Why so many recommendations to go multi family - commercial?

68 Replies

I'm a newbie and have recently purchased 3 properties, all townhomes in Utah. Two are in southern Utah and will be vacation rentals which will cash flow really well. My third is a long term rental in northern Utah that will appreciate well but cash flow low. I'm looking to take the next step by investing out of state where properties are more affordable. I'm trying to decide on a market but also on the best strategy for me to scale my business by acquiring either SFH or small multi-family residential - duplex, triplex, or fourplex or 5 plus multifamily commercial. My goal is to buy and hold rental properties and in 5 years have the option to retire (if wanted) from my W2 job. Has anyone stepped through this that could recommend which is the best approach to scale at this early stage?

I would just keep buying,  Don't hesitate.  The equity of your properties will make you wealthy.

My son in Clearfield is doing just that.  He has 3 houses and great net worth.  He has a wife and 4 kids and they live very well.  He owns his own glass company, does several flips for people that know him and he takes a part of the equity for his work.  Has a  couple new big homes being built South of Provo and should do very well.

I suggest not getting any partners unless they are only money people for a part of the pie.

I did over 900 flips in Ogden in the 90"s .  Last house I lived in Fruit Heights and raised my teenage kids there.  I love your area but don't miss your winters!!

Good luck

Dave

@David Avery I agree. It is always hard to purchase when the cash flow is not great but my rents have gone up considerably over the last few years and now my cash flow instead of $150/month is 500-850/month. Real estate investing for cash flow really is a long game but Utah is booming and hesitation is expensive to your future.

Are you kicking yourself now that you didn't try to keep all your flips? :)

@David Avery that was your main source of income at the time I imagine if you did over 900. I sold one this year and I'm still regretting it.....bought for 263k sold at 450k and in the end I realized I would've been in a better stop had I just made it a rental

@Brandon Pace

I’m going to attempt to answer the thread title question. There are a few reasons why so many suggest to go multifamily/commercial. Here are the reasons I went that route.

It is because it is a longer and slower process to scale single family rentals. I bought an 8 unit last year (package of 4-duplexes), and it took far less time and effort than purchasing 8 individual SFRs. Management is easier since they are all adjacent in one location. Financing was far simpler. Adding value is a function of increasing cash flow rather than comps.

The amount of effort and time I spent buying those 8 units is equivalent to the effort and time of buying one SFR.

I've been through that, and it was a rocky road the first year. I would say that only now, three years later do I actually feel like I know what I'm doing. I'm running a business, not causally purchasing a house or two. I have payroll to make, a balance sheet and cash flow statements to monitor. 

It does sound like you've had some success, which is great. I would recommend that you continue to purchase deals that your comfortable with until your balance sheet is stable enough to have a failure at the next level. 

Logan, yea its hard to not take that $$$ and do a few more deals.  In Ogden we did 4 plexes.  My business partner would buy and sell them.

I would run the crew and make the properties shine!!!!

We would sell them to Salt Lake investors, all day long for $150,000-$160,000

We would also carry the down payment on a note and kick BUtttt!!!!

So at the end of a project/deal.   we would split $55-65K.  Pay for my crew and material and I would float my labor till the sell!

P.S.  my partner ( business) got a bad addition called Cocaine!!!!!

live and learn.

Just life!!!!

@Brandon Pace personally I prefer MF for two reasons:

- it offers me more security. If one unit happens to be vacant for any period of time, I have other income coming in from other units. This is especially helpful if you purchase a property with value-add potential through renovation.

- having a bunch of units in one place helps if you collect rent monthly in person and/or wish to check in on your properties on a regular basis.

David, thanks for your feedback. A couple of clarifications to your advice. Are you advising not to form a partnership for the business as a whole or not to have partnerships project to project with the exception of a partner who is financing the deal?

Also, I appreciate  your advice to continue buying to build wealth. Would you suggest I buy out of state where properties are cheaper so I can scale or take a slower approach (due to funding more expensive properties) in Utah and grow slower?

Much appreciated!

Brandon

Logan,

I agree about the hesitation. I saw the townhome I purchased increase in price with each phase that was released With appreciation sky rocketing. Are you finding off market deals?

My main question is why do other places look better than UT (besides adding more choices)?

I get asked in OR about buying in UT (and TX and AZ) often.  Plus you know the market there better.

@Brandon Pace Real estate can be a grow wealth slowly plan and that is completely OK. I started adding MF into my portfolio to help stabilize expenses and to reduce my maintenance/capex costs (fewer roofs, foundations, HVACs, etc to maintain). I could also get a better deal on PM with larger unit counts. Have you thought about a "stack"? Maybe buy a duplex, then a quad, then an 8-plex and grow that way?

I'm old school and have always kept an eye on my properties  ( within a hours drive).  I just think it makes you sleep better when you can physically see your properties.  Even though Pueblo Colorado was very good to me in 40 months.!!!!

Partners can be difficult.  Make sure none of your friends, family, associates what to take advantage of your hard work,  Of course money help, money backing, etc, sometimes you partner to get most of the profits then nothing at all.  Utah has difficulty in partnerships, But Colorado and Arizona is more common.  But be so careful because they can file a lien,  which is a nightmare to resolve sometimes!!!  Or they can do so many other things if they have an addition or going through a divorce, etc.

