Hey monkeys,
I’ve gotten to that stage in life where I’m looking at purchasing my first property. I’m looking into buying a 3-flat property with 2 beds and 1 bath each unit, and living in one of the units myself.
What are the some of the benefits/risks to this type of investment? How should I be looking at cap rates? What are the best real estate investing books you’ve read?
Full disclosure - I plan on putting ~10% down on a property that is
Great idea, this is how many real estate investors got started. You should look out for a few things:
Know how to estimate the rental income and the vacancy allowances. Your units won't be rented 100% of the time. And your units are not drastically more special than the ones nearby. People are still price sensitive.
Know the expenses associated with owning the property. Weirdly, a lot of people overlook property taxes and HOA dues if applicable. Talk to people in that neighborhood you're looking at. Really get to know the neighborhood. Drive through it in the morning, afternoon, evening and spend a Friday/ Saturday night driving around. You want to know the area intimately.
Im assuming you know how to use MS Excel. Build out a basic pro forma for your income. Theres many online you can just download for free too. This isn't always necessary, I have some good friends who don't even know how to make a formula in excel and they do well with investing.
Generally speaking, cap rates are pretty compressed right now. If you have any time, you might be better off looking for something where you can add value. Personally, I love places that have ugly paint jobs. Painting is easy and can be done yourself on the cheap- yet many potential buyers see vomit green and immediately say no. Shaggy carpet is also great, easy to throw in some laminate flooring and it looks like much better. Which brings me to my next point..
Meet a good contractor. Your contractor will make the difference from you wanting to jump in the bathtub with a toaster or feeling like you're a real estate genius. Do not underestimate how useful your GC is. Don't cheap out on them either.
Check out Bigger Pockets, though you have to wade through a lot of bs they have some solid advice every here and there. If you have more questions feel free to PM me.
Regarding HOA fees, if I were to purchase an entire brownstone and rent out the other 2 units, wouldn't I be building the reserves individually for the property? Or are you referring to HOA fees like neighborhood homeowners association fees? Maybe I'm thinking about them incorrectly.
Neighborhood Home Owner's Association dues/ fees/ waste of money usually. The cost should be passed onto the tenants. But I've seen people not think about it, so the cost wasn't passed on.
As @SponsorPromote" mentioned above, your choice in contractor, if you were to pursue a value-add property, is extremely important. If you don't come from any type of construction background, determining pricing on your own can be tough. Finding someone you can trust is key. The paint and carpet comments are SPOT on. Cosmetics can be quick and cheap upgrades.
In terms of pricing, it may be obvious, but avoid bidding wars. If the price becomes above market or out of your price range, let it go. Unless you know the market down-pat, it can be very risky buying above/at-the-top of the market.
Vet your potential tenants to the max. In certain states, it can be almost impossible to evict them (ex: Massachusetts). Credit checks, LinkedIn-Facebook-Instagram-Google stalk the crap out of them. Don't let poor tenants tank your investment. Three years ago, I had to give a landlord a resume in order to be considered for an apartment. I don't blame him. The rent from your tenants pays for your mortgage; collecting rent is the #1 priority. Also, since you're living in the building, it is doubly important so your standard of living does not suffer.
How important is a general contractor if I plan on doing minimal repairs to the property prior to renting out to tenants?
Minimal repairs can be pretty subjective, but assuming you want to just go in and freshen the units up. Paint, fix small Sheetrock issues, repair of basic dripping fixtures/sink traps, new floors. On a smaller 2-4 unit like you’re looking for, none of the above are a big deal. You don’t even need a contractor for them, in the beginning having a good affordable and capable handyman is even better.
For future reference as well just because someone does good work this year, doesn’t mean he will next year too. Most of the guys in this field are always chasing the next check and whenever you’re talking about physical visible results, when someone rushes a job, it shows. Always check the work you have done.
I own a lot of properties myself, I’d look out for the following.
Assuming you are based in the US, on a multi family property a lender whether it’s a conventional or non-conventional will require at least 25% down. Possibly more depending on your credit. It’s not uncommon to see 30-35% down on multi family if the loan is non-conventional.
Avoid unique properties, they can be difficult to appraise if there are not enough direct comps in your market area.
Avoid properties that require significant renovations until you are familiar with the process. Renovations that are “supposed” to take 6 months can take over 12 months! There will always be additional costs as walls and floors are ripped up and more issues are found.
Be prepared to spend some time trying to fix things. There’s nothing worse when you’re starting out than a feeling of calling a plumber and being charged a few hundred when it was a simple fix.
Watch for zoning easements. Issues are rare but you don’t want to deal with that on your first deal.
Be careful if acquiring a property with tenants already, not all landlords are honest and once you buy it, it’s yours. I should also mention not all owners disclose everything wrong with a property, “Ohhh I didn’t know about that”
It can be a great business to be in if you do your research, or it can take you broke if you have a bad tenant and major repairs come up.
So even if I live in the property, the bank will likely require >25% down? From what I have read, many people state that if you live in (owner occupied) the property, then the banks will allow for lower down payments.
I don’t have any personal experience with trying for a conventional multi family loan where you’ll also live in the property, but considering that typical single family conventionals are requiring around 20% down I don’t see it being something widely available to get sub 20% for multi family.
