Newbie looking for Apartment Complex advice
20 years of age Texan. I have made roughly 20,000 dollars this year flipping houses. I have suffered a lot of profit loss from under estimating expenses. I am getting tired of flipping and am thinking about getting a small complex with maybe 12-20 units. The plan is to have a management company to manage the tenants and give me a list of repairs. I plan on replacing common things such as light bulbs to reduce expenses. However, with the tenants I feel I am out of my league. This is why I am thinking of getting a management company.
Thoughts? Comments? helpful advice?
I would start small with a SFH, duplex, triplex, etc and MANAGE THE PROPERTY YOURSELF. Even if you eventually want to have a property manager, you need to know how to do it so that you understand what the management company is doing to/for you.
Good Luck,
Mike
Mike, I am worried about having multiple SFH's for a few reasons.
1. More houses equals more possible expenses (Roofs, yards, ETC..)
2. I would have to hire contractors out to different places instead of one central location
3. I think I would get more cashflow from apartments then simple duplexes.
Thoughts? I am still a newbie so try not to laugh at me.
I think Mike's point is that it's much easier to learn management on a SFD or duplex, and I agree wholeheartedly. Buying an apartment building when you don't have the experience to run it, or more importantly, to know if your management company is running it properly, is asking for trouble. Start small, and when you are comfortable you can move up to bigger buildings.
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Contractor
- First Property Management
Multi-unit housing = multiple tenants
Each tenant will have a unit that eventually will have issues. As for items that are "common" for multi-units, you will also find that replacing that one common item (say the roof) will cost much more than that same item for a smaller unit.
As MikeOH said, learn the landlording business on a smaller scale so that you won't be overwhelmed by the larger scale of multi-units. The thing from MikeOH's post to not overlook is: "so that you understand what the management company is doing to/for you." "Doing to you" (think "getting gouged") and "doing for you" (think "taking care of matters") will both occur to some degree.
ok, any other advice ? I've had problems in the past underestimating expenses.
There is no magic pill here. The advice provided is dead on and borne from experience.
Start small and work your way up... if you are having problems with estimating repairs on a single family, the repairs on a 10 - 20 unit will eat you alive. Find a contractor and pay them to assist you to understand the costs.... hang out in a Home Depot, stop and visit other work sites and ask lots of questions...
But don't rush in and buy a 10 - 20 unit building thinking you are going to be any better off...
Best of luck!
A big building like this is going to be a bigger problem. Building codes are different for commercial properties like an apartment building. Building inspectors are much stricter. If an inspector feels you are endangering your tenants, they won't hesitate to shut you down and force all the tenants out. Yes, there are fewer roofs to fix. But where you can spend $5000 on a roof on an SFR and not touch it again for years, you'll spend $20,000 on a roof an an apartment building, and be faced with continuous maintenance.
Cash flow comes from buying right relative to rents. Doesn't really matter if its an SFR or an apartment.
Jon's last sentence is the key. If you buy it right you will have more room for error. Mike is also right that you should start with something smaller and try mangement yourself. Hey, maybe you will like dealing with scumbags. Good luck to you.
Very interesting Jon. I never even thought about that. So my question is this. Am I better off with multiple SFH, duplex, triplex etc or just 1 complex? I am definitely not going straight to a complex after what you have told me. I just want someone's take on it.
You're better of with whatever makes you the most money for the least effort. A lot depends on your market. In mine, most apartment buldings (say, up to about 16) units are either overpriced ($40K for units that rent for $500, in not-so great neighborhoods where I have SFRs) or grossly overpriced ($100K for units that rent for $600). Plus, I see lots of promotion signs on those cheaper units saying "one month free" and such. Those don't seem like a great deal.
Duplexes, triplexes and quads are scarce (compared to either apartments or SFRs), and also often overpriced. I've bid on a few, but never managed to get one. These would be nice because you have several units on a single loan.
Apartments are going to require commercial loans. SFRs can be had (at least a few) with conventional loans. You can also use creative techniques to acquire these with less outlay than a 20-30% down payment plus fixup costs. With an apartment, you're solidly into commercial loans. That's probably 30% down and only based on purchase price. You just can't get into that business without having cash. Yes, you might find a deal where you could do something creative. But there are only a limited number of apartment deals available, and finding one that's both a great deal and available with creative financing is like finding a needle in a haystack. Simply because there are so many SFRs, you have a shot at finding good deals.
If you want to live off your rentals, you're going to need dozens of rentals, perhaps even 100. Unless you really work at it, those aren't going to be one big complex. And at the prices I see complex bring, I don't think they would be profitable anyway..
I started with SFH. Then I purchased my first quad (4 units) multi-family building. Sold all my SFH and now I have 8 quads. It is the equivalent of a small apartment building. I have 4 tenants but only 1 roof, 1 location to drive to, 1 location to collect rents etc.
Buying a quad you can manage yourself. You will become very keen on the price for all repairs. Once you get there, then you can turn it over to a management company.
When we got to 32 rental units + 2 SFH we turned it over to property management. My property manager is acutely aware that I know what things cost and doesn't try to overcharge me (common issue with property managers).
Starting with quads lets you have decent cash flow compared to house. With house if tenant moves out you pay 100% of mortgage. On quad if tenant moves out, other 3 still cover your mortgage and you have no loss.
Over time you can play monopoly by trading in your quads for a bigger apartment complex since you know the ropes. Like monopoly trade 4 green houses for 1 red hotel.
Originally posted by Jon Holdman:
... With an apartment, you're solidly into commercial loans. That's probably 30% down and only based on purchase price. You just can't get into that business without having cash. ...
Actually, Jon, it is only partially the case, that the commercial loan will be based on purchase price. A commercial lender will definitely want to see that the earnings and expenses support the debt service (DSC, DSR, DSCR - whichever of those you want to call it). And there will need to be some reserve funds available to the borrower too.
