I have come across a 6-plex that would seem to give positive cash-flow. The building seems to be in good conditon, the units are already rented and the area has low vacancy rates. This would be the first real estate investment I make. Are there any pitfalls in multifamily units that don’t normally apply to single family homes that I should be aware of? Any particular things I should do/not do, precautions I have to take? Since this is my first investment, I’m afraid I may be jumping in at the deep end.
Any advice would be greatly appreciated. Thanks.
Alexinsiva
One “quirk” that immediately comes to mind is that buildings with more than five units are often considered commercial property and may need a commercial loan.
I would broach the subject of “owner financing”…often times, folks wanting to get out of the day-to-day ownership thing will enjoy a steady income stream from them financing the deal…plus their capital gains only have to be declared as they receive them instead of as a lump…
Multiplexes are, naturally, more management intense (more tenants, more ‘problems’, more vacanies, etc.). Where in SFH the tenants change light bulbs in common areas, mow the grass, etc., etc. - you or your management will need to do that.
On the positive side, if you have a SFH and there is a vacancy, it is 100% vacant. If you have a vacancy in a 6-plex, it’s only 16.66% vacant and the rents from the other five units will probably carry your expenses during the vacancy.
I’m sure the other good folks here that are more experienced with mutiplexes than I can also offer some input.
Keith
You are aboslutely right. In fact, this 6-plex I’m told is considered “commercial” property. What are the implications of having to get a commercial loan? Anything else I need to know about commercial property vs SFH? Any special tax implications for example?
Alexinsiva
Closing costs tend to be a little higher on commercial property.
Hi Alexinsiva,
Financing aside, there's a bit of a learning curve involved. Even if you have the skills to do most things yourself you should amass a list of pros to call on when you're tied up. If you don't have the skills to do everything yourself, then there's even more reason to compile that list.
Our first building was a 12 flat. It was a bit frustrating at times due to the fact that although we knew what to do in a given situation, we didn’t always know how to do it in the most efficient and cost effective manner. This is where even the advice of a pro via phone can turn a headache into a memory.
Find a carpenter, plumber, electrician, locksmith and painter. When they come out to do something for you watch them work. I learned how to change light fixtures, fix busted copper pipe, change locks, and do everything that could possible come up with a toilet just by watching the people we hired to work and asking questions along the way. They truly love it when it’s clear you’re asking questions in order to learn. In the beginning you may feel a bit helpless when something comes up that falls outside your realm of expertise. That’s where being able to tap into the expertise of your team will always save the day.
If you realize from the start that you don’t have to figure everything out all by yourself, then a 6-flat will be a breeze. I’ll bet inside of 4-6 months, you’ll be so far on top of things you’ll wish you were working with a 12 flat instead.
Take care,
Howard
Commercial lending is a different beast from residential I have found, I am not a pro or anything, but what I can say is that the loans are more expensive in general, and dont seem to be credit score drivin as much as they are based on the merits of the investment.
One thing you want to look at is if it is a flat roof or hip roof. You will have more leaking and repair cost with a flat roof. What is the age of the air conditioning unit or units?? Those can be costly items as well.
Concerning cash flow, you need to be aware that when a loan is being underwritten lenders will take 75% of the gross rents, not 100%. A lender considers the fact that a unit or units will possibly be empty sometime in the year and you will not be receiving rent revenue.
Another question you want to ask yourself is about management. Are going to do it yourself or hire a propety management company. If you do it yourself you will save on the fee every month, but you will have to put up with calls in the middle of the night about stopped up toilets and such. That is another factor for you to weigh out.
Multi family can be very lucrative and it can be a headache. Getting good tenants in the properties is a major key to keeping the headaches down.
Hope this helps!
Greg Wilson