General: bottom line thoughts on owning many multis?

General Real Estate Investing
1

SO…

As I start a -sofar- exciting real estate career, I am thinking how I will set up my approach.

These are my goals:

  1. Long term wealth (27yrs. now). I don’t want to get rich quick, I just want great security in the long term.
  2. Responsible and moral practices.
  3. The option to work as a carpenter / small-time rennovation contractor while still making a “good” living after taking into account the taxes and benefits of owning investment real estate. When I say “good” I mean no rent/mortage and at least $50K per year (remember my day job as a carpenter should provide around $30K of that).

Thoughts/questions:

  1. It seem very clear to me that 2-4 unit multis are a great way to build long term wealth. Is this really a great way to go? If those with experience could “do it over again”, would you go that route? Why or why not? And if not, what route would you go? Flip? 5+ unit rental buildings? Commercial? Develop homes?
  2. Any thoughts on dealing with health insurance (single)…should I pay it through LLC as an ‘employee’ that will provide tax benefits? What conditions must I/LLC meet in order to do that?
  3. What parameter do I have to meet to buy, for example, a truck and a table saw and ‘write it off’ to my real estate activities.
  4. I don’t mind hard work, sacrifice, or ‘making it happen’.

I recently had the thought, “what if I have beginner’s naiveté and mulitiple multis are too much work or just not the best way to go?”. Do I have tunnel vision here or am I on the right track? How should my plan of investing in multis that pay for themselves develop over the years? Should I just buy more and more?

THANK YOU!

Many questions from the Merrimac valley of Massachusetts

2

There are a million ways to make money in real estate, many of which involve never owning a property. I won’t presume to suggest what is best for you but I’ll take a stab at your 4-plex vs commercial question.

If you compare the price of 4-plexes in the same area to smaller commercial properties, say 5 to 8 units, you will often see the prices are similar. In some cases the 4-plexes are more expensive. The reason for this is that it’s easier for most people to buy residential than commercial.

Up until the recent subprime mess, you could buy residential property using a mind-numbing array of zero to minimal down financing arrangements. With little down required, it makes residential apartments approachable to almost anyone and the high demand drives prices up. With high prices, cashflow on these buildings can be a problem though.

One drawback to 4-plexes is that rents might not cover all your expenses. For residential, the banks don’t care about this. Negative cashflow on 4-plex apartments is ok with the banks and they will loan you money anyway. It’s easy to get yourself into trouble here. Commercial is different.

Financing for commercial property is more restrictive. For a typical commercial deal, the bank will require at least 20% down (yes, I know, there are ways around this but I’m talking in general) and place a restriction that the rents more than cover the expenses with enough to cover the loan (typically by a factor of 1.2). Obviously, not everyone can come up with 20% down. Thus, fewer people can play the game, demand is relatively less, and the resulting prices per door are typically lower than for similar 4-plexes.

So where can you make the most money?

I know many people who “collect” 4-plexes and nothing else. They are quite happy and also quite wealthy. There’s nothing wrong with that. In my opinion though, if you have the cash, commercial is the way to go. I say this because there is much more variability in the deals and more opportunity to make extraordinary profits. This is because of the pricing structures.

Residential property is valued on comps. Two identical residential properties, sitting side-by-side, will be worth exactly the same. This is not true with commercial, which is valued on income. If two physically identical commercial properties, with the same rent per unit, are sitting side-by-side, and one is fully leased, and the other is 50% vacant, in theory the second one is worth half of the first. (Ok, the land is worth something but you get my point.) Thus, the landlord’s ability to manage his building plays a big part in the value of a commercial property. Find a mismanaged commercial property in a great part of town, say with low rents and some vacancies, and you might be looking at the opportunity to force a lot of equity if you can buy it cheap and fully lease it at market rent. This is tougher to do with residential apartments since they tend to be worth the same in the same area no matter what the income.

The benefit to residential apartments is that you can buy them with less cash. One drawback is it’s tough to make them cashflow. If you have the money, IMHO, commercial is the way to go. The deals are harder to find, but I believe there’s more opportunity.

I wish I asked this question when I was your age. Good luck.

3

You need to stick to buildings with 3 units or less. That is the cutoff between getting slack from inspectors and being held to the full letter of the law. I would get a duplex and live in 1 unit. You will be exempt from most fair housing rules and the consumer protection law won’t apply to you. You can learn the ropes and keep a close eye on things.

Forget the LLC. It will cost you $500/yr plus you will have to disclose your personal address in the public record.