Why so many recommendations to go multi family - commercial?
Investor 路 Centerville, UT 路 Member since 2020 路 61 posts 路 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?
@Brandon Pace
I鈥檓 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.
@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?
I sure do:
Take some extra time to interview commercial lenders in the area you plan to invest. There is so much variability in knowledge and experience and a great banker will help you out immensely.
Start putting together a personal financial statement and a debt schedule if you haven't done those already. You will also need 3 years of prior tax returns.
Form an LLC specifically for your commercial investing.
Hold on to your current properties rather than selling. Banks want to see consistency. That doesn't mean never sell; if the price is right, go ahead.
Interview insurance agents and find one experienced in the commercial area. This can save you a bunch of time later when you are in a hurry.
Get to know a good commercial real estate agent.
Of course, there are many more, but these are the top ones on my mind. PM me if you want to talk further. I have nothing to sell. I just like teaching.
Commercial!
During Covid , rents are low!
Buildings vacant everywhere.
Of you can do this one trick!!
Get a 5 year tenant to commit. Statrvir Federal lease.
It鈥檚 like GOLD
馃挵馃挵馃挵
Then go buy the commercial office space for them.
That 5 year commitment should pay 1/3 of your building.
Did just that on the Kiesel Building in Ogden , Utah.
Paid $585,000 for 80,000 square feet.
Rented one level to State of Utah for five
Years at $255,000.馃挵馃挵馃挵
Had 5 levels!!
Commercial!
During Covid , rents are low!
Buildings vacant everywhere.
Of you can do this one trick!!
Get a 5 year tenant to commit. Statrvir Federal lease.
It鈥檚 like GOLD
馃挵馃挵馃挵
Then go buy the commercial office space for them.
That 5 year commitment should pay 1/3 of your building.
Can you explain this a bit please, or some article or book you suggest?
Just stole a building in Ogden with great terms and my business partner landed the state of Utah to lease up about 1/7th of the building.
It was a golden lease. You can't go to wrong with a lease from the government!!
Brandon, One more thought, There are a few foreclosure properties on the MLS. Sometimes they can be picked up for a fairly good price. Most of them need a face lift, updated bathrooms, kitchen, painting, yard, curb appeal, new lights and fixtures, etc, I can line you up with the perfect person to get it ready for you. You may need $10-15 K to re had, but may make $40,000 after it done to sale or rent for $500 more then your payments.
Get 2-4 very good agents looking, working for you guys.
This is the ticket to success, have the experts in their field work for you!!
Ogden, West Valley, West Haven , one of my best deals was their.
Kearns, Clearfield, Roy, since you live in Davis County, all if these areas are close
to you.
@David Avery Slam dunk on Kiesle!! What is the state using the lease for? What a deal!! I鈥檓 going to DM you about your foreclosure tip.
@Brandon Pace There are several strategies for RE investing, and each can work. I just wanted to share my thoughts on my experiences with MFH vs SFH. I know many investing coaches advocate MFH as a way to get higher cash flow from your investment dollars, but most often I see that strategy employed in markets with higher land values.
On the issue of distributed vacancy, it's true that a 4-plex can retain 3 rent income streams despite one vacancy, but the same can be true of a package of 4 SFH properties. If purchasing 4 SFH would require more capital than one 4-plex, then it becomes a question of whether 3 SFH's would have a lower turnover rate than the units in the 4-plex and thereby reduce your overall lost rents over a longer period of time.
I'm not trying to convince you. If you decide to go MFH for future investments, you're following in the footsteps of many successful investors, so no harm in that.
@Nic S. I get what you are saying about vacancies. It seems to me that the vacancy risk would be mediated for large multifamily closer to a 30-50 unit. To me a 4 plex vs 3 SFH homes would not be much different for vacancy risk depending on the market. One other argument for SFH in our current environment is a trend that people want to spread out a bit because of COVID with SFH. I wonder if this trend is strong and holds for years to come.
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?
Honestly it depends a lot on your personal complete picture and situation, there is no 1 universal "best" way to scale that fits all. The first major fork is cash flow, some really need maximal cashflow and for those it's paramount to scaling, others have more than ample income and are a-ok at even a net0 COC so they can go for maximal equitable appreciation which in the vast majority of cases/markets is a much large yield rate than cash-flow. As I said, this is just the first major fork in sorting out what is your best plan for profitable growth.
From what I have seen most seem to promote multi-units either out of self profitable means such as being a realtor who has tunnel vision on that 1 sale, or that they have had such a struggle creating good profitable acquisitions that they default to where they seem to be found, multi's, especially commercial.