I would move forward and buy as much as you can, Ogden, West Valley, Kearns,  My son just did a Flip for his in laws in West valley.  They put up $225,000 and said all we want i $10.000 More, My son and wife did the house and my son and wife made over $40,000, gave them the $10,000.  WIN WIN

I later told my son, your in laws were the same as a hard money lender!!!!

He laughed and said , but I trust my in laws more!!!!

If you can find good deals, that is when you make your profits!!!

Good luck and yes I got this Forum going for you guys!!!


No votes?


Dave

Like @Anthony Gayden , I too will try to answers your original question @Brandon Pace .  

A few reasons why I have focused on commercial, specifically self storage over SF and MF.  I have worked on SF, MF, condos, townhome, etc.  Commercial within self storage is:

1.  More predictable. We can model out performance closer to actual versus sf, and mf.

2.  Easier to manage, 25%-35% operational expense compared to MF at 50% - 55%.

3.  Greater ability to implement different tax strategies.

4.  Greater barrier to entry for competition.

5.  Greater flexibility in product to meet demand.

6.  Cost basis lower per unit, less risk.

7.  Greater access to financial debt structures.

8.  Bigger market on exit sales.

9.  We also compared the amount of time we spent on a flip, new construction and self storage.  They were about the same amount of time, and not even close on the profit.  

I am sure there are those who will disagree with 1 or more (even perhaps all of them), but these are the reasons we have directed our focus on investment away from SF.

Just to chime in on the title of the thread. One of the problems we've seen in Utah since 2016 really is the decline in available SFR inventory. Although rents have increased, they have not increased at the same speed as property values.

This means that rent to value ratios on single family homes started getting less and less attractive starting almost 5 years ago.  To find value, investors have been looking for assets that have higher barriers to entry so they don't have to compete with the owner occupant crowd.

As recently as 3 years ago, it was not uncommon to see a decent cash-flowing single family property in good condition that was fairly rent ready.  Those started drying up as owner occupants started buying homes above appraised value and often with deferred maintenance.

In about 2018 investors really had to start shopping different asset classes where they weren't competing with FHA loans etc. Owner occupants started looking at duplexes and the occasional 3-4 unit depending on configuration driving those prices up to unreasonable levels. But we still see small triplexes and fourplexes with only studios and one BR at relatively sane prices for this reason.

Subsequently, investors moved on to the 5+ unit class that was unavailable to owner occupant loans to find anything that made any sense.  And one could argue that these have become overvalued.

Now a lot of investors have moved on to new construction (and often 5+ units) because the cash-flow on existing construction is similar (or worse) than new.

So there are good arguments about scaling that multi-family provides. But hedge funds did just fine buying SFR's from 2009-2012. @Jay Hinrichs can probably tell you about how to kill it with SFR's when the market makes sense for it.

But those days are gone and we're just looking for anything that isn't entirely overvalued from a return perspective.  That's why your seeing multi-family.  And particularly multi-family new construction.

@Brandon Pace there are many different strategies. You can become financially independent with vacation rentals, single family, small multi, large multi, mobile home parks, storage or commercial. Buying larger properties or portfolios helps you scale faster, but scale is possible in EVERY asset class I mentioned. There are people who own 1000 single family homes. Granted it could take work to acquire that many properties, unless you are able to buy portfolios, like 100 houses from one investor.

I like single family homes because I can acquire them and sell them easily. There is multiple exit strategies, either owner occupied or for investment. I like the separation  between tenants and properties. If you own an apartment building and have trouble with a couple tenants, they can drive out other tenants. If I have trouble with a tenant, it isolated to that tenant. 

People like storage and commercial because they avoid dealing with tenant issues. People like mobile home because they avoid dealing with maintenance issues. People like large multifamily because high concentration of tenants can simplify management. People like the high income on vacation rentals, but it is a very active business.

The only caution I have is avoid the "I have more doors" trap. You can make more profit from 10 single family homes than from 100 apartment units, with 1/10th the tenants to deal with. People make more on three vacation rentals, then 10 single family homes. 

The point is that there are lots of strategies with different advantages or disadvantages. 

For one, if you find a good commercial deal you don't have to deal with a knucklehead residential lender measuring it by your debt-to-income-ratio. 

Finding a LEGITIMATELY good commercial deal, however, (and not a marginal one) is going to be a bit of a trick in these markets today. Got bubble pricing in most markets based off of future projected growth, and interest rate fun when you go to try to refinance in 5 years. 

Not into making predictions, but I wouldn't want to have to hope interest rates in 5 years will be just as low as they are now. 

Can anyone tell me how to reply and insert the @name so that each person can be notified or know I am responding. I plan to respond to each of you but thanks for all your feeback.

Scaling.

Cash-flow.

Conventional loan limits (restricted to 10 financed properties on FNMA and FHLMC).

There's probably a bunch more reasons. There are also negatives to consider.

I don't have any commercial investments nor commercial investment experience. I am familiar with commercial lending, but definitely not an expert.

Not everyone is interested in commercial. But I definitely am, and that's a goal after our next investment property. It will be a multi-family, and the current plan is to use traditional financing.