Small MFR or Larger MFR as a new investor- Confused!

Realtor · Columbus, OH · Member since 2023 · 1k+ posts · 1k+ votes

I am an out of state investor looking to invest in turnkey properties in Cleveland and/or Columbus. I have looked at other places like Birmingham, Little Rock and Memphis, but for now settled on these two (mostly!). Between these two, I am leaning more towards Cleveland. I have a leasing agent I like and I will use a property manager (yet to interview/hire). I am going to do a DSCR to keep my person DTI low preferably, and I don't see much difference in the DSCR rates vs conventional rates when I have checked with a few lenders.

Overall my goal is to build up a portfolio that can generate 60-75K in cash flow in 4-5 years, with a 3% annual property appreciation.

Here is where my thinking starts to get muddled-

Strategy A- But 4-unit multi families in Cleveland. As is well known on this forum, there are parts of Cleveland on the East Side that provide a high cash flow with Section 8. But the high CF numbers on paper will not likely not be a reality as there will be more fixes/rehabs/tenant turnover with these properties. I am open to this, but the more I think about it, I don't know if getting into Sec 8 on my first property is a good thing.

Strategy B- Buy 4-unit multi families but buy them in westside neighborhoods such as Edgewater and maybe ones on the edge like Tremont (which seems to have the best value+ price combination). These are though in general hard to cash flow overall.

Strategy C- Buy a 12-16 unit apartment complex around $1MM. More of these are available in Columbus (compared to Cleveland) in areas like Franklinton.

Across all of these strategies, I am not risking more than 30% of my capital.

I can go small multi families to bigger ones, or I can go for the bigger ones. My intuition and data so far indicates that scale matters- the more the number of units, the more you get economies of scale. The part where I get scared is that I don't really have a team, and the feeble attempts I have made at building one have not really resulted in anything. For example, while I understand the concept of cost seg, I have no experience with it. When I say the team, I specifically am referring to a lender and a competent property manager who can manage a large property and a CPA because all of this is for nothing if I cannot figure out the right tax strategy.

I'd love to get some feedback from some of the other folks on this thread, please share your thinking.

I would recommend looking into using strategy B in Columbus! Going big in an area that you don't know very well can be a little risky. I would start one deal(anywhere from 2-4 units) at a time and go from there. As long as you build a solid team with a great CORE 4 with a great realtor, contractor, property manager, and attorney, then you'll go far.

[email protected]614-490-1163

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Ravi Bhagavan
OP
Member since 2024 · 6 posts · 5 votes
1y
Thank you, that's helpful
Quote from @Kerlous Tadres:

Quote from @Ravi Bhagavan:

I am an out of state investor looking to invest in turnkey properties in Cleveland and/or Columbus. I have looked at other places like Birmingham, Little Rock and Memphis, but for now settled on these two (mostly!). Between these two, I am leaning more towards Cleveland. I have a leasing agent I like and I will use a property manager (yet to interview/hire). I am going to do a DSCR to keep my person DTI low preferably, and I don't see much difference in the DSCR rates vs conventional rates when I have checked with a few lenders.

Overall my goal is to build up a portfolio that can generate 60-75K in cash flow in 4-5 years, with a 3% annual property appreciation.

Here is where my thinking starts to get muddled-
Strategy A- But 4-unit multi families in Cleveland. As is well known on this forum, there are parts of Cleveland on the East Side that provide a high cash flow with Section 8. But the high CF numbers on paper will not likely not be a reality as there will be more fixes/rehabs/tenant turnover with these properties. I am open to this, but the more I think about it, I don't know if getting into Sec 8 on my first property is a good thing.
Strategy B- Buy 4-unit multi families but buy them in westside neighborhoods such as Edgewater and maybe ones on the edge like Tremont (which seems to have the best value+ price combination). These are though in general hard to cash flow overall.
Strategy C- Buy a 12-16 unit apartment complex around $1MM. More of these are available in Columbus (compared to Cleveland) in areas like Franklinton.
Across all of these strategies, I am not risking more than 30% of my capital.
I can go small multi families to bigger ones, or I can go for the bigger ones. My intuition and data so far indicates that scale matters- the more the number of units, the more you get economies of scale. The part where I get scared is that I don't really have a team, and the feeble attempts I have made at building one have not really resulted in anything. For example, while I understand the concept of cost seg, I have no experience with it. When I say the team, I specifically am referring to a lender and a competent property manager who can manage a large property and a CPA because all of this is for nothing if I cannot figure out the right tax strategy.
I'd love to get some feedback from some of the other folks on this thread, please share your thinking.
I would recommend looking into using strategy B in Columbus! Going big in an area that you don't know very well can be a little risky. I would start one deal(anywhere from 2-4 units) at a time and go from there. As long as you build a solid team with a great CORE 4 with a great realtor, contractor, property manager, and attorney, then you'll go far.

0 Reply

Arman AhmedPro Member

Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 961 votes

1y

@Ravi Bhagavan

Ravi, you’re thinking about this really strategically. I agree that scale matters, but without a solid team, even a high-cash-flow property can become a headache. Starting with a smaller multi (4–8 units) in a strong area lets you gain hands-on experience with management, tenant turnover, and minor rehabs while building relationships with a property manager, lender, and CPA you trust. Once your team is solid and you have the systems in place, scaling up to larger complexes becomes much less risky and more profitable. I’d be happy to share what’s worked for me if you want to dive deeper.

