New Multi Family Investors
New to Real Estate · San Diego · Member since 2019 · 34 posts · 22 votes
Hey BP Community,
My partner and I are just starting out and have a goal to purchase our first Multi-Family property in the next 90 days. We have our down payment secured and will be investing from out of state. The next step in our process is to identify which markets we'd like to explore and have narrowed it down to the following three: Austin, TX, Baltimore, MD and St. Louis, MO. We're going to use either the Buy and Hold strategy or BRRRR method. Our question to the BP community is if anyone uses similar strategies in any of these markets would recommend one over the other.
Thank you!
Steven
Good Luck Steven!!! Now is a great time to invest in real estate. I am biased as I believe in the BRRRR strategy. I agree with Arn, the Austin market is very competitive and may not be the place for the best return on your investment. Many times we are drawn to the hot markets, but that does not make the best place to invest. If you are looking to grow your portfolio and you do not have unlimited funds, consider the BRRRR but make sure you are buying the property right. The purchase price plus the rehab amount should be not greater than 70% of the after rehab value. Another way to look at that is to access the after rehab value (let's say the ARV is $200,000 for a simplified example) take 70% of the ARV (70% of $200,000 is $140,000). Then determine the rehab costs making sure you have a 5% to 10% contingency built in that for surprises (let's say that is $40,000 in this example). Then subtract the rehab costs from the 70% of ARV number and you have the maximum you should spend to purchase the property ($140,000 - $40,000 = $100,000). In this scenario the maximum purchase price would be $100,000. This is a guide and by following this once you refinance you will get all or most of your investment back to be able to purchase a property. In the BRRRR method the 70% rule is the first consideration in determining the purchase price and whether this is a good investment. The second and equally important calculation you need to make is what is your NOI or how much money will you make a month.
As a lender we look at numbers a little differently, but you want to make sure that your NOI will cover a debt service ratio of 125%. This means your rental income minus your expenses will cover 125% of the mortgage payment. You must also ensure that this meets your minimum return on investment.
These 2 formulas are key to refinancing your property. From a lenders perspective we will lend (cash out) up to 75% of the property value as long as the rent minus expenses covers 125% of the mortgage payment.
In the BRRRR Strategy, you will successfully grow your portfolio if you add these key financial metrics to choosing the right property.
Finally, the numbers are important but they are not the only factors. They say the key to real estate investment is , Location, Location, Location. You choose the Location by numbers and many other factors. Numbers say no this is not a good deal but never say buy a property for the numbers alone.
Good Luck!!!
Exciting to start the multifamily investing journey.
Austin certainly is a great market but very competitive. I suspect you might have better luck sourcing properties in the two other markets you suggest.
I am located in Greenville SC which is a wonderful market, population and jobs growing rapidly. I just completed a 12 unit purchase in the Greenville MSA and am excited about it.
Good Luck Steven!!! Now is a great time to invest in real estate. I am biased as I believe in the BRRRR strategy. I agree with Arn, the Austin market is very competitive and may not be the place for the best return on your investment. Many times we are drawn to the hot markets, but that does not make the best place to invest. If you are looking to grow your portfolio and you do not have unlimited funds, consider the BRRRR but make sure you are buying the property right. The purchase price plus the rehab amount should be not greater than 70% of the after rehab value. Another way to look at that is to access the after rehab value (let's say the ARV is $200,000 for a simplified example) take 70% of the ARV (70% of $200,000 is $140,000). Then determine the rehab costs making sure you have a 5% to 10% contingency built in that for surprises (let's say that is $40,000 in this example). Then subtract the rehab costs from the 70% of ARV number and you have the maximum you should spend to purchase the property ($140,000 - $40,000 = $100,000). In this scenario the maximum purchase price would be $100,000. This is a guide and by following this once you refinance you will get all or most of your investment back to be able to purchase a property. In the BRRRR method the 70% rule is the first consideration in determining the purchase price and whether this is a good investment. The second and equally important calculation you need to make is what is your NOI or how much money will you make a month.
As a lender we look at numbers a little differently, but you want to make sure that your NOI will cover a debt service ratio of 125%. This means your rental income minus your expenses will cover 125% of the mortgage payment. You must also ensure that this meets your minimum return on investment.
These 2 formulas are key to refinancing your property. From a lenders perspective we will lend (cash out) up to 75% of the property value as long as the rent minus expenses covers 125% of the mortgage payment.
In the BRRRR Strategy, you will successfully grow your portfolio if you add these key financial metrics to choosing the right property.
Finally, the numbers are important but they are not the only factors. They say the key to real estate investment is , Location, Location, Location. You choose the Location by numbers and many other factors. Numbers say no this is not a good deal but never say buy a property for the numbers alone.
Good Luck!!!
Great to hear that you are moving into the multi-family space!
Regarding which market you end up choosing- my team and I focused on the following criteria when we decided which MSAs we would target-
Hope that helps!
