Considering A Multi Family (MFH) Purchase? Watch This Video FIRST!!

a bigger pockets its met today we're going to talk about multifamily so everybody wants to buy multifamily that's like the talk of the town these days so we're going to talk about small versus mid-sized multifamily in the evaluations of the two pros and cons so for those of you that are out there that are like hey Matt what is the small multifamily well for the purpose of this conversation small multifamily is anything up to 20 years mid-sized multifamily is 20 minutes up to 100 units and then there's another category that's all we over here that I'm not going to talk about today that's called large multifamily and again these are my definitions please don't leave a comment in the comment section below okay Matt I think small multi-families up to 40 units I understand there's no textbook definition for what is small and mid-sized multifamily but what the purpose of this conversation please allow me to have these definitions please but then there's large over here that's above 100 units and reason we're not going to talk about a hundred units or war is because it the competition and the average buyer changes a lot going from a hundred up to say 100 200 300 units right the buyers get way more sophisticated as typically companies or very seasoned individual investors and a lot of times you run into reach you know publicly traded organizations you run into even insurance companies hedge funds all those folks get involved in the space on this side of the equation and so a lot and a lot of the rules change which we can talk about but not in this video so this video if we're going to talk about small and midsize multifamily and the pros and cons of both the one is not better than the other they're different and I think that you should for what you guys want to do you should evaluate the pros and cons and if you're looking at one consider some of these things in your evaluation okay all right today today all right small multifamily under Pro under this oh one more thing definitions of small although I is up to twenty some people would say that it shouldn't a duplex triplex or for family be considered small because those can be bought as a house act because under the house hackage look that up under bigger pockets in the forums and kind of definitions and articles and all on edge ads that are written about house hacks but in general that's where you're living in a multi-family yeah and how tech really works is if you're getting FHA financing low down money financing because it's a primary residence so the Internet's are is no that's not only small multifamily and the main reason why I bring small multifamily up to 20 units and encompassing two three and four family as well it because the biggest pro of these which is a competition and the reason that's a pro is if they're not you think it's competitive and just like the four or five units base try the competition over here there's a lot more competition on this side unless you're getting it off the market deal or something that that is like they call it a pocket deal meaning like something that's not marketed to everybody so this is a very competitive space over here this is not as competitive and so that's why that's a advantage I think of here especially once you get above two three four units once you get above where people can house hack on cheap money for lots of bank finding it Simmons up like that when you get into spaces like a 10 unit there's not that many people that buy ten units because the bigger fish that are up here don't want to bother with a ten unit and they're really small fish that are down here even you know just getting started or I just want to play around the single-family homes or whatever they don't even want to get into the space it's too big for these guys down here and it's way too small to these guys so that's why I like small multi like say ten fifteen units those are really great buildings because it's not that many cap there's not that much competition on these types units okay so the another Pro for for this for this type of building is there is some a little bit economy of scale what do you mean about that Matt I'll tell you so some economy of scale means that reading crease let's talk about that I can increase my rent on the 20 years building by 10 dollars a month on all my units and make 2 an extra two hundred dollars a month or twenty four hundred dollars a year no tenant will deny a ten dollar a month rