I am a newbie to investment real estate. With that said, I’ve decided that apartment complexes best fit my goals and talents, but I am looking for a bit of reassurance.
I’ve read that most folks start out with SFH and work their way up, but that for me is less appealing. I like the notion of a high ratio of rental unit to management unit. Apartments are buffered from vacancies. Buying one 10 unit apartment building versus 10 houses seems like a huge win in terms of time spent locating deals as well managing the properties. I have a good (but demanding) day job that I really need to keep (for now), so time is my most critical asset.
I have excellent credit, a managable mortgage on my primary residence and verbals from a small group of people who together can pool enough to control about $1M in property. IOW, I’m not trying to do this with 0 down or anything like that.
(Yes there is a question in here some where!)
Am I completely off my rocker? What are the barriers to skipping past houses and duplexes and starting with apartments? Does anyone here know of someone who has done this?
I Know people thats controlling apartment buildings but they didnt start out doing so…after they learned the game of investing and was making good monthly cash flows they started buying buildings and selling there houses and they been doing it for atleast 3 years before they even baught a 10 unit. I advise you learn the game before you go big.
You are not “completely” off your rocker - but pretty close. Although not impossible, starting with a 10 unit building as opposed to a single family house is not a good idea. There are many differences between SFHs and multi-unit buildings. It is not just the number of units!
First of all, SFHs are very forgiving of mistakes. Obviously, a high percentage of the population lives in SFHs and therefore there is always a market for buying and selling them. If you make a mistake with a SFH or find out that being a landlord is not for you, it is very easy to sell a house. Getting out of a multi-unit can be very difficult because only an investor will buy a multi-unit. Additionally, a higher percentage of owners of multi-unit buildings are sophistocated investors and these people will only buy if they are getting a great deal. That leaves newbies as the only people that you can sell a multi-unit building to at retail - if you need to get out.
Another factor to consider is that tenants in multi-unit buildings require a LOT more attention than tenants of SFHs. In my experience, tenants in multis require at least FIVE TIMES the attention of SFH tenants. One bad apple can stir up an entire building. Your statement that “apartments are buffered from vacancies” is not true. In fact, the percentage of vacancies in apartments is generally higher than that of SFHs. Also, apartment tenants frequently have conflicts between each other (Jimmy’s radio is too loud. Billy has visitors at all hours of the day and night. Jane left beer bottles on the sidewalk again. ETC, ETC, ETC) From the landlord’s standpoint, it is a lot like running a kindergarden class - except that you have to deal with them 24/7/365.
Yet another factor to consider is that bigger (more than 3 or 4 units) multi-unit buildings are considered commercial property. Work on these buildings not only requires a building permit, but also approved plans and state licensed contractors. This can greatly increase the cost of any project!!! Also, depending on your state, tax implications can be different for commercial property (meaning higher taxes).
In summary, multi-unit buildings are MUCH harder to manage, harder to sell quickly, have many hidden costs, and are less forgiving than SFHs. I would strongly suggest starting with a few SFHs before moving to any multi-unit buildings. This approach will give you the opportunity to learn the business on a small scale and therefore not make big and costly mistakes on a grand scale.
I would advise you to talk to tedjr the other moderator he has done these deals right in your area and is very approachable and knowledgeable when it comes to that type go strait to the man that has done them he can answer better then anyone on this forum!
So you’re implying that the MFH market is far less liquid and if per chance I turn into a motivated seller that I’ll be sliced up like a turkey at thanksgiving!
Ok. So this is where the players are. I actually like the fact that apartments are bought and sold chiefly by investors. IMO this makes for a reasonably level playing field IF you know the rules and do your homework.
I’ve read that if you buy it “right”, perform solid due diligence based on the property’s current operating statements, check the supporting expenses and rent rolls, NEVER rely on what NOI the seller or broker says it “could” generate, and look for deals where value can be created, then you can play too. IOW, I am working pretty hard to build the knowledge necessary to avoid becoming a motivated seller.
Thanks for the response tsboss1. This seems to be the way a lot of people do it. One thing I wonder though is this. Once you’ve learned the SFH market and are successful at it, you’re going to take a switching cost hit in order to “start all over again” learning apartments, the market for them in your area, etc.
Then again, I see what you are saying. Most people go that way in order to learn the ropes in a more forgiving environment.
Did your friends start out with the notion of buying houses as a proving ground on their way to apartments, or did they back into apartments in search of better returns (et al) ?
You brought up tenant problems. Now I know I’m going to draw some fire on this one I plan to carefully select a property management co to run my apartment(s). THEY will deal with these issues for me, and I will focus on managing them. I have limited time and can only reach my goals by spending most of that time looking for deals. BTW, I’d want to use a management company for SFH as well. Toilets, make-readies, collecting rents… I don’t want or need another job. Nuts???
I know that the financing parameters for MFH 5+ units is different, but I hadn’t thought about building permits, plans and state-licensed contractors. Thanks for the heads-up.
I plan to carefully select a property management co to run my apartment(s). THEY will deal with these issues for me, and I will focus on managing them. I have limited time and can only reach my goals by spending most of that time looking for deals. BTW, I’d want to use a management company for SFH as well. Toilets, make-readies, collecting rents… I don’t want or need another job. Nuts???