Which Road is Best

Question

Hi!

I thought I had it all figured out. I was going to invest my money in apartment buildings and use my cash flow to buy more apartment buildings. Now I'm not so sure.

Let me back up. My goal is cash flow. I'm interested in buy and hold properties.

I'm wondering if it would be a better strategy to buy multi units small enough that would qualify for traditional mortgages with the advantages being lower down pmt and longer terms.

This my example-If I have 300k I could buy one $1m investment and I would then need to pay debt service and hopefully pay back my initial 300k investment in a reasonable amount of time so I could repeat the process.

Example 2-The same 300k, used for three 500k small multi units, 20% down instead of 30%,longer term means I pay myself back faster ..,

I'm missing something, right?

TIA!

Teresa Buchanan · Answer

Bradley, thank you! How much experience is required and what terms are typically offered?

Teresa Buchanan · Answer

Hi David. I honestly know nothing about this type of investing but would love to learn. Thank you for the offer. I would like to take you up on that.

My intention was to buy outside my home state and use property management but I don't really consider that to be passive.

David Thompson · Answer

Hi Teresa,

Do you want to be active or passive?  Sounds like you want to own apt building (MF) outside your state where you might find better cash flow.  If you are accredited, you might want to look at investing w/experts in passive syndications / partnership deals where you can leverage their expertise in selected top markets.  You provide the limited partner capital to help the general partner buy these sizeable investments, but reap solid returns and not have to worry about the financing, dealing w/residents, etc.  Something maybe to consider.  If I can help educate you on this strategy let me know.

Bryan O. · Answer

Consider also that you aren't going above 10 properties with killer conventional financing terms. If your goal is 50 then you're going to use the same sort of commercial financing for 40 of those that you would for an apartment deal. Also, SFH are going to take far more time to source, rehab, etc. With apartments, you could quite literally buy one deal and be done but you may need significant capital to buy it.

So, the answer is: whichever you're better at, and whichever you can afford. Both are equally viable routes to get you there the "fastest". Are you better at marketing to get under-market homes, doing great rehabs quickly, financing out your capital, and continuing? Would you then self-manage to keep the numbers high? Or are you better at finding the hidden gem in an apartment deal that really reduces expenses or allows you to increase rents? It's a higher cost of entry, but the end result is far easier to predict because it is based on reality, not just what Sally HomeBuyer paid next door for her home. Of course, it also requires a different knowledge set than SFR.

There is no "best" way. There are "best for you" ways, but that's all up to you. Of course, you can probably hire a guru to let you know what the perfect method is ;)

Teresa Buchanan · Answer

Hi Bryan,

Thank you so much for replying to my post. I very much appreciate you taking the time.

The truth is both types of investments are very appealing to me but at this point I only have experience with sfh. My personality type is an all or nothing sort of thing. With that I'm most attracted as many units as I can get at one time. I do understand the advantages/disadvantages of each.

The numbers are where I'm struggling. In my simplistic example it appears I can achieve the numbers I desire by longer financing terms and less money out of pocket. So that is where my inquiry lies, numbers. My question is (more concisely) which route will get me to 50 units the fastest knowing I need to repay my self (my initial down pmt) in order to buy the next investment.

Thanks!

Bryan O. · Answer

@Teresa Buchanan there are a ton more factors than that. With apartments you get logical valuations, economies of scale, consolidated doors, and huge potentials for upside if you buy value-add.

With SFH, you have better terms for lending, more "commonly understood" investing (most investors have owned a home and understand how they work), and more exit strategies.

The financing is the smallest consideration... it's just numbers. Those can be crunched all day long and see which deal wins. The harder part is figuring out which flavor of investing suits your goals, available time, tolerances, understanding, and style.