Originally posted by Tyler McCracken on 11/3/2009 on www.askthelandlord.com
INiTIAL THOUGHTS ON MULTIFAMILY INVESTING –PART 1
We landlords often classify ourselves as cheap, frugal, thrifty…., to name a few… Truth is we’ve been educated to look for Value. I started my career of Landlording focusing on multi-family housing. I discovered I could get a lower price per unit and deal with most issues at one time –this happened to work well as I also had a 9 to 5 job at the time.
There are several tricks of the trade that we all learn -some maybe more localized due to regional differences in construction, governance, density, and/or demand….
I will share with you some of the lessons I’ve learned that I believe accelerate wealth with rentals in the Charlotte market.
What are the three greatest costs we face in the game of real estate?
Prior to the “anybody fog a mirror” lending days, I would target Multi Family Housing that was 5 units or greater due to less demand. What does that mean? It means a better price/unit. You see back then it was harder for investors to get standard 1 to 4 housing non-conforming loans let alone a commercial loan. Does that ring a bell? Certainly sounds familiar in today’s environment and certainly one that we should get used to. We’ve got at least 3 to 5 years before the credit & financial markets open up to even 50% of what we saw at the height of the frenzy.
One needs to develop a relationship with a local/regionally based bank. Typically you’ll find that a bank won’t do more than a 15 or 20 year amortization, install a 5/7 year balloon, and will require 20-30% skin (down payment) in the game for loans under a million. Once you develop a portfolio of rentals you’ll find the ability to provide that skin in the game from equity already created in existing product.
2. Overhead Expenses
What is an overhead expense? Well, I classify these expenses as utilities, maintenance, capital improvements, taxes, and/or any other essential costs associated to keeping a rental performing.
People who know me know what the first thing I do when stepping out of my car… Care to guess? I count water meters. You see I want the residents of my rentals to pay for as many utilities as possible within reason. Water expenses can be a killer!!! People tend to not care if a toilet constantly runs if it’s not on their dime. I’ve had great success in buying duplexes, quads, 5-plexs, and up with separate water meters…. I’ve also had the fun of $1,000 dollar water bills too. What would you prefer? I would suggest that one also counts gas and electrical meters too.
What’s the other greatest expense I eliminate with my target market rental preferences? Can you say Carpet!?! I like Hardwoods. Yup, some claim they get torn up or destroyed; however, I will say with certainty -having owned over 100 rental units that hardwoods hold up in all levels of rentals (including the low end). Carpet will kill you. One could ascertain that in warmer climates such as California, Florida, and Texas that ‘tiled’ flooring throughout would be an acceptable custom. I must also state that I target older housing stock that is typically pre-1970’s let alone WWII. I repeat carpet will kill you. One bad apple in a rental will destroy it in no time. I can refinish/restore hardwoods in practically the same cost of one new carpet install. Going into my 16th year in this business, I can attest that hardwoods last the test of time.
Utilities and flooring are the two easiest daily expenses to focus on….. Two big Items I particularly single out as I’m inspecting a prospective investment. Of coarse there are many more…. However, I will argue that you’ll consistently save more money with a focus on these.
The word management is all encompassing one that novices tend to rule out as a simple percentage expense -which is all but wrong in the world of day to day landlording for the typical investor. This is an item that can either make you or break you whether it be financially and/or psychologically.
I find that smaller multi-families require a lot more hand holding than single family homes when it comes to day to day management. Why? More people are crowded into the same space. Thus, the opportunity for greater conflict.
I find great success in putting like minded people into the same multifamily property. My greatest success is marketing to what I call the “Creative Loafer” market that I’ll classify as 20-30 year olds that are typically starting out in life. Usually they are of the non-married segment that consists of liberals, yuppies, dreads, tattoos, piercings, and/or artists. You see I don’t really care what the race, religion, skin color, and/or any other protected class is….. I’m looking for a mindset. My places are typically in emerging areas that make them affordable. I find my market will pay a greater rate for the area but expect above average fit-n-finishes for that market location. Typically my multi’s consist of 8-900 square feet 2/1’s; however, I used to have an eight unit consisting of 3/2’s. What do you think it attracted? Yup, families with kids –usually 2 or more. I have trouble dealing with kids in multi’s –left alone they become little Tasmanian devils. The only features that 8 unit provided was the size and affordability with no similar mindset other than people with kids. Without going into details, one could see how different mindsets created more babysitting and dealing with the differences of the residents within.
I know that I’ve only touched on only a few points in the world of multi family rentals let alone the world of landlording. However, I feel that these few points can be critical (and an essential foundation of thought) in the success of investing. Remember, your location may have different traditions. This is not meant to be the rule. What I invite you to do is post what issues and idea’s you look for when your investing in multi family rentals. Remember we are interested in creating value –the value you receive will be a great as the value you give.