Maybe you’re reading about FHA mortgages and those are another story. You need to look up the requirements and see if you meet them. I’m not sure they’ll let you buy an $800k property as originally mentioned with an FHA mortgage though.
You can go FHA 2-4 units with as little as 3.5% down if it is owner occupied.
As long as it is in HUD max loan limit for FHA.
If you take an investment loan then yes. If buyer lives in the home, then they can take residential mortgage and go as low as 3.5% (under 20% requires PMI). The rules may be different outside the US, I don't know.
That said, it would great if you did an AMA on personal real estate investing.
Definitely will look into posting an AMA eventually when I have some time. Just pushed into another state and might enter another in the next 12 months.
This just isn't true. There are plenty of high leverage fist time home buyer programs out there.
You are correct, but you have to live in the property. Not very familiar with FHA for the record, as I never did one. Work with private/portfolio lending at this point.
Definitely do 1-4 so you can get .gov subsidized 30yr money. Also, it would be a good idea to start watching home improvement YouTube videos. I learned how to change shower/sink cartridges, replace fixtures, replace toilets/waxrings and all other minor handyman work that would cost typically cost $350-500 a svc to call out a plumber.
Does anyone have any insight about beginning to build a small portfolio by first purchasing out of state?
I live in SoCal where the median home price is $690k, whereas some strong markets (pop./job/wage growth) have lower medina home prices of $260k (Dallas), Boise ($310k), and Austin ($360k). If I were to live in a property myself and go FHA, i'm looking at median home prices of >$1M+. That's obviously way outside my range.
So my thinking is to purchase (without extinguishing all my cash) a turnkey 2-4 unit somewhere out of market where it's cash flowing, and build the property management/contractor relationships before moving into something higher yielding, more value add.
Someone please let me know if i'm making a mistake here.
For the people buying out of state, are you not scared that you aren’t an expert in your market and the local players have an upper hand?
Why buy somewhere where you don’t have the most knowledge in. I thought they said buy real estate locally.
How do you get around this? Any tips? If the numbers are good do you visit the property and buy it?
Is the philosophy that a return is a return regardless of location?
haha ... everyone loves this question. I love it also.
Yes. Do it. I bought a new duplex 4 months ago with 10% down 2 blocks from a major downtown (my wife and I take the train into work, sold a car, so nice getting out of traffic).
I am in development, but I did not really value the property normally, I just figured out what my monthly housing expense would be and what my cash flow would be if I moved out and rented both units. Bottom line:
-2500 mortgage (taxes, insurance, PMI included) -120 utilities +1400 rent +60 utilities +500 mortgage principal paydown (only gets better) +100 tax benefits (writing off loss (cost segregate/accelerate depreciation, interest expense, etc.) (in a high marginal tax bracket))
$550 housing expense for my wife and I just outside downtown! We are hedged against inflation significantly and we have the potential for big upside in appreciation)
This is the correct way to evaluate an owner occupied multifamily. My buddy did this for awhile and had a roomate in his unit so his "rent" was $0 and he was putting about $600 a month in the bank. He used the accelerated savings from no housing costs and the $600 in cash flow to buy his second duplex 2 years later with similar metrics.
Are you implying the $500 mortgage principal paydown as a positive cash flow? Wouldn't that be included in the $2,500 mortgage?
yes, I am implying it as positive cash flow, Technically I would need to anticipate my sale date and discount the principle paydown at an applicable discount rate, but getting too technical with these small deals gets people lost in the weeds. Just look at the big picture. Also, my wife and I are about finished paying our mortgage down to below 80% LTV so we can get rid of our $140 PMI, bringing the total housing expense to $410 ... We have capex expenses I am not including, but those are discounted at our marginal tax rate and they only alter this picture slightly.
Our alternative was to continue paying $1,500 in rent, $70 in utilities and commuting through traffic (instead of the train). We have been doing a LOT of work, putting up drywall (devising wall was really thin, sound issues), installing appliances, fixing issues with the original construction, but I do not anticipate much work going forward, just normal house maintenance, yard work, but that is "home ownership".
It's amortization not an expense.
I don’t know of many properties in the 3 unit range that are sold as cap rates. The group of investors who buy these are typically Mom and pop.
A good rule of thumb is that you’ll want the cost of the rental property to equal 1% of the monthly rent. So in your case, a $300,000 triplex needs to bring $3,000 a month gross.
I personally think this cuts it’s too close and unless you’re buying in a superb location, or it’s a brand new property, I shoot for 1.5% to be safe.
This seems highly unlikely in the city that I'm looking in the Midwest. The 3 unit properties I'm looking at run for ~$700,000 and would bring about $1,600 per unit (each 2 bed, 1 bath). This would equate to ~$4,800 in monthly gross rental income which is way off from $7,000. Can anybody else opine if this makes sense?
You’re rolling the dice with that. 5% interest @ 30 years on $630,000 will run you $40,583.76 annually. $57,600 in yearly rents leaves you $17000 after payments. What about insurance? That’ll probably cost you $5k if not more. What about taxes? Let’s say that one is $5k. You are down to $7k. What if one unit stays vacant for two months? What if one tenant trashes the place and you have to repair it?
You have to leave room in your numbers to make money.
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