Investor · Centerville, UT · Member since 2020 · 61 posts · 47 votes
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’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.
@William Hochstedler I can see what you are saying. All 3 of my investments are new build townhomes. My search at least on MLS in my local Utah searches have new construction similar price point as existing. I figure new will have less cap ex and maintenance expenses.
@Joe Splitrock I love your advice about not getting caught in the “how many doors” trap. More is not always better depending on your strategy. To your point, My vacation homes in southern Utah are forecasted to cash flow $1300/month each. Whereas my long term new build rental my only cash flow $300. I’d go all in on the vacation homes right now if I had ability to borrow and more specific properties meeting my criteria were available. The only worry I have is not being diversified enough and relying solely on the hospitality market to thrive.
@Account Closed my residential loans hinging on debt to income ratio have been exhausted. I’d like to borrow more but will need to get a rental history on my current properties before I can apply that to income to help my ratio. I have not explored commercial loans nor searched for commercial deals and recognize the deals are far and few between in this hot market. I do like the thought of commercial borrowing by merit of the the property itself rather than my debt to income. I am interested in getting there in the future.
For a few years I was buying commercial plexes even though I thought I was looking for 5 bed homes. A wave of tired landlords hit so I adapted.
Of course I picked up a bunch of homes over the years but haven't shopped for 1 in a while. The market says my little bread and butter $75k homes I bought are now worth $235, so I'm selling them slowly as they become vacant.
Catching more retiring plex sellers and buying those while everyone else seems to be looking for houses.
@Steve Vaughan good point that I don’t need to feel locked in to owning a property for life. Do you invest in one geographical market or multiple? And why?
@Steve Vaughan good point that I don’t need to feel locked in to owning a property for life. Do you invest in one geographical market or multiple? And why?
Just my backyard. As a 10x Napper I don't have interest or need to research and stay up on multiple markets.
@Brandon Pace i have never built any self storage myself but was looking into it but when this virus hit everything skyrocketed in prices so i backed off on that idea but finding a self storage deal can be a real pain because they are not that common compared to single family houses.
@Brandon Pace I'd be happy to provide insight on asset based commercial loans. We fund 1-4 units on 30 year with no DTI, and 5+ for value add up to 24 months.
@Steve Morris I’m looking outside of utah to invest in less expensive properties that will cash flow better. I am very limited on my time to deal search especially in this hot market. So I am considering it to stretch my dollar and create some better cash flow than what I am finding here. Let me know if you think I am missing something and recommend another option.
>Let me know if you think I am missing something and recommend another option.
The residential real estate market is efficient. In your area, I suspect the homes that cost more are typically in nicer areas with less risk. The same is true at a national level.
Higher priced markets (low cap rate) are perceived to be more desirable, higher return, less risk than lower priced markets *high cap rates).
Example, Meridian, MS has an property appreciation rate for this century below the inflation rate and a rent appreciation rate for the last 10 year below the appreciation rate (and rent has declined for the last 6 months). It has a declining population. I would expect cheap properties, but history indicates there will be no rent growth in inflation adjusted dollars. This should be a low cost
Compare this to the various historical higher appreciation areas such San Francisco, NYC, San Diego, LA, San Jose, Seattle, etc. The properties are expensive (low cap rate), but the property and rent appreciation have historically been outstanding. This implies the low cash flow property will improve with time. With enough time, it will have cash flow better than a place such as Meridian. This is in addition to the value created via appreciation. Leveraged appreciation is a fabulous wealth builder.
In summary, the prices of a market are not random. The high cap rate markets will have great initial cash flow, but their perceived growth and/or risk is not great. The low cap rate markets have poor initial cash flow, but their perceived long term growth and/or risk is considered to be great.
There is a reason that low cap rate markets have low cap rates and it is not because the investors in those markets are expecting a lower return.
My recommendation for you it to concentrate on the market you know best. Once you are very comfortable in that market, you can look at other markets. What you may find at that time in that the grass is not greener on the other side of the road (i.e. the other markets really are not superior to your market).
@Brandon Pace I recommend getting into medium and large multifamily. These are the 5-plus units and require a commercial loan. They take more work and experience to get but they scale so much better than the smaller properties. Keep on investing and go big when you can.
My tax returns are still such that I can finance a $10m apartment complex easily, but can't refinance my own $1m home.
So there is no way I'm going to try to grow a real estate empire by dealing with 1-4 family pinhead lenders (or rather pinhead originators that have to fit you in a conforming loan box)
Also, my goal was always to have 1000 units (which seemed huge at the time, I have 1500 units now). And I knew there is no way I'd be able to find, finance, and run 1000 SFH. But getting a few 100-200 unit apartment buildings? Much easier.
If you have to buy 1-4 family because that's all you have the capital to do then so be it. But if you CAN get a bigger property, skip the small annoying deals.
@Dan H. Wow! I am so glad you explained that about the higher end rentals vs lower end being present across the national market. Perhaps it is wise to stick around locally where I know until I get a little experience. I will take your advice into consideration.
@Benjamin Aaker Thanks for your advice. I am beginning to see the scalability advantage of 5+ units. Do you have any specific tips or steps for me as a new investor having only purchased 3 townhomes as rentals to prepare for the opportunity to scale by acquiring my first 5+ property?
@Cody L. 1500 Units is amazing. Likely, my capital is a stumbling block at the moment. But I could work towards positioning myself to have capital. How did you get the capital required to get your fist deals in commercial?
@Cody L. 1500 Units is amazing. Likely, my capital is a stumbling block at the moment. But I could work towards positioning myself to have capital. How did you get the capital required to get your fist deals in commercial?
First deal was an 8 unit. Down payment came via savings from my 9-5. Sold it at a profit, rolled the $ into another deal, refinanced that one, and so on and so on.
My tax returns are still such that I can finance a $10m apartment complex easily, but can't refinance my own $1m home.
So there is no way I'm going to try to grow a real estate empire by dealing with 1-4 family pinhead lenders (or rather pinhead originators that have to fit you in a conforming loan box)
Also, my goal was always to have 1000 units (which seemed huge at the time, I have 1500 units now). And I knew there is no way I'd be able to find, finance, and run 1000 SFH. But getting a few 100-200 unit apartment buildings? Much easier.
If you have to buy 1-4 family because that's all you have the capital to do then so be it. But if you CAN get a bigger property, skip the small annoying deals.
We went the small unit count route (mostly duplex to quad) and have done quite well (no complaints), but if I were to do it again we would go commercial multiplex. Why? Because it scales easier. I know there are people on BP who have many doors in small unit count. We have a fair amount of doors (23 in San Diego, which is an expensive market). We need to make changes to continue to scale. Either more use of property management or hire dedicated help.
There were various reasons we went the small unit count route: 1) our first rental was my ex-home (single family) 2) it is the route my Mom had used 3) financing of 30 fixed F/F is tough to beat. 4) smaller price points
If I were to start again, I would go commercial MF (5+ units). I would use a professional PM on every unit. I would try to migrate to higher unit count properties.
This is not to say that success with small unit count is not possible. If anything, I show that it is possible. What I am saying is that I believe the value ceiling gets difficult to raise earlier with the small unit count. $10M of small unit count can be achievable, $100M would require hiring and managing of dedicated staff (it would be a full time job). We recently refinanced 8 properties (17 units). Just the signing of the paperwork took 6 hours and this was without any significant break. Note, a single MF apartment building could easily have more value and more units than we just refinanced. A single set of documents for the Commercial MF property, maybe 1 hour.
I have learned a lot taking the path chosen. However, I would take the commercial MF path if I was doing it again.