing I was going to add to everyone else's comments.
These are just related to management:
I highly suggest not just relying on a tenant screening service that just looks at their data and references from afar. If you want my take on screening tenants, after lots of practice and learning the hard way, you can probably search for my posts or my name and screening tenants. At any rate, you can get lots of great advice on how to screen tenants here.
After I was good at screening tenants, then I was comfortable screening from afar, but I would facetime with them and/or talk to them quite a bit on the phone first, wait to see if they actually sent documents when they said they would, etc. But, I believe you really need to talk to them in person, see their body language, do they smell like smoke, do they bring weird people with them to view the apartment, etc. I learned not to do open houses, because I wanted to see how they acted alone with me and if they were on time, etc.
Other than tenant screening, as others have mentioned, learn your landlord-tenant laws. They're not hard to learn. Google your city and landlord-tenant handbook or guide and there is usually one for free. I also really love Nolo Press books. Just Google it. Easy to read books and written by lawyers. Their California landlord book even contains all the contracts you need. They also have contracts for all states, I think, on their website.
Also, I highly suggest doing month to month rentals. If you get conned, it's way easier to kick them out.
I completely agree that you should self-manage in order to control your profit.
Im a property manager and though making a few mistakes have seen quite a few over the years from those I have worked for.
One of the biggest things is asset quality. While many here buy low C and D grade rentals I push a little higher. I have a 4 unit and rent is already over 80% paid and I'm not worried about the last tenant as its a student with family backing them that pays by the 5th. I guarantee a lot of people stressing the rent payments the most on here were probably already having issues prior to covid. Most bought low grade assets and got what they paid for. If a property is hitting the 2% rule or even 1.5% don't get suckered into buying it.
Other big issues include if doing a renovation being there or hiring a 3rd party project manager to manage the contractor. Don't underestimate expenses. Keep in mind for you things will magnify for a multi family. For utilities split them up frint if possible. Based on location you should consider hvac retrotting options. Even in some C+ or B grade assets it might make sense to do baseboard if its in boiler. In NC maybe a mini split but they are expensive. Metering water is another issue.
Stay on your tenants if they are falling behind and don't be afraid to take them to court to get the rent money.
There are a lot of things to know and mistakes that can be made. 1 of the best things is to get an investors agent. I think from the beginning 1 thing a lot of people do is they don't work with 1 that could offer unbias 3rd party advice. Most agents don't have enough experience managing a variety of assets. They don't have ample project management experience. Most realtors are not large scale investors, or property managers, or project managers. That being the case they don't really know how to analyze a deal. They might have an idea because they have a couple rentals but thats really not on the same level as someone who has been around the block and has been a full time property manager or project manager for years. It truly is about getting the right place and having the right plan from the get go. Lets say you were considering getting a place and you went with someone you knew and they didnt know how to analyze and being new you popped on here for free advice or worse yet used the 50% rule. The advice would probably not be as good because no one would care because your not paying them. The same goes for calling property managers to get free advice. They might not mind taking a couple minutes telling you the good neighborhoods but beyond that they aren't going to take hours to properly analyze properties for you for free. However if you weed out and find the right agent you get someone getting a commision you will have to pay to someone anyway. That incentizes them to help you to a higher level because they are getting paid to. They would help you with a business plan and refer contractors. Your basically getting a borderline mentor or atleast someone who can help with checks and balances for something you would probably have to pay for any way unless your becoming an agent so its almost for free. Between that along with bp and other educational content it will really help you find the right deal and have the right plan.
@Steven Aguirre Thank you for the advice Steven! Very helpful, I appreciate it. I never thought to not supply appliances. I honestly didn’t even know that was an option. Also, I was actually considering a duplex to house hack and I think it would be easier to manage as my first property. If I find a duplex and numbers work, I figured I would take that route.
@Michael Ibekwe Thank you Michael. I never thought about this. What system do you use to collect rent? I would like to use an automatic system to avoid dealing with the issues that can come with receiving checks.
@Victoria Coleman I use cozy.co to collect rent it's a very good property management system and FREE for landlords!! Also you can request background checks, and credit checks at the tenants expense when placing new tenants. Cozy allows you to not only collect rent but tenants can also message you through the platform and put in maintenance requests. Once you get big enough you can let your virtual assistant (VA) be your internal property manager and save yourself from costly 3rd party property management expenses!
@Sue K. That’s one thing I was worried about, finding good, reliable, honest tenants. Thank you for the advice, I’ll be sure to take a look at your posts and start doing my due diligence. Also, I haven’t done much research on month to month leases, but of course I heard of them. I’ll take that into consideration as well!
@Tim Jacob This is great Tim! Thank you for taking the time to give this response. Since I want to house hack my first property and I’m not interested in doing a complete rehab, I’m looking for B properties in B class neighborhoods. Also, to find an investors agent, I was going to ask for referrals from local investors at the meetups I attend and do some interviews to make sure I find the right match for me.
I was actually looking into becoming a property manager. However, the only information I found told me to get my real estate license, but not much of anything else. Would you mind sharing how you became a property manager?
