All Forum Posts by: Allan C.

Suggest you really stay away from 5+ unit properties. Seems you're still on the learning curve for MF investing and 5+ has different lending, insurance and permitting requirements than 4 or under. 

I have similar background to you and my strategy is to focus on high quality assets in diversified markets. I have commercial and residential MF assets in Midwest and west coat. The west coast assets have high capital basis, thus strong depreciarion offsets any net earnings from Midwest markets, thus I don't pay taxes on net income. 

I'm levered up decently (but maintain high reserves), which is fine for now since I use W2 income for daily living. When the debt is paid down in 15 years, I can use future cash flows to offset W2 when I retire. Since I work a demanding W2, my goal is to minimize unit count while maximizing equity growth.

i get the appeal of looking at Midwest markets, but if you can acquire higher value assets then I recommend you do so. Returns are a function of risk, effort and barriers to entry. Cheap properties usually come with higher risk or higher effort, otherwise institutions will crowd out all the retail investors.  Sounds like you're focused on the long game, so think through how risk and effort factor into your strategy. 

Note OP that you'll have to wait 2 years between Sec 121 exclusion, assuming you don't have qualifying event to shorten timeline on the second sale (ie job relo). 

I only invest in markets with populations greater than 1M and have economic diversity. While these markets have greater risk of temporary over-supply, they have fundamental support to sustain a stable renters market over the decades. 

I also believe I can operate my rental business more effectively than the 90th percentile, so investment returns should meet my underwriting expectations. 

I know you didn't intend for this to be click-baity, but this is a click-bait thread. Your original statement premise is a very broad generalization that has basis flaws. 

I suspect this thread will get traction with blue vs red debates, but many opinions will miss fundamental drivers of asset growth and appreciation. 

You already have great responses above, but I'll put my vote to not get license. It'll be a distraction and I think it'll cost you more in the long run. 

If you get your license, you'll naturally want to be involved in all aspects of the deal, which ultimately prevents you from focusing on the most important parts of the deal. 

I invest in multiple markets and have strong relations with numerous realtors in each market. It's like with any business, vertical integration has is pros and cons, and you won't fully understand the tradeoffs until you are far down the line. Focus on taking ones step at a time and then make a decision when you are more informed. You aren't losing anything by deferring this decision. 

If this is your first deal you also need to realize that proforma seller P&L statements are always wrong. Expenses are always left off to juice the NOI for unsuspecting buyers. Spend some time to understand how to underwrite a deal. Look at numerous listings and see components of opex that different sellers include, and you'll start to get a better picture.

also don't forget to include a reasonable vacancy number, and also include capex!

I'd worry less about the loan and make sure you fully understand your insurance costs. Commercial insurance rates have increased significantly over the past few years, and 5-unit is the most inefficient asset type to buy. You get stuck with higher costs across the board and that 1 extra unit doesn't get you more scale than a quad. 

on the lending side I agree with others - DSCR is best option.

The question that I have is what will differentiate you from everyone else employing this strategy? There is certainly margin in flipping, but is it enough to be worth your time?  Do you have the right experience and team to do this efficiently? There is plenty of cash and people in LA market looking for distressed properties to flip - how will you avoid over-paying and making the right decisions to capture $200k gross?

I'm a believer in the strategy, but I think your expectations need to adjust to something more practical. 

You've got good feedback on immediate path forward so I'll share advice on future mitigation. I do everything I can to not have leases expire past Aug 31 on my cold-climate rentals.  I've been stuck with a winter vacancy before and it's very difficult to fill. 

you can't avoid a tenant that breaks a lease, but you can reduce vacancies during challenging months by setting your lease dates appropriately. 

hopefully the end of winter brings you better luck.