Invest in 4Plexes or Apartments?

I’m selling an SFH with 225K equity in CA and looking to reinvest out-of-state to maximize cash flow and some appreciation. I’m considering both 4Plex & Apartment bldgs.

Apartments seem to offer economies of scale & cash flow plus on-site management. Not sure about appreciation unless rents are increased. However, they require higher down payments, higher interest rates, interest only not available, and your $$$ are less diversified.

4Plexes cash flow fine but you need to buy more (vs. apts) and need to deal with corresponding multiple transactions / location and property management / maintenance issues. It is nice that financing is like SFHs with low down and interst only options.

If we put management / maintenance issues aside: the remaining trade-off is financing. I’ve not yet done all my research, but it seems like I could leverage 4Plexes much more (Avg 10-15% down, vs. 20-25% down) than apartments while buying at about same CAP rate. So would seem to be advantageous.

What do you think about this tradeoff? I’m sure many of you have gone through this and likely have other considerations which I’ve not even thought about.

Apartments are all in one location. The down payment seems a little large. You need to do some more searching. The smaller the downpayment the greater the ROI. The key is to be creative and stay away from conventional money. Ask around in your community. Private investors are usually more creative. Take your time. A good deal in 1 year will always better than a bad deal you pick up tomorrow. That was always my problem, I wanted it now and I PAID THE PRICE.

I am also looking to get into apartments in So. CA for reasons of single management location, great cashflow potential, lower risk (versus duplex) if you have many units. I understand in order to get low down/no down deals you can use lease option, sub2 just like SFH.

I guess the challenge for me is to do more research, understand the law, find a good deal, creative financing, how to deal with PM company or on-site manager, accounting etc. I am looking to purchase 4-10 units to start. Any advise is greatly appreciated.

I’ve been managing a 14 unit apartment building by myself for 3 years (in addition to a fulltime job). I do everything; clean, paint, electrical, water heaters, place ads, answer phones, pay bills, do paperwork, evictions, yard work. Everything except lay carpet. Sometimes it’s a lot of work and sometimes I don’t really do anything for weeks at a time. They don’t pay me anything. Just free rent and utilities. But it’s low pressure. And if you even it all out I usually come out ahead. Usually. But saving money was only 1/2 the reason I took the job. What I really wanted, was to see what owning an apartment building might be like. I answered an ad in the newspaper and was hired by a property management company. They are a 2hr drive from my building. I only see them about once every 9 months when they drive up to take me out to lunch. Probably talk to them on the phone once a week. Email them about twice a week.

So what’s my take on the apartment business? Well, I think it’s pretty darn easy if you get the right manager. We average about 1.5 to 2 vacancies a month and I could improve that but (I admit it) I can be lazy and they aren’t paying me so why go crazy? Then again, I’ve been doing this for 3 years while working fulltime so how lazy can I really be? I give myself a solid grade of ‘B’ as a manager. I could be better… but I could also be a lot worse. One past manager actually started a campfire on his living room floor and nearly burned the building down.

After observing this business from the trenches… I’d have to say that the wildest thing I have witnessed… is what I HAVE NOT witnessed. Specifically, the owners. In over three years I have never once met, nor spoken to, the owners of the building. I am told they cruise a sailboat fulltime.

My advice to a future multiunit investor would be…
– Don’t charge the maximum amount the market will bear. It’s greedy and you will pay for it. Higher turnover. More demanding tenants. Be cool and give people a great deal. They will love you for it.
– Buy new appliances whenever you can. They look fantastic and don’t cost much. Letting a unit sit vacant for one or two months because it has a crappy stove and fridge is ridiculous.
– Paint, paint, paint! Many ‘sins’ can be covered with a fresh coat of paint. Buy the good stuff too. It lasts longer and you need to apply less the first time.
– Do not use intimidation. Kill people with kindness instead. 95% of people will bend over backwards for you because they are so thankful they have a nice landlord for once in their lives. As for the 5% who are too stupid to ‘get it’… you shouldn’t have rented to them in the first place.
– Never charge late fees on rent. Pretend like you’re going to. Put it in the rules. But never do it. In three years I have not charged one person a late fee. Bounced checks? Yes. Charge for that. You have to draw the line somewhere.
– Always keep the yard looking nice. Spend a little money. It makes people feel like they’re living in a much nicer place than they really are.
– Don’t drive up in a new BMW. If people think you’re rich they won’t respect you. Drive an old truck or something. Keep a low profile. Don’t flaunt it. You gotta remember, the average tenant is… poor. Don’t rub it in.
– If a tenant accidentally breaks something, fix it quickly. Act like it was no big deal and don’t charge them for it. They will be speechless with relief and thanks.
– If someone stops paying rent wait 45 days before posting an eviction notice. Try to work things out with the person. Occasionally, you’ll get a tenant who will miraculously cough up 3 month’s worth of rent seemingly from nowhere. And for those who really don’t have the money, you are doing them a great kindness by giving them extra time to figure out where they’re going to live. Besides, you’ll probably see some of that money when the collections process is over. If someone fails to pay rent… you are most likely the real problem. 9 times out of 10 you should not have rented to that tenant in the first place. Be nice, learn your lesson, and don’t repeat it.
– I hate it when a landlord posts an eviction notice on someone’s door when the tenant is only a few days late on rent. To me… that is an evil thing to do. Evil. If your bills are so tight that late rent impacts your financial stability… you are in the wrong for biting off more than you could chew.
– If three tenants complain about the same problem, you should fix it now. Obviously, you dropped the ball somewhere and the problem is on your end. Fix it fast and you will instantly have three (or more) happy tenants.

