Our friend Peter is interested in investing in real estate and we spent an afternoon together talking about the various aspects of investing.
Not too long ago, he emailed me: “A specific thought I had (could be completely misplaced) was to actually start bigger with a multi-unit house/apartment building rather than many single family homes. Most of the reason is return on time investment. Going through many separate mortgage applications and research seems like a big time suck. If you start bigger, might be more complicated but you get a larger return from the start.”
Here is my response:
Your thought is not misplaced. It is a lot of work and as some commercial investors say, it’s just a few more zeros for larger property and not that much more work. The only challenge with starting in commercial, say larger apartment, complexes are. Residential rentals give you diversification but they are more work: separate, discrete transactions, spread out over time, and each transaction is different (location, price, lender, price point)
- To buy commercial locally, you have to get deals off-market, not listings from brokers. Seattle area does not cashflow unless you find off-the-market properties. Not impossible but you need to hunt.
- Locally, per unit costs are very high. Each unit can you get 2-4 units in another market – that means 2-4 more tenants. One Seattle tenant leaving = 100% rent loss. 1 of the 4 in another market = 25% rent loss. (yes, 4 times the toilets but that is why we buy “B” properties, not the slum lord stuff)
- So then you head out of state. You have to go a bit inland into cashflow markets (coastal states don’t cashflow). Financing for out-of-state buyers with no prior experience on sizable apartments is a challenge. I’m talking about price tags of $1+million where you may not have all the down payment yourself. Few months ago, I evaluated some 100 units and hit the financing barrier. There are ways to handle that but again, it is not just a few phones and off you go filling out a loan application. Apartments are very hot, being bid up by private equity funds who are loaded with cash from individual investors like you and me.
- On every transaction you learn something – a lot, a thing here, a thing there. Some would say cut your teeth on something smaller where the mistakes have fewer zeros. I would agree, though you don’t need to start with a single family house. You can get a small apartment building. I’m trying to solve right now. The dollar value is just over $400. $400 is a lot in Red Robin/Starbuck’s currency. In real estate it’s not too bad. It’s a single family rental. If it had occurred on an apartment, would be more like $2,000 to $4,000. (that would be endless fries AND burgers at Red Robin).
- And by the way, if we didn’t discuss before, be extra wary of condo investing!
- Right now apt financing can be pretty low too. But I like the current interest rate levels for residential and for folks who are a bit shy about pulling the trigger, it’s a good start especially if you have the right property manager and they are committing $20-50K, not $250K for a $1 million apartment building. Exit strategy on that would be another investor. Single family can always be sold to an owner occupant (which means you sell retail price).