All Forum Posts by: Ronald Perich

The biggest drawback to small multifamily properties is exit position. The market is smaller and typically more experienced with investing. But that also makes it one of the better opportunities. Less competition and you often find owners who tried it and didn't like it, weren't successful at it, or simply want to walk away. The small multifamily arena is also not on the RADAR for the big players. They seem to be in SFH or large complexes.

I'd invest in SFH if I was interested in forced value instead of cash flow. There are dumps in good areas that can be excellent rentals you can use in the medium to long term but then liquidate when the consumer market is hot. But as @Jeff B. mentioned the ability to scale exponentially is really reduced.

If I look to purchase a 10-plex, it is going to be 1 closing, 1 title search, 1 inspection, 1 loan. SFH are ten of each typically. Property management costs are typically less with ten units in the same area versus 10 SFH spread over a geographically diverse area.

In the end, it's all about your goals with investing. You can start with SFH and use the appreciation/forced value to play into the multifamily arena. Certainly a respectable and often used technique.

This is a typical issue you'll find for part-time landlords, accidental landlords, etc. Financials are not always available. You can do your own research, as mentioned above. Make sure zoning is good for these properties. And check to make sure there are separate utilities to each unit versus single. Otherwise you'll be paying for all of the utilities as one of your expenses.

@Dmitriy Fomichenko

Thanks for the clarification. I didn't understand the easy rules that the IRS puts in place. Similar to the 27 1/2 year depreciation with the 1/2 month on both ends. They really make it easy, don't they.

But really, thanks for clearing that up. I stand corrected.

@Scot Howat has it correct. You can only take out 50% or $50K, whichever is less. Up to that amount once per 12 months. Must pay back in equal payments or all at once (typically). Rolling into a self-directed doesn't mean the loan necessarily goes with it (talk to your plan administrator).

$50K loan will cost you $910/mo and you'll pay off around $9,300 in yr 1. So after year 1, you can get another loan for around $9,300.

If you're looking to get into four houses (say at $50K a piece) and use the loan as a down payment mechanism, you'll probably have to take it out in two chunks. Maybe one loan when you get your first house and one when you get your third ($25K each).

I've used this myself. But I also had cash reserves. I caution you... make certain you have money set aside for all of the fixes you'll need or want to do when you buy them. And for that bad egg who trashes the place.

If you withdraw, of course you have the taxes and penalties (if under 59 1/2). If over 59 1/2, some 401(k) plans will allow for in-service distributions to a qualified plan. So he could roll it over some of his funds into a self-directed IRA that permits investing in real estate. If he uses an IRA to fund, he has to do it properly to ensure compliance with all of the rules.

Good luck!

@Jeremy Paschedag I've been hearing a lot on the air from them too. Actually thought about buying a franchise opportunity at one point. But their fee structure was a little too wonky for me. $99/month for this area is pretty hefty, especially with a lot of places renting in the $700-$900 range. Plus you have an initial start up fee of $99. Plus the placement fee of one month's rent. So my PM cost for a SFH that rents for $800/mo will be almost 20%. And even if the existing residents stay, the PM fee for year two is 16.3%.

If I have 20 SFH @ $800/mo, I'll pay them somewhere in the area of $30,000/yr in PM fees. I could hire an office assistant or pay for a full-time employee for that amount. I'm not bashing them. Like I said, it's probably great in areas where the rent can support it. But there are a lot of areas where that amount just won't be financially viable.

 Each and every one is different and is based on the current condition and characteristics of the property itself. Think of it like this... a buy-rehab-flip guy/gal will get a listing of everything that needs to be done to put the property into retail condition. That is a massive list that will have replace items, repair items, and leave alone items on it. 

If you are buying an investment for the long-term, you need to take that list and do the same thing. Only the "leave alone" items are not a $0 cost item.

Instead, each "leave alone" item should be given a likely life-span remaining and an expected cost to replace. You need to do the same with the "replace" and "repair" columns as well.

Do the math and you'll know how much to put aside each month for you CapEX.

The more "replace" and "repair" you do up front, the less your maintenance costs will be. But you still have to replace eventually.

The biggest mistake I think "hobby" investors make is to never plan for the repairs and maintenance. I'll go to an existing, solid resident and offer to paint (an acceptable color) a room for them well in advance of their renewal. Less expensive than a turn-over.

When first presented with an opportunity, I'll use the rules-of-thumb to see if I should even spend time running more detailed numbers. My expenses are usually 45-55% depending on the community - licensing, water/sewer included, etc. can make a big difference in the expense category.

But once it's time for due diligence, I'm writing down everything I can think of.

@Jason Slater, I'm not sure that it matters what environment we are in when it comes to finding opportunities. You may have to wait it out as a bad deal is worse than no deal. If you don't properly plan for these expenses, you'll be in trouble. 

And it's like death by a thousand cuts. 

Example - I just had a unit come available. The water heater is still functioning. But it was installed in 2003 (by the previous owner). There is no way I'm not changing that thing out during this turnover. 

But I planned for it. Every month, I set aside money for these types of expenditures, and it doesn't matter if the unit rents for $1000/mo or $400/mo. In six years, I better have the $800 it's going to cost. I already know the roof needs to be replaced in the next five years. I've estimated what that's going to cost and am putting the money aside right now for that expense.

The "rules" of 10% for maintenance and 5-10% for CapEX are back-of-the-napkin stuff. Used to help quickly analyze an opportunity to see if you want to explore further. During the due diligence period is where it needs to get real and you are writing down exactly what your expenses will be using hard numbers (as only you can best estimate based on your area).

@Mitch Anderson,

Tough to answer your question. But the St Louis area does have a couple of good PMs from what I understand (and some really lousy ones). You will have better luck with getting PMs over in Missouri than Illinois, but we have a few over here.

Do not go Condo in St. Louis. Very difficult to cash flow and appreciation is out of the question except in the highest-end areas. In fact, most areas of St Louis won't appreciate very quickly. It's a steady-eddie area. @Alex Tillman has some good suggestions. If you're considering the Illinois side of the river, O'Fallon, Glen Carbon, Troy, Edwardsville, and near Scott AF Base are good areas.

I have had so many compliments on the rentals we rehabbed using higher-end vinyl plank flooring. CrownLake from Menard's. Most thought it was hardwood flooring. Best part about it? Waterproof. Second best? Very durable. It usually doesn't crack and split off when something hard is dropped on it as laminate can sometimes do.