The thing is commercial residential has some rather big teeth in it, and a novice can get into serious trouble fast on that 8cap property they bought. For example, deferred maintenance, a roof alone on one of those buildings, yeowzer it's a heck of a bill, or boilers, bad caretakers/managers of just simply not knowing that they need on-site management and how to operate. And especially the fact that literally every commercial residential deal I have ever seen/worked has always been loaded with let's say creative math and selective memory by seller.
If you can handle a lower COC yield up-front, than hands down stay in SFR, your 5-7yr equitable gains will be game changers to say the least, plus they are the most liquid of all housing class's, most flexible, and provide the most options for finance scaling such as tapping equitable gains, wrap-around refi's, commercial mortgage portfolios, tapping lines of credit for portfolio commercial mortgage, on and on and on.
If COC is required and it's all about self-sustaining compounding growth, well, that's a whole different conversation.
@Joe Splitrock. Yes everyone has a different strategy. I have moved away from SFH and focus on 1/1 condos. Just makes my life a lot easier. Of course there are some HOA rules but with most SFH's these day you have HOA as well. Neighborhoods don't like rental properties, condo owners don't seem to mind. I never have to worry about the lawn, the roof, the sprinkler system or eviction of families with kids. Not much Upkeep once I buy and remodel. To each their own, most investors shy away from condo's.
@Anthony Gayden & @Logan M.
I agree with this response and think you nailed it. I'm only in SFH right now but am aiming to scale into apartments soon. The way I explain it to people is ask yourself if you'd rather do 50 transactions for 50 roofs and 50 HVACs and 50 tenants? Or would you rather do 1 transaction for 1 roof & 1 HVAC and 50 tenants?
The hardest part, in my opinion, is working through the transaction. Minimize the number of those and your scaling quickly... well... scales
After having multiple duplexes in so many states, what I achieve is low uncorrelated market risk property but the return profile are pretty much similar.
Yes getting to scale is easy without too much headache with large MF, it's kind of the middle.
@Fred Cannon: one of the best CoC I've seen is a 1/1 condo. It's 30% CoC. So you're right. This condo thing is often overlooked by investors.
@Brandon Pace, it becomes a scale game. There are a lot that have done single family rentals successfully, myself included. I was up to 9 doors, so by no means a large investor. The turning point for me was when I had two roofs to replace in the same month. That cost me $12,000 in one day. If you are budgeting for these items continually, it is fine, but a single rental, kicking off $300/month is netting $3,600 per year. If you did not budget to be replacing a roof, and it costs $6,000 for a tear off and reroof, including replacing some decking, you just lost 2 years of profit for that roof.
A 4 family roof will not cost 4x a single family. A 20 unit property is not 5x a 4 family in cost, so you ultimately get better margins, when properly accounting for Capex and ease of management. Then you also get into commercial mortgages which don't effect your credit report or DTI, etc.
@Brandon Pace, it becomes a scale game. There are a lot that have done single family rentals successfully, myself included. I was up to 9 doors, so by no means a large investor. The turning point for me was when I had two roofs to replace in the same month. That cost me $12,000 in one day. If you are budgeting for these items continually, it is fine, but a single rental, kicking off $300/month is netting $3,600 per year. If you did not budget to be replacing a roof, and it costs $6,000 for a tear off and reroof, including replacing some decking, you just lost 2 years of profit for that roof.
A 4 family roof will not cost 4x a single family. A 20 unit property is not 5x a 4 family in cost, so you ultimately get better margins, when properly accounting for Capex and ease of management. Then you also get into commercial mortgages which don't effect your credit report or DTI, etc.
A fourplex doesn't generally cost 4X a single family, generate 4X the revenue or cost 1/4 as much for a roof. It obviously depends on the size of the building. When dealing with fourplex and multifamily, you are generally building up, rather than out. That gives you a smaller roof per square feet. A three story building puts more square feet under a roof than a two story, so you do get some economies of scale.
People spend $20K or more on apartment roofs (depends on size obviously but get really expensive). The flat rubber roofs cost more than asphalt, even similar size.
Regardless of what type of property you own, you need to budget for CAPEX. If you have a fourplex that gives you $800 a month in cash flow, that is $9600 a year. So you drop $15K on a roof and you are still eating up your cash flow for long periods. This is one of the reasons that we look closely at roofs and other major CAPEX items when buying a property. If I have to spend a few dollars more to get a property that is updated, it works out better.
Hi @Brandon Pace
First, go look at the guidance I just posted. Second, you need to sell all three of your properties and pull to a cash position. Because you don't want to be in a buy-and-hold position unless it鈥檚 a personal home where you're never going to get your spouse to let you move. You never want to hold properties in a down cycle because you're going to lose equities as the market falls that will far surpass your cash flow. Liquidate all three properties and switch to a flip position as we are anticipating the market to fall.