Well, that’s my two cents anyway. But I’ll only charge you $50 bucks. What a deal eh? Owning an apartment building is something I really hope to do in the next five years because, if you run the place properly, it’s a piece of cake. Case in point: last week I had to evict a woman. (The worst thing a landlord is forced to do.) But the woman was so thankful for the kindness I’d treated her with… that she hugged me in the parking lot the night she left.

P.S. To answer the question ‘4-plexes vs. one large apartment building’… I’d have to say an apartment building. Definately. If I had to run around to 3 different locations I would never have lasted one year as a manager. THAT’s how big the difference is in time and labor.

Great post Thumper. I am not sure that I agree 100% with all of your comments, but most of them are right on. One more thing that might be done is to call your tenants every 6 to 8 months to see if there is anything that needs to be done. It will help you stay ahead of the preventative maintenence and make the tenant feel that you really care. After all, they are paying your salary/payment/etc.


Thanks Wilson. Yeah, I can get a little opinionated sometimes. Not that my opinions are always right. And I do admit that my views on things like late fees might change once I become an owner. Can’t all be peaches and cream eh?

Good post Thumper!

I agree with most of your posts but only a few like if a tenant breaks windows or something, they should pay for it, just like you break someone’s windows, just my 2 cents.

I wonder would it help to give some sort of commission off say new rents if the manager bring them it, or how much better cashflow he help improve, say x% of gross rent. Have any landlord given managers some % of rents for better performance?

The tenant below me tripped over his baby’s stroller and put his elbow through the sliding glass window breaking one pane of the two-paned window. Instead of repairing the window and charging him for it… I popped out my own window and put it in his unit. He and his wife were so happy they didn’t know what to say. Of course, I have a partially broken window in my dining area now but what the heck.

Would I, as a manager, work harder to fill vacancies if the owners offered me a % of the take… or some kind of cash incentive? Hmm. I guess that depends on HOW MUCH we’re talking about. I definately would like to see them offer me a substantial bonus if I kept the building completely full for 3 to 6 months. That would be great… and yes, I would probably try harder. But then again… sometimes people leave in waves for no particular fault of the manager… and likewise come in waves for no apparent reason. So you may fall into a situation as a manager where you’ve just worked harder that you’ve ever worked before but still end up with 3 vacancies and no bonus. That would be very frustrating.

It’s a really tough call - what would motivate a manager to work harder? I think… probably the best thing to do is simply to give the manager a good deal to begin with… a job he’s thankful to have and doesn’t want to lose (compensation depending on the size of your building of course) and HIRE A GOOD PERSON. If you get a stand up guy and pay him fairly then the results should please you. Also, don’t jack your rents up so high that the poor guy has a difficult time keeping the place full. Turnovers suck for a manager. And I do mean… SUCK. Too many turnovers and you could lose a great manager. I urge anyone to remember this GOLDEN RULE: a great manager a far, FAR more valuable and hard to find than a great tenant. If you find yourself fortunate enough to stumble across a great manager… then spend a little money and be SURE that you keep him happy and make his stay worthwhile.

In my particular situation, managing a 14 unit building by myself, I’m given free rent and utilities. Honestly, I think the owners are getting over on me a little bit. (Maybe more than a little bit.) I get peanuts to run the building ($150 a month) and I frequently wait months to be reimbursed. It is not unusual for me to carry a balance of -($1,500.00) for 8 month’s of petty cash expenditures and a water heater. If I wasn’t interested in the rental business and doing this for the experience I probably would have quit a long time ago. It would be much easier for me to simply work a part time job if I wanted some extra cash. Peace. Quiet. ACTUAL VACATIONS… without worrying whether or not the building was burning down while I was away. I haven’t had a decent vacation in over 3 years. In fact, most of my vacations are spent sitting at home (which sucks) because it’s less stressful than leaving town. Hmm… can somone please tell me why I’m doing this again!?

I guess if you’re going to be an owner… then it’s probably not wise to overpay a manager either (as they might become spoiled and lazy). But I’d just be extra, extra careful that you don’t underpay a good manager… or you might find yourself on your hands and knees at 10 o’clock at night chipping human waste off of a toilet and picking cat feces out of a carpet. If you like doing that sort of thing, then by all means… underpay your managers!