Go big or go small-- first investment question.

7 Replies

The more I read and hear about REI, the more excited I get to begin my life as an investor. My husband and I will be buying our first home in June and decided to get a multifamily and owner-occupy with the idea being that the entire place will eventually be rented out to tenants.

After looking at some multi-families though, I happened upon a larger "multifamily" for sale which is actually a complex with 14 one bedroom apartments, one two bedroom apartment and three commercial spaces. It's in our desired area and is for sale for $500,000. I calcualted that our monthly payment would be approximately $4000.

This is the math I did for the unit:
14 One Bedroom Apartments at $700 each (this is being conservative), we will live in the two bedroom, we will rent the three commercial spaces for $800 each (again-- conservative). This would be a total income of $12200 per month. Minus 10% for a property management company leaves us at $10,980. Minus 50% per the 50% rule leaves us at $4880. Minus our $4000/month payment on the property leaves us living "rent free" with an inflow of $880/month. This sounds amazing. Obviously. But I'm wondering if (being so new and all) I'm biting off more than my husband can chew. Thoughs?

You forgot to account for vacancies and economic loss (concessions, bad debt, rents being below market, etc.). You should reduce your gross rent by another 10-15% for that.

Jade,

If the figures you gave were correct and it all goes according to plan it does sound amazing like you said. However, one thing you should keep in mind with 14 one bedroom apartments is the up keep. Unless you hire an on-site manager, you would be the first go to if a problem was wrong with someones unit. In addition, if you are living in one of the units in the complex these service requests or complaints will come knocking on your door at anytime of day. If the work and maintenance is something you and your husband are looking forward to then by all means. But if the two of you are just looking for a way to get passive income and a free living arrangement, there are easier ways to do that then managing apartments on your own. Hope this helps!

Rob

The incredibly greedy truth is that we are looking for both free rent with a bit of work-free profit and the long-term benefits of investing in RE. We both work full time and have a newborn-- we don't want the tenants to KNOW that we're the owners ;-)

I was hoping that the property management company could shoulder the maintence needs for the units and that the "50% rule" would cover the costs to pay their maintence workers etc.

I would love to be more hands-on and not use a property management company however at this time, I can't give up my 9-5 unless I know that I will be making enough to support my family (well half support my family). And I highly doubt I could handle managing the property myself while working FT and still have time for my family.

This sounds like a great opportunity,  Agree that you will have more turn over and higher costs with one bedrooms, but if you are building equity and living for free, would you be relying on the positive cash flow?  It could all go toward unforeseen items and/or building a cushion?  Have you talked to management companies to see what their actual cost and rent predictions would be?  Has a bank confirmed they will loan to you on the terms you calculated?  Agree that in your situation you would keep quiet about being the owners.  Are any of the units currently vacant?  Could indicate an undesirability of some kind.  Seems like you'd want to have a really good inspection and really understand what kind of noise/home life you'd be subjecting yourself to.  Sounds fun!

Originally posted by @Michele Fischer :

This sounds like a great opportunity,  Agree that you will have more turn over and higher costs with one bedrooms, but if you are building equity and living for free, would you be relying on the positive cash flow?  It could all go toward unforeseen items and/or building a cushion?  Have you talked to management companies to see what their actual cost and rent predictions would be?  Has a bank confirmed they will loan to you on the terms you calculated?  Agree that in your situation you would keep quiet about being the owners.  Are any of the units currently vacant?  Could indicate an undesirability of some kind.  Seems like you'd want to have a really good inspection and really understand what kind of noise/home life you'd be subjecting yourself to.  Sounds fun!

We wold not be relying on this at all. The largest issue would be that if the units were vacant for an extended amount of time... we could not possibly cover the entire monthly payment on our 9-5's. We'd be screwed. So we would need a management company that could keep someone in at least some of the units. I would say we could probably afford for half of the units to be vacant at any time but no more than that. The income would be set aside for future investments. Like I said, this is our first venture into REI and we want to build up a nice portfolio to "retire" on (do REI's ever actually retire??). We're young.

And ahhhh financing. The answer to your question is.... no. We have not looked into financing yet because we plan to do a lease option. So when I say buy I mean "sort of buy" I don't expect that this exact property will be available come June when we're ready to make our move however from what I can tell on CL and loopnet, properties like this aren't terribly hard to come by in our area. I would like to meet with property management companies but am not sure how much time they'll be interested in giving me when I don't have any actual properties at this point for them to manage. And again, I would love to eventually be able to manage our properties on our own but come June it just won't be feasible.

Frankly, it sounds like a nightmare.  As a new family you already have enough stress in your lives.  Without experience in this field, you can't be sure that the numbers you were given are accurate (real estate agents are notorious for padding the numbers), so it could also put a financial strain on you.  It won't take long for the tenants to figure out that you're the owners, then you'll be bothered for trivial matters constantly.  If you have a bad neighbor, you can't just move out.  You must evict him and live next door to him while he's very angry at you.

If you're willing to owner-occupy, you should take advantage of the 30 year fixed mortgage that you can qualify for with a 4 unit or less.  Spend a year in the 4 unit to learn the business.  The tenants might still drive you crazy, but there will be fewer of them, decreasing your odds of picking a bad tenant.

When my children were younger I had some sketchy tenants in one of my buildings from the previous owner.  Because I didn't have anybody to watch my kids, I had to lock them in the car in the (shaded) driveway and try to keep an eye on them whenever I had to deal with the building.  It was very stressful.  Now that I have experience and know what I'm doing, I pick good tenants and my kids are old enough to help.  Real estate is awesome and you can make a lot of money, but it's not a race and your sanity needs to come first.  Just my opinion.

This sounds like an excellent deal with me.  Considering you gave conservative numbers for gross rent, the property is worth $915k at an 8% cap.  You are leaving a lot of room for any "newbie" errors...

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