All 3 markets are vastly different.
Austin, TX is a growing market, with a large amount of companies coming in and people relocating. It is a highly competitive market and has become expensive.
St Louis, MO is a shrinking market and is loosing population. You will be able to buy cheap properties here.
I don't know much about Baltimore, other than it's had it's ups and downs, along with crime issues (like most cities)
I think you need to really understand what type of market you're looking for. Do you want growth or cash flow or both?
In general, if you have no experience flipping a property or owning a rental, think I'd learn some place more local first UNLESS you have a real trusted person in that market.
You're going to have to depend on a lot of 3rd parties which can suck a lot of profit out of your deal.
Yes, were very excited but as you know starting out can be a little intimidating so we are trying to ensure we utilize all of the resources available to us (like asking questions in the forums). First off, thank you for taking the time to respond to my post so quickly, it means a lot!
We assumed that would be the case with Austin and your answer reaffirms our assumption. And as far as the other markets, we aren't 100% committed to those but are more so trying to narrow down our search. We haven't looked into Greenville, SC at all but based on your recommendation we'll definitely take a look and start running some analyses on properties in the area.
Congratulations on your recent 12 doors! Something to aspire to. I should have specified, we are starting with small MF housing to dip our toes in (2 - 4 units) and plan to scale up once we get some experience under our belt.
Thank you again Arn, I appreciate the assistance!
Personally, I wouldn't feel very comfortable trying to pull off a BRRRR project that's across the country. It brings a lot of ease-of-mind and control to be local so you can see the progress on the place in person on a regular basis. Unless, as Steve Morris said, you have a real trusted person that's in that market that could help lead the project. If the place is rent-ready, you could just spend a few days there to close and hand off the keys to a property manager.
Thank you! We definitely think so with the low interest rates that we're seeing.
Wow thank you for all of this information and providing your opinion on Austin. It seems like that may not be the best market to start off in due to competition and price barriers.
My partner and I are currently reading David Greene's book, Long Distance Real Estate Investing and he does discuss the 70% rule as a way to evaluate potential BRRRR properties. However, hearing it laid our in terms of our specific scenario is really helpful. My only only concern is that the "surprises" from rehabing the property may go over the 5 - 10% contingencies you've set aside. In your experience, is this typically a conservative number that always covers any additional costs that come up?
Thanks!
Thank you.
I think the primary questions for you to answer is:
Are you investing for immediate cash for or for long term capital growth?
Yes, nice to get both but in my experience one generally predominates.
My opinion is that in one’s 20s 30s 40s during peak career earnings one should focus on capital growth and then as one gets older and ready to scale back or leave the corporate W2 grind, the scale tips towards cash flow.
Just my opinion, I understand many may not agree! Not saying my approach is right just saying what worked for me. Each of us has to make our own decisions.
The answer to cash flow v capital growth will narrow your market search down.
Cash flow Midwest a good place to look.
Capital growth Sunbelt a good place to look.
Best of luck! You can also peak at KC if you'll be looking in MO.
Baltimore, MD I lived in for some time and still own properties in that market. I wasn't a big fan of multifamily there for a variety of reasons, so I moved to Houston, TX, which is a little more welcoming for newer MUltifamily Investors than Austin or ay DFW where all the "big boys" are. Houston, TX is an underdog market which is why I still like it a lot.
If you are investing OOS, you definitely want to find on the ground partners in your target markets, as yes, the capital is parked and ready to be deployed, but then you gotta find the deal and asset manage it well post-closing and those are equally important.
Depending on what your overall goals are for real estate investing will help you narrow in on a few markets. You had already listed a few but those markets are all pretty different. OOS investing and be very successful with the right market and right team in place. Best of Luck! @Steven Kassler
I agree with Caleb Brown -- if you're taking a peek at Missouri, then I would venture to the other side of the state and look at Kansas City. I might be a little biased since I'm based out of KC, but I would sink my money in the KC market long before the STL one -- they are vastly different. Aside from selecting the market, since you're an out-of-state investor, I'd spend amble time selecting the right partner when it comes to your property management -- finding the right team is nearly as important as finding the right deal. You will need a partner that you not only trust, but that will be your boots on the ground for daily operations.
Here's an article about rent growth in KC if you're interested:
Kansas City apartment rents fell 1.8% since pandemic began - Kansas City Business Journal (bizjournals.com)
Lots of luck to you!
@Steven Kassler awesome goal. You can do it and don’t be scared to ask for help when needed
Thank you! We're excited to start this process as well.
Awesome, I appreciate the tips. Especially things not to do (i.e. Ignore daily static like unemployment, RE price fluctuations, etc.). These are often the items that get overlooked so I appreciate the insight.
