How to scale beyond duplex

Question

Bigger pockets forum helped me to learn and purchase an out of state duplex that was renovated and is now fully rented. It was a great landing experience and I want to do it again but want to purchase a larger multi family, ideally a between 10-15 unit. This is a new territory and I have watched multiple webinar, podcasts and still hitting a wall on how to get started. What has helped you? Where can I look to find such an apartment deal where there is value add? I am worried about property management as I haven’t had the best experience so how do I find someone I can trust that will run the operations for the apartment?

Adam Tafel · Answer

Be careful. Real estate is local, unless you are listening to a podcast/webinar focused on your target market I can’t imagine much will be gained in value. The main issue with scaling to larger buildings is the significant entry cost increase, which normally comes with a lower class neighborhood. I can buy Class A 1-4 family in the Twin Cities all day long, but if I’m shopping for a 10 unit I’m forced to look at Class C, which comes with brand new challenges and expenses.

You need a broker to be a true fiduciary and not a salesperson, easier said than done. Someone with multiple references of those who have achieved your exact goal and gone on to purchase multiple deals. Currently we are seeing a wave of listings in the multifamily space purchased in the peak hype market of 2021-2022, buyers are selling for a variety of reasons.

Drew Sygit · Answer

How do you screen a tenant to find a good one?

You use a process that you apply to all applicants.

Do the same thing with PMCs.

We’re a Property Management Company (PMC) in Metro Detroit ONLY, with 25+ years of experience, and we’ve seen owners make the same mistakes, over & over again when looking to hire a PMC – which drives us nuts!.

In our experience, the #1 mistake owners make is ASSUMING all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY.

So, owners mistakenly think price is the only differentiator – and look for a PMC like they’d shop for groceries☹

We encourage you to learn from the mistakes of others by reading posts here on BiggerPockets from owners that picked a PMC solely by price and regretted it.

We recommend exploring as many sources as possible to get referrals AND cross-reference them to get as much accurate information as possible.

Check out NARPM.com, BP’s Property Manager Finder (BiggerPockets: The Real Estate Investing Social Network), etc.

Even if someone gives you a referral, do NOT make the mistake of assuming that just because a PMC met their expectations, they’ll meet your expectations. We all have our own expectations and what works for someone else, may not work for you.

If you’re new to all of this, it's often a case of not doing enough research, as you don't know what you don't know!

So, ask more questions!

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

A well written management contract should clearly spell out what is expected of both the PMC and the owner, to PROTECT both and avoid misunderstandings. Why do you think purchase contracts are so long and have such small print?

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊

Here’s some articles we’ve contributed to BiggerPockets about screening a PMC BETTER than you would a tenant!

20 Questions to Ask When Vetting a Property Management Company: Processes

13 Questions to Ask to a PMC: Communication and Documentation

24 Questions to Ask When Evaluating a Property Management Contract

Caleb Brown · Answer

I'd find a solid broker that deals in that area. As for value-add opportunities, look for things like below-market rents, poor management, deferred maintenance, utility bill-back opportunities, operational inefficiencies, or vacancy that can be improved through better management.

On the property management side, I'd spend as much time vetting the manager as I would the property itself. Ask for references from owners with similar-sized properties, review their contract, understand how they do maintenance, and ask how they handle leasing, renewals, delinquency, and tenant communication. A great property manager can make an average deal perform well. A poor property manager can turn a great deal into a headache.

Before jumping into a 10-15 unit, I'd also analyze a lot of deals and spend time understanding commercial underwriting, especially how NOI, expenses, and management change the value. The numbers become much more important as you scale.

Kerlous Tadres · Answer

Congrats on that first duplex. For finding 10 to 15 unit deals with value-add potential, I would recommend starting on LoopNet and CoStar, but honestly the best deals I've seen come from reaching out directly to owners through direct mail or calling smaller local brokers who specialize in that asset class. They often know about deals before they hit any platform. On property management, from my experience the best way to vet someone is to ask for their current rent roll performance and vacancy rate on existing properties they manage, then call a few of their current owners as references. A solid PM should have no problem with that.