Investing in multi-family – Looking for a mentor / advice.

[saiine]

I’ve thought a lot about my next step in real estate lately and continue arriving at purchasing multi-family (4-6 unit) outside of San Diego (and all of California for that matter).

From my research, cash flow on day 1 is much more likely in other parts of the country. I am specifically looking at Kansas City, Indiana and Atlanta.

My situation (late 30’s, no kids, single, good income, 1 condo with about 150 in equity in San Diego, retirement portfolio is good).

I’m looking specifically at spending 50-80k (20% down and conventional financing) and hoping to net at least $250 per unit.

My long-term goal is within the next ten years to establish a portfolio of rentals that produce 10-15k in passive rental income.

While I am spending a considerable amount of time on BiggerPockets and other resources just trying to soak up knowledge, the pigs have never failed me in the past and have always offered sound insight.

Naturally, I wanted to come here and ask, has anyone gone down a similar road? Any thoughts or lessons learned you would like to share?

Thanks!

[Anonymous]

The 20% down jumped out at me. Several years ago I looked into pulling equity out of my eight unit property. I never did. I could be wrong but it seemed, at the time, Chase was doing only 50% loans for non owner occupied.

[gzz]

You won’t get a 20% mortgage for a low end out of state investment property

Your expectations on returns, even if you could, are unrealistic.

The market is pretty rational. Buildings that appear to have really high cash flow have substantial deferred maintenance and/or are in declining rental markets.

Management of out of state low end apartments is a potential nightmare.

I suggest you look into buying another condo or house and renting your current one out. You will get a better mortgage that way.

[saiine]

Thanks for your comments,

I was inspired by this post here: https://www.reddit.com/r/realestateinvesting/comments/817z6d/ama_ive_built_a_portfolio_of_35_rental_units_and/

He did an additional post worth checking out here: https://www.reddit.com/r/realestateinvesting/comments/8y1e7w/investor_us_lessons_learned_from_analyzing_100/

gzz, can you expand on why my expectations are unrealistic?

[Myriad]

Hey, I bet it’s the same guy that lied about how he got to a $1m.
https://finance.yahoo.com/news/anton-ivanov-millionaire-story-truth-210757837.html
Lives in SD.

But you need to have 25% down for the better rates for an investment property.
Not sure about KC, but even in Denver, $200k will get you an older 2bd/bth townhome in an ok area. Nothing like a 4-plex.

[saiine]

Yes, that AMA is Anton. The Yahoo article is a little misleading, and he does address that in his AMA. At the time written, it states he only owned 2 properties (He now owns 35).

He also wrote dealcheck.io – which I suggest checking out.

Anyway, it’s not just Anton who has been successful with real estate and particularly investment properties. His story sounds very similar to other stories I’ve read, and I am convinced my goal is feasible with hard work.

It certainly isn’t easy, and having initial capital helps (as he did).

Anyway, I spoke with my lender today and was pre-approved. I should clarify that I am looking at 2-4 unit properties, which I have learned means conventional financing works. I misspoke earlier and said 4-6 unit.

My lender informed me he has many clients that have gone down this path.

[gzz]

You are hoping for a “passive” return of 10-15k on an outlay of 50-80k. That suggests a return of, at lowest, 12.5% (10k on 80k).

If there were a lot of investments like this, REITs that can borrow money easily at 5-6% would buy them all up. But they don’t, because properties that suggest a double digit cash flow have serious risks, most commonly declining rental market and deferred maintenance. All over middle america there are completely abandoned apartment buildings. The reason they were abandoned rather than sold is that even at a price of 0, the rent doesn’t cover basic expenses like tax and maintenance.

A Californian with 80k trying to get buy an apartment building out of state with no landlord experience is a target to get ripped off.

This is all academic though. It is just obviously a bad idea for so many reasons, and you are not likely to find financing.

[Myriad]

With $50-80k, it’s better to invest in a REIT or some type of real estate crowdfunding. Less risk and don’t actually have to manage the property.
With out of state property, you will have to fly out there to manage and do due diligence, even if you have a property manager.

[saiine]

Hi Gzz,

Perhaps I was not clear. My goal is to acquire multiple properties to earn that amount of passive income in the next decade.

I would be starting with 1 property at a target price point between 50-80k. I would try (after all expenses) to profit $200 monthly.

I’ll share my thought process here, and if I am way off or my assumptions are wrong, please chime in.

A purchase price of 80,000 with 20% down at 4.5% that rents for $1150. (This is realistic based on some of the properties I have seen)

Principle, Interest and Taxes 484.00. Accounting for 10% vacancy ($115), 25% banked for capital expenditures ($287), 9% property management ($100), I am looking at $164 net. I can get that to $200 if I put a little more down.

The thought is that I would then rinse and repeat this approach. Throughout the next decade, I will certainly learn to recognize better deals, perhaps a flip or purchasing larger units, negotiating lower property management expenses, etc.

Deferred maintenance is a valid point, and that is what I classified as capital expenditures above.

Appreciate your insight – let me know what you think.

[saiine]

Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?

[Myriad]

[quote=saiine]Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?[/quote]

Well, it’s a matter of how much do you trust your property manager. I hear plenty of horror stories. Are they really spending the funds on maintenance? How are the tenants? Does the property meet city codes? Illegal activities? – what if the property manager is involved?

Stuff you would/can do by driving by a local property is not possible.

[FlyerInHi]

[quote=Myriad][quote=saiine]Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?[/quote]

Well, it’s a matter of how much do you trust your property manager. I hear plenty of horror stories. Are they really spending the funds on maintenance? How are the tenants? Does the property meet city codes? Illegal activities? – what if the property manager is involved?

Stuff you would/can do by driving by a local property is not possible.[/quote]

So true Myriad.
I built my portfolio over the years and I’m still remodeling. I still have 2 more to do. I did thorough gut jobs and update of my properties so I will hopefully not have to do it again until I die.

It’s not as easy as people think. You can’t buy deplorable properties and have reliable tenants and cash flow. A plumber service call is easily over $200. There goes the profit.

[sdsurfer]

If it was me, I’d start with one out of state unit before I go for 8 of them. Get a feel for owning out of state and how the relationship with your management company is going to be before you make the larger investment. I know so many people that have been talking about investing in multi-unit properties “because the price per unit is better”, but I’d think the expenses/maintenance are higher too.

[FlyerInHi]

[quote=sdsurfer] I know so many people that have been talking about investing in multi-unit properties “because the price per unit is better”[/quote]

Hummm… It depends where. I have been looking in Nevada and the price per unit on 4 plexes are higher because buyers can actually get 30 year mortgages whereas single condos have to be paid cash.

[saiine]

Thanks,

Yes my plan is to start with 1. I realize a lot I will learn a lot with the first few properties, and likely make some mistakes.

I found a mentor out in Las Vegas who I have connected with who seems extremely bullish on the Vegas market. Looking forward to learning more from him.

I’m not in this for the short game, I am looking 10-15 years down the line – but I have to start somewhere.

[quote=sdsurfer]If it was me, I’d start with one out of state unit before I go for 8 of them. Get a feel for owning out of state and how the relationship with your management company is going to be before you make the larger investment. I know so many people that have been talking about investing in multi-unit properties “because the price per unit is better”, but I’d think the expenses/maintenance are higher too.[/quote]

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