Agreed, we have ironed out our criteria and originally we're going to solely operate with Buy and Hold, however we didn't want to limit ourselves in the event that a good opportunity arose. We do understand the importance of nailing down our niche so I think our immediate game plan is going to be focus on Buy and Hold however if the 1% rule doesn't necessarily apply to the Buy and Hold properties we're analyzing, we make look at it as a potential BRRRR opportunity.
Thanks again Jeffrey!
Agreed! And admittedly, there isn't much science behind our search for a market because we really don't know what we don't know aside from what we read and listen to on the podcasts that talk about choosing a target market.
Ideally cash flow and growth would be the goal, however I do understand that that's not always very realistic to assume both are possible in a given market. As a starting point, cash flow is our goal - the idea is to use the cash flow we are earning from our first investment property to add to our next down payment as we scale our portfolio. Is there a more "scientific" approach to identifying top cash flowing markets that you use when identifying your markets?
Thank you for your time and response, it means a lot!
I hear what you're saying and yes, while the ideal situation would be to invest in a local market I don't think it's possible for us right now. My partner and I are located in San Diego, CA and the market is very competitive as well as expensive so out of state investing is really the best option for us (at least from what we can see). We do understand there is certain levels of risk associated with out of state investing as well as challenges but we're the new guys on the block and gotta get scrappy! The goal is build our portfolio to the point where we do have the capital to invest in market eventually.
Thank you for your response!
Yeah I hear what you're saying. I definitely can see the challenges of managing a project from out of state being difficult. Thinking out loud, maybe our strategy would be to leverage the BRRRR strategy in markets where we have our "competitive advantage" and know someone in the area as you had mentioned.
Good food for thought, thank you!
Great point. I think up until this point our main goal was cash flow but after reading your logic, long term capital growth may need to be a strong consideration of ours as we identify our markets.
Thank you for the market recommendations with specific criteria for each. EXTREMELY helpful!
I appreciate it. Good call! I actually have several colleagues that live in the KC area and I hadn't thought of them as resources to help me understand the market from a "boots on the ground" perspective. I will definitely look into the area.
I appreciate your time and suggestion!
Great insight from our prospective market in Baltimore. It's awesome to hear your thoughts from personal experience as we narrow down our search. I appreciate the recommendations on different TX markets as well that are more "underdog" friendly. Definitely gives us a little more direction in the Texas market.
Yes, once we identify our market the next step is putting the team into place. As with everything that is new, it feels like we are about to climb Everest but hoping to get this process nailed down so it soon feels like we're just taking a walk in the park (unless it never feels that way!).
Great advice. After reading a lot of these posts, it seems as if we are a little "all over the place" in our previously mentioned markets. However, there was a lot of great actionable advice that I think we will use to our benefit.
Thank you for the well wishes! You as well.
That's huge! Thank you for the recommendation. As I mentioned to Caleb, I actually have several colleagues that I work with in my 9 - 5 that live in KC and I hadn't thought to pick their brains about the KC market. It's good to hear that the potential for KC is also a lot better than St. Louis. I think we need to show KC some love in our search.
Also, thank you for the article, I will definitely take a look. Best of luck to you as well and thank you for your time!
@Steven Kassler congratulations on making the decision to dive into real estate, and especially multifamily!
Looks like many share this opinion, but I believe Austin is getting over saturated at the moment and the scale is starting to tip more towards institutional investors making up the majority of viable players in that market. Same goes for the DFW metroplex.
Based on what Ola said above (and he is one of the foremost experts in Texas in my opinion), you can still find other excellent opportunities in markets that aren't hot on Bloomberg or these forums all the time. Houston is a huge city and I still have friends taking down deals there that would be unheard of in DFW or Austin right now.
Another option is exploring some of the tertiary markets in the state that get less attention from the big dogs. Moving from Dallas to Lubbock, TX I have been consistently impressed with the ROIs on multifamily properties here, and the amount of meat left on the bone when investors are selling multifamily properties here. Would make an excellent case study for the perfect value adds LOL.
The next complication of being an investor comes after the easy part of finding and acquiring the right deal, and that is operating it. Whether you are managing it yourself remotely or decide to bring in a 3rd party management team, contractors, etc on the ground, it is paramount that you do your due diligence and make sure that you are hiring the right folks. Too many horror stories about perfectly fine investment properties being run into the ground even though mgmt is sending glowing updates to owners only to find out their property has been completely neglected and is in disrepair when they make the trip out to visit or decide to sell years later.
Regardless of which market you and your partner end up in, I highly recommend checking references for vendors, contractors, agents, management, etc. with as many local on the ground sources as possible to verify that you are doing business with the best.
Cheers and best of luck on your acquisition of your duplex/fourplex in the near future!
-Matt
Thank you! I appreciate the kind words.
To be honest, I wasn't sure the response I would get by posting my questions (as I'm sure they aren't novel and are probably asked every day by new investors). However, I'm humbled by the amount of thoughtful responses I've received from everyone.
It's not everyday you get people this willing to lend assistance or advice to a newbie, so THANK YOU again to everyone for the help.