New Investor Considering Multifamly

6 Replies

Hi everyone. New to investing here. Have 2x SFR in Indianapolis grossing about $1k/month after PITI and management. I've been looking to expand and trying to find new deals. I'm out of state looking for cash flow buy and hold rentals.

My agent just brought a small multi (2-4 units) and small complex (5-15 units) to my attention. I could buy either or both. I hadn’t planned on doing multifamily so early but the napkin math quickly caught my attention. Before I jumped on this though I was hoping to get some advice.

My understanding is all or 95% of the units are currently rented. They are small (most 1 bed, a couple 2 and studios) with low rent per unit. Tenants have been long term (shortest over 1 year). Annual GRM for small is 4.48 and the complex is 2.46. Just based on these I knew I wanted to at least look seriously.

I have a number of concerns though.

  1. It’s not Indianapolis. I’m not familiar with the market but a quick google search shows it seems to be a declining, small rural town with no major industry or job producer. I’m VERY worried that if/when a vacancy arises, who knows how long it would take to get a tenant.
  2. The seller has been managing himself and has been paying utilities on one unit of the small and ALL utilities at the complex. I’m not super comfortable with tenants having no skin in the game to conserve. It’s an older building. I don’t know if individual metering is even possible, and even if it was, how would I do that, would it cost an arm and a leg, and would it alienate the tenants whom I don’t want to leave due to concern #1??
  3. The reported operating costs are pretty high. I’m awaiting details but it’s currently listed at 55% of rental income. I assume higher. I would have to add management even if I somehow addressed the utilities issue. The multi comes with a small parking lot across the street. Like I said I wasn’t planning on multifamily yet. What do I need to worry about liability? I’m assuming I can’t get regular insurance? Where do I start looking? I’m not sure about delayed maintenance/ capital expenditures that will be needed.
  4. Financing is a bit new as well. I’m ready for a conventional purchase or refinance on a small enough purchase but can’t quite afford the complex. Where do I even begin to look for a loan for the complex because I can’t do a normal mortgage with this?

I’m sure there are other factors I haven’t even thought of yet.

Any and all advice is very much appreciated.

One you are semi experienced start learning about mfh. It took me two years to transition from buying turnkey rentals to doing mfh.

@Brandon Koser
I recently acquired a six unit mfh in souther California at 10x grm
I have been primarily in sfr investing and I have learnt following in first month
1) quality of tenant is superior in sfr
2) cost of operations is higher as well
3) lot of upkeep through out the year
4) tenant does not do any small fixes as compared to our sfr tenants
5) turnover is frequent
6) market rent can be achieved after upgrades only

I would carefully scrutinize your areas of investment even though numbers look great

I thought there would be multi family oppty in Indianapolis so why not look local

@Brandon Koser

For financing, you will go to commercial loan brokers who usually charge one to one and a half percent of loan amount as commissions

Or you can go to a credit union who specialize in commercial loans

It’s achievable

Hi Brandon,

It’s a comeletly different world in terms of investment. But this might be your chance  to move into this space. I also invest in Indianapolis and secondary markets to Indianapolis. If you want some guidance for how to select the right market and how Togo about analyzing a deal I’ll be more than happy to give you the basic info that you would need to get a quick start. PM me and I can send you the initial info that you need to get into MF. In my opening it’s much much better, if you have a chance now to get into it go for it. 

Originally posted by @Brandon Koser :

Hi everyone. New to investing here. Have 2x SFR in Indianapolis grossing about $1k/month after PITI and management. I've been looking to expand and trying to find new deals. I'm out of state looking for cash flow buy and hold rentals.

My agent just brought a small multi (2-4 units) and small complex (5-15 units) to my attention. I could buy either or both. I hadn’t planned on doing multifamily so early but the napkin math quickly caught my attention. Before I jumped on this though I was hoping to get some advice.

My understanding is all or 95% of the units are currently rented. They are small (most 1 bed, a couple 2 and studios) with low rent per unit. Tenants have been long term (shortest over 1 year). Annual GRM for small is 4.48 and the complex is 2.46. Just based on these I knew I wanted to at least look seriously.

I have a number of concerns though.

  1. It’s not Indianapolis. I’m not familiar with the market but a quick google search shows it seems to be a declining, small rural town with no major industry or job producer. I’m VERY worried that if/when a vacancy arises, who knows how long it would take to get a tenant.
  2. The seller has been managing himself and has been paying utilities on one unit of the small and ALL utilities at the complex. I’m not super comfortable with tenants having no skin in the game to conserve. It’s an older building. I don’t know if individual metering is even possible, and even if it was, how would I do that, would it cost an arm and a leg, and would it alienate the tenants whom I don’t want to leave due to concern #1??
  3. The reported operating costs are pretty high. I’m awaiting details but it’s currently listed at 55% of rental income. I assume higher. I would have to add management even if I somehow addressed the utilities issue. The multi comes with a small parking lot across the street. Like I said I wasn’t planning on multifamily yet. What do I need to worry about liability? I’m assuming I can’t get regular insurance? Where do I start looking? I’m not sure about delayed maintenance/ capital expenditures that will be needed.
  4. Financing is a bit new as well. I’m ready for a conventional purchase or refinance on a small enough purchase but can’t quite afford the complex. Where do I even begin to look for a loan for the complex because I can’t do a normal mortgage with this?

I’m sure there are other factors I haven’t even thought of yet.

Any and all advice is very much appreciated.

 Welcome aboard Brandon.

1st thing I'd do is separate these two properties out. They are both multifamily yes, but they are wildly different when it comes to real estate financing. Anything that is 1-4 units will fall under traditional 30 year residential financing. 5+ is commercial financing and a whole different animal.

My recommendation would be to focus on the 1-4 units 1st. Get your feet wet in the business. Nothing beats a 30 year mortgage, best financing in the world. You are limited to 10 of them so I think it makes sense to utilize a big chunk or all of those 10 before you move onto commercial financing which is far less favorable.

As it looks like you are investing out of state (or at least long distance in a market you aren't familiar with) here are some best practices on out of state investment.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

James Wise, Real Est