[email protected]614-418-6081

1 Reply

Aaron ZimmermanBusiness Member

Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes

1y

I think you should go with 2-4 unit multifamily to start. You want to learn on smaller deals first and then grow to the larger ones. How long is the loan for on the dscr loan? Something to consider is if it's 5 years, this is a little riskier than longer term debt because there's a lot that can happen in 5 years (rising insurance costs, property tax increase, etc) that can kill cash flow whereas a 30 year fixed provides some stability.

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes

1y

Quote from @Ravi Bhagavan:

I am an out of state investor looking to invest in turnkey properties in Cleveland and/or Columbus. I have looked at other places like Birmingham, Little Rock and Memphis, but for now settled on these two (mostly!). Between these two, I am leaning more towards Cleveland. I have a leasing agent I like and I will use a property manager (yet to interview/hire). I am going to do a DSCR to keep my person DTI low preferably, and I don't see much difference in the DSCR rates vs conventional rates when I have checked with a few lenders.

Overall my goal is to build up a portfolio that can generate 60-75K in cash flow in 4-5 years, with a 3% annual property appreciation.

Here is where my thinking starts to get muddled-

Strategy A- But 4-unit multi families in Cleveland. As is well known on this forum, there are parts of Cleveland on the East Side that provide a high cash flow with Section 8. But the high CF numbers on paper will not likely not be a reality as there will be more fixes/rehabs/tenant turnover with these properties. I am open to this, but the more I think about it, I don't know if getting into Sec 8 on my first property is a good thing.

Strategy B- Buy 4-unit multi families but buy them in westside neighborhoods such as Edgewater and maybe ones on the edge like Tremont (which seems to have the best value+ price combination). These are though in general hard to cash flow overall.

Strategy C- Buy a 12-16 unit apartment complex around $1MM. More of these are available in Columbus (compared to Cleveland) in areas like Franklinton.

Across all of these strategies, I am not risking more than 30% of my capital.

I can go small multi families to bigger ones, or I can go for the bigger ones. My intuition and data so far indicates that scale matters- the more the number of units, the more you get economies of scale. The part where I get scared is that I don't really have a team, and the feeble attempts I have made at building one have not really resulted in anything. For example, while I understand the concept of cost seg, I have no experience with it. When I say the team, I specifically am referring to a lender and a competent property manager who can manage a large property and a CPA because all of this is for nothing if I cannot figure out the right tax strategy.

I'd love to get some feedback from some of the other folks on this thread, please share your thinking.

One thing to take into account is inventory. There aren't gonna be multiple well priced 4-plexes just sitting out on the market in those Cleveland neighborhoods you've mentioned.

1 Reply

Ravi Bhagavan
OP
Member since 2024 · 6 posts · 5 votes
1y

Yup, I am learning that to be the case as I look into this more!
Quote from @James Wise:

Quote from @Ravi Bhagavan:

I am an out of state investor looking to invest in turnkey properties in Cleveland and/or Columbus. I have looked at other places like Birmingham, Little Rock and Memphis, but for now settled on these two (mostly!). Between these two, I am leaning more towards Cleveland. I have a leasing agent I like and I will use a property manager (yet to interview/hire). I am going to do a DSCR to keep my person DTI low preferably, and I don't see much difference in the DSCR rates vs conventional rates when I have checked with a few lenders.

Overall my goal is to build up a portfolio that can generate 60-75K in cash flow in 4-5 years, with a 3% annual property appreciation.

Here is where my thinking starts to get muddled-
Strategy A- But 4-unit multi families in Cleveland. As is well known on this forum, there are parts of Cleveland on the East Side that provide a high cash flow with Section 8. But the high CF numbers on paper will not likely not be a reality as there will be more fixes/rehabs/tenant turnover with these properties. I am open to this, but the more I think about it, I don't know if getting into Sec 8 on my first property is a good thing.
Strategy B- Buy 4-unit multi families but buy them in westside neighborhoods such as Edgewater and maybe ones on the edge like Tremont (which seems to have the best value+ price combination). These are though in general hard to cash flow overall.
Strategy C- Buy a 12-16 unit apartment complex around $1MM. More of these are available in Columbus (compared to Cleveland) in areas like Franklinton.
Across all of these strategies, I am not risking more than 30% of my capital.
I can go small multi families to bigger ones, or I can go for the bigger ones. My intuition and data so far indicates that scale matters- the more the number of units, the more you get economies of scale. The part where I get scared is that I don't really have a team, and the feeble attempts I have made at building one have not really resulted in anything. For example, while I understand the concept of cost seg, I have no experience with it. When I say the team, I specifically am referring to a lender and a competent property manager who can manage a large property and a CPA because all of this is for nothing if I cannot figure out the right tax strategy.
I'd love to get some feedback from some of the other folks on this thread, please share your thinking.