@Victoria Coleman there is a lot of information here, there is no right or wrong way just best practices. Here are my lessons learned:
1. Research / know your numbers...get tax info. from the city / County, get your insurance quote, know your cost of ownership (ongoing cost) numbers.
2. Develop your systems: How to screen prospective tenants, collect rent, file eviction, handle maintenance calls.
3. Get leases from different property managers, read through each, understand why the clauses are there and develop your own. Follow the law. I have legal shield (lawyer service) to review my lease annually, or after I make a change. Every time a tenant teaches me a lesson, I add a clause. Some lessons I only want or need to learn once. My lease is 6 pages long. A lot of lessons.
4. If you house hack your first multi...this is just me..... tell them you are the manager, not the owner. I bought a building I was living in, tenant knocked on my door at 2a because he locked himself out....I moved the next month. LOL.
5. Personally, I don't ever want a property where I pay any utilities but this is market dependent. If you can avoid it, I recommend it.
6. Find and build relationships w/ a couple plumbers, electricians, general contractors / handymen.
7. Know your numbers....yes I know I said that first, but it's that important.
Find a mentor that has started small and at one time had the same questions you currently have. They will understand your fears and concerns and will be passionate about helping someone else. This type of person will also love to talk property because they have lived it and feel a sense of satisfaction in having navigated the ropes successfully. Ask them all of the questions you can. You can read alot of books and listen to a bankers opinion all day but what help are they going to be when you enter a unit for a filter change and smoke alarm battery check and you discover things like tenant has moved in a roommate, are those bedbugs on the wall, why is there a pet tiger in the bedroom...etc...
You will need a voice to call to say what in the hell do I do? this isnt what I was after when I decided to to invest in property.
Call them. They will have been through it and be able to say "here is how i always handle that issue....."
@Carl Millsap Thank you for the in depth response Carl. Number 3 is gold! I’m the same way, I only want to learn a lesson once. I also heard on the BiggerPockets podcast that you should say you’re the manager and not the owner. I see you didn’t waste any time getting out of there lol. Thanks again for the advice!
@Brian Briscoe Hi Brian, what would you say is an adequate amount of reserves for a small multifamily(2-4 units)? I know it depends on the condition and age of the property, but maybe a safe average amount?
@Mary Mitchell Duplex or triplex. I will be using financing and partnering with my sister.
Ok, most of the info provided in this thread is for larger deals :). you dont need to make it complex. Use this rental/househack as a learning opportunity... but dont over think it. Find a place you want to live in that you can afford....that is the biggest hurdle.
Given the times, dbl check that funding is still available - i know a lot of low downpayment loans are no longer being offered.
I managed my personal residence for 5 years starting out with roommates in one residence before renting it out once I moved away and managing remotely. I will not it was an A class rental. It will not work well to try that at even the C+ or lower level ir if you have too many or if you have a good enough paying job and value your time more. After doing that I became an agent. I property managed full time for over 4 years by now as well as project managed mukti multi families, my original place and a few other single family places. I recommend getting to real estate license. It will not be hard to find work in low income areas because it doesnt pay well. I would think about taking on a few of those to understand what that leads to. It will help you talk from experience. You might have someone who has a portfolio where some is worth taking and some isnt. That happened to me and I managed more liw income than I eould prefer as a result. Now I wont take any but I have been around a few years. I wouldnt worry about your hourly rate too much early on within reason. After a few years it can change. It will help you as an investors agent after enough time.
A big question would be if you get the license why pay someone else to be a buyers agent when you can keep the commision money when buying your place.
I would say at that point think about how comfortable you actually are in regards to analyzing your own deals. I know its tempting to say lets just guess based on poor analysis because you have a feeling. If uts b grade it should have sky high expenses. Some should be mitigated by a thorough inspection but do you have any clue what it will take to replace what needs to be. Contractors won't come out to give free estimates to a house you dont own yet. I understand you don't want a reno but there srill might be some stuff you will need to do off the bat or shortly thereafter.
The important thing is to again get the right place with the right strategy. If that means pay thousands for an agent, a thorough inspection, and the right contractors to do work thats the important thing. Be careful trying to get things too cheap no matter what is. Newbies are notorious for this and they wind up stepping over dollars for dimes.
We have now entered a new environment. Going forward landlords are going to be lowering their rent to keep or attract replacement tenants. If you are now getting into the market calculate your numbers on the current rent number and minus about $100-$150. I lived this situation in 2005-2006. The longer you can hold off on buying the better, as times goes forward landlords are going to be dropping out of the game and you will be able to make some good deals.
@Mary Mitchell It's good to have that information for the future especially when I decide to move out and rent the other side and look for other deals. Thank you for the advice! My sister is in the Air Force so we plan to use her VA loan.
@Edwin Williams That’s exactly what I’m waiting for. Continuing to learn and get everything in order so when the time comes I can be prepared to purchase. Thank you for the advice Edwin!
@Tim Jacob Thank you for the advice Tim. I’ve been contemplating getting my real estate license for awhile now. I know it can be beneficial to do so. I appreciate you taking the time to go into details, this was helpful!