FIVE REASONS Your First Deal Needs to be 12+ Units
If you’ve been listening for a while, you know that we are always talking about cashflow deals. From the first time you underwrite a property, we are looking for deals that not only cashflow, but also deliver returns for you and your investors. This is especially critical for people doing their first deal.
I am not a big fan of buying and renting single family homes or putting big amounts of money into properties that do not throw off cash. Really, I often coach people to get into 12+ units for their first deal. While it may seem a little scary for a first deal, but there are many reasons why. Here are just 5 reasons:
1) Lower Cost per Door
As you get into larger multifamily properties in a given asset class and market, the cost per door decreases as compared to the cost of a regular single family home. For example, if there is a B-Class 12 unit apartment building in a B-Class area, the cost per door in a typical midwest city like Cleveland Heights, Ohio might be $55,000. A home in the same area STARTS at $75,000 and goes up from there. Depending on the amenities, you could offer a community center, gym and upgraded security. All these things drive the income of the asset and hits your NOI.
2) Install Professional Property Management
If you are looking to scale your portfolio of real estate, implementing professional property management is an absolute must – not only for their ability to manage the tenants but also so you can rely on their track record of experience. If you are going the single family route, you know that having 12 different homes in 12 different area, with 12 roofs and various demographics, it’s difficult to manage. It becomes even more difficult as you more to the mix. If you have homes in various parts of the city, you would need to become familiar with all the local landlord-tenant laws and deal with eviction court. Instead, having a professional management company that interacts with your tenants, handles collections, and maintain the property is easier when done by a professional.
3) Greater Cashflow
Cashflow in the multifamily space is driven by units. The more units you have the more cashflow you get. The great thing about many units is that if the property is being managed well, and you put a little increase across all the units, it can impact the overall gross income substantially. For example, if you have that same 12 unit apartment building and you increase the rent by $25/unit/month, you will gross another $3,600 annually. This grows exponentially if you have many more units. But it does not end there; Because you have so many units, you can install coin operated laundry to drive additional income. On larger deals (greater than 40 units), you can put in other amenities like vending machines and reserved parking spaces.
4) Income Stability
If your single tenant decides to leave the single family rental you have provided for them, you are now at 100% vacancy. The income of that property is at zero income as it takes you a 3 to 4 weeks, at best, to turn the unit, run the advertising, interview tenants and get it filled.
In a multifamily, if you lose a tenant, you will still be cash flowing. If you lose 1 tenant in a 12 unit, you are at 8.3% vacancy. You can still pay the note, cover your expenses and even have money left over. In a multifamily deal, you are not nearly as exposed financially as a single family. deal.
5) Friendly Financing
When you are getting into larger deals, they are actually easier to finance than a four-plex or even a single family. This is because in the smaller deals, the bank is looking at income. Since these types of deals are considered “residential”, they look at YOUR ability to make the payments. The bank is looking at your borrowing power, your income and credit report. As you move up to 5 units and beyond, financing deals becomes easier. If the deal is good and strong under $1.0MM, your local community bank would probably love to see it. If you get into a deal over $1.0MM, you leverage a larger lender or even the small-balance loan programs from Freddie Mac and Fannie Mae depending on your track record and that of a partner if you have one. There are long-term fixed rate HUD financing for larger deals available from national banks, private lenders, hedge funds and others that need to put large sums of money to work. Some lenders will even do interest-only for a to allow you time to stabilize the property, allowing you to cashflow even more. In this case, they are not looking so much at your personal income as much as they are looking at your team to make the deal a success.
Anyway, are you looking to get into your first deal? Are you looking to do something small or go into something larger than 12 units? Let me know in the comments. I’d love to hear from you.
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