Author Topic: Size of first rental advice?  (Read 1845 times)

max924

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Size of first rental advice?
« on: May 11, 2016, 02:02:59 PM »
Hi all, I am looking at purchasing my first true rental. I have been a landlord before but only with a house I moved out of and started renting out.

 I have talked to the banks and determined what I am able to borrow for a rental. In my area I am looking at everything from duplex's to 8 unit apartment buildings. My question is, should I avoid purchasing something like the apartment building vs a small duplex based solely on the fact that I am a newcomer to the rental business and should start small?

 I realize something like this may need property management, higher insurance, etc, but if the numbers make sense why not go for it? I got excited when I learnt I could get into possibly purchasing an apartment building, so I have turned to the internet to take me back down a notch ;)

Any thoughts are appreciated, and I do realize an apartment building would be labelled commercial, although at this time I don't know all that that would entail.

iamlindoro

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Re: Size of first rental advice?
« Reply #1 on: May 11, 2016, 02:46:27 PM »
There's nothing that explicitly makes taking on more units in your first deal a *bad* idea, exactly, just one worthy of a great deal more caution.  As you mention, anything over four units is going to be considered commercial from both a lending/mortgage perspective and an insurance perspective.  Commercial financing is a ton more strict, and generally the repayment term is quite a lot shorter.  I'm generalizing because plenty of people have certainly come up with creative ways to get commercial property financed, but overall, the terms aren't as favorable as residential lending.

The bigger concern for me would be the potential for being undercapitalized-- eight units means potentially eight or more each of the items that wear out, get broken, etc.  If you take on a SFH or duplex and find that your initial repair budget gets blown, it's probably blown at a much more manageable level than it would be if you purchase an apartment building and require unexpected major repairs soon after closing. 

For example, I closed on a duplex in January.  I had the property inspected and I had my two different contractors in for rehab quotes.  I was pretty confident that my up-front repair budget would be around $5,000.  In the months since, I've gone through a few major repairs, an expensive eviction of an inherited tenant, and some "bite the bullet and get it done for the long term" repair/improvements that drove that cost up to close to $12,000.  I've got the money, but if the same kind of thing happened to me if I was expecting $20-30K in up-front repairs, I would have to raid other investments to cover the costs, and that would be no fun at all.  Someone with a smaller stash than me might end up with a repair bill that they couldn't cover at all.

Don't get me wrong, I actually love multifamily properties for a lot of reasons and would love to own a small apartment building some day... but I've shied away from it so far because an unexpectedly expensive repair could jeopardize my long term FIRE plans.

tonysemail

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Re: Size of first rental advice?
« Reply #2 on: May 13, 2016, 08:48:37 PM »
In my city, 4+ unit properties are under rent control whereas a duplex is not.   Also, renting a SFH does not require a city business license.   Its good to research and understand your local city laws.

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Jim2001

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Re: Size of first rental advice?
« Reply #3 on: May 14, 2016, 11:36:27 AM »
+1 for the concerns on increased potential costs and therefore reserves on commercial properties.

So, consider talking to a commercial lender to see what you would qualify for.  Also, find a commercial realtor, or  property manager and see what they've got listed.  Ask them run you through the numbers on the listings.  When you go to purchase anything larger than a SFH, it is be reasonable to request the past financial records (likely after you've made a deposit, but it doesn't hurt to ask prior) to assess repair history, rents received, utility costs, etc.

I'm a big fan of building a team of experts (property manager, CPA, legal support, loan broker, etc.)

clarkfan1979

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Re: Size of first rental advice?
« Reply #4 on: May 17, 2016, 06:00:03 AM »
Instead of a 4-plex for $200,000, I think a 4 bedroom, single family home for $200,000 would be better. To get your feet wet, you will have one lease and one unit. Plan on making mistakes in the beginning. However, you will learn from them and get better. After 3-5 years, then maybe go for the 4-plex. You can always protect yourself against risk with excess cash.

max924

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Re: Size of first rental advice?
« Reply #5 on: May 17, 2016, 06:57:54 PM »
Thanks for the replies and advice. I will be looking at the 8 unit tomorrow. I also have a triplex I will be checking out, it is a bank sale so the price is right. I will have to make an appointment with my banks commercial lender to determine exact finance details.

I understand the reasoning for going non commercial in some cases but the return on my money invested appears substantially better than a duplex, or sfh, which is the big carrot for me. Although it is extremely unlikely, I would be able to carry the 8 unit building, even if totally vacant, so
I feel I am not overextending myself. Saying that, I am still not fully versed in the commercial end so will have to start learning...

ashfo

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Re: Size of first rental advice?
« Reply #6 on: May 18, 2016, 09:43:19 AM »
I have been reading a lot about commercial multi families on Bigger Pockets recently and themichaelblank.com.  I found Michael Blank's website on Bigger Pockets as he has blog posts there too.  I read one blog post that said if you want to get into commercial multi families, 5 or more unit, as your strategy then you should consider doing that right away.  Valuating a property with 5 or more units is different than 1-4 units.  Commercial lenders will still consider you a newbie even if you have several 1-4 unit buildings, and the first time you buy a commercial property you will be at least financing wise, in the same position as you are in now.  Comfort wise, maybe you'll be more confident and comfortable taking that step after you have another property under your belt. 

My thought was always to start with 1-4 units and work my way up to smaller apartments 5-20 units.  Right now my husband and I own a duplex, and live in one unit.  We are now thinking of jumping into commercial multi families next since that is our ultimate goal.  You should read some of Michael Blank's stuff.  I have found it very helpful so far, but I'm still in the very early stages of learning to analyze commercial multi family properties, and we are saving up for a down payment, and/or looking for partners to help us get there faster.  Not sure I'm sold on the partner idea yet, but I'll be reading about different ways to structure partnership, and seeing if that something I'm interested in.