One thing to take into account is inventory. There aren't gonna be multiple well priced 4-plexes just sitting out on the market in those Cleveland neighborhoods you've mentioned.

0 Reply

Min ZhangBusiness Member

Real Estate Agent · Member since 2022 · 1k+ posts · 1k+ votes

1y

I hear you on weighing those different strategies, Ravi! Scale definitely helps with smoothing out vacancies and expenses, but it also ramps up the need for a solid team, which sounds like the piece you're still piecing together. Smaller multis can be a good way to get comfortable with tenant turnover, CapEx, and PM communication before taking on a 12–16 unit. On the other hand, if your end goal is cash flow in the 60–75K range within 4–5 years, jumping into larger units can get you there quicker if you have the right systems in place.

For DSCR, you're right! rates aren't much different than conventional these days, and it does help keep your personal DTI clean. Where most people get hung up isn't the financing, it's finding a PM who's competent with either Section 8 or larger buildings, plus a CPA who can structure things with depreciation and cost seg to maximize the upside.

Just curious, between cash flow and appreciation, which do you feel is more important for you on the first couple of deals? That might help point the direction between the A/B vs. C approach. Happy to keep the conversation going!

[email protected]614-412-2912

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Ravi Bhagavan
OP
Member since 2024 · 6 posts · 5 votes
1y
Thank you for the detailed response. I want to be breakeven at a minimum from the start, being cash flow positive is great. As I am scouring through BP, I am falling in line with the school of thought that buying a property with a long term intent to hold in a 'good' area (B/C+) where cash flow is going to minimal initially is a better option that going for max cash flow which will require investing in other areas. I am also thinking through issue such as tenant quality, tenant turnover which seem to be high with max cash flow properties. Perhaps a slight digression from my original Q but hope I made some sense!

Quote from @Min Zhang:

I hear you on weighing those different strategies, Ravi! Scale definitely helps with smoothing out vacancies and expenses, but it also ramps up the need for a solid team, which sounds like the piece you're still piecing together. Smaller multis can be a good way to get comfortable with tenant turnover, CapEx, and PM communication before taking on a 12–16 unit. On the other hand, if your end goal is cash flow in the 60–75K range within 4–5 years, jumping into larger units can get you there quicker if you have the right systems in place.

For DSCR, you're right! rates aren't much different than conventional these days, and it does help keep your personal DTI clean. Where most people get hung up isn't the financing, it's finding a PM who's competent with either Section 8 or larger buildings, plus a CPA who can structure things with depreciation and cost seg to maximize the upside.

Just curious, between cash flow and appreciation, which do you feel is more important for you on the first couple of deals? That might help point the direction between the A/B vs. C approach. Happy to keep the conversation going!

0 Reply

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Ravi Bhagavan

where are you located and can you invest closer to home?

"it's too expensive"

OK, what about a couple hours away?

0 Reply

Ravi Bhagavan
OP
Member since 2024 · 6 posts · 5 votes
1y
Thank you for the response. I am in California. It's not just a case of being expensive to buy but there are other factors such as high purchase prices equate to a higher property tax bill, balance between landlord vs tenant rights where the scales have tilted more towards the latter, cost of operations (such as labor costs when things need to fixed) etc.

Quote from @Nicholas L.:

@Ravi Bhagavan
where are you located and can you invest closer to home?
"it's too expensive"
OK, what about a couple hours away?

0 Reply

Adrian Lammersdorf-SciollBusiness Member

Realtor · FL · Member since 2020 · 234 posts · 101 votes

1y

Agreed on starting small with the 2-4 unit properties. You'll gain all the experience from that alone and it will give you a really good feeling of what you want to do from there. Grant Cardone made me think I wanted to have this massive portfolio at one point in my life, now I just want a good amount (5-10) of paid off small multifamily spots that are a mix of long, short, or mid term rentals.

Another idea is syndications. There are some good opperaters out there and I have some recommendations if you need one.

I'm also big into REITS, and its a great time to invest in them and they are great to really be hands off.

[email protected]561-305-2404

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Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

1y

I would go with the better deal. A poor deal on a 16 unit is not as good as a great deal on a 4 unit and vice versa.

you wrote: "My intuition and data so far indicates that scale matters- the more the number of units, the more you get economies of scale."

"Economies of scale" is just BS passed on by Gurus. The economies of scale get priced into the market.

2 Reply

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Ravi Bhagavan

I hear you on California being tough, I do. But the issue is that there are SO MANY THREADS on BP from investors like yourself who picked exactly the markets you mentioned for "cash flow" and had a really rough time.

Avoid Revolution Properties LLC at all costs

https://www.biggerpockets.com/forums/48/topics/1242392-rough...

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

https://www.biggerpockets.com/forums/432/topics/1231840-sell...

https://www.biggerpockets.com/forums/311/topics/840134-memph...

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

Whenever I see someone from California say "I looked at a bunch of random markets that I don't know anyone in several thousand miles away because I want cash flow" I get concerned. And that's exactly what you said.

So my question to you is - what will you do differently?

Hope this helps give you some things to think about

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Small MFR or Larger MFR as a new investor- Confused!

Small MFR or Larger MFR as a new investor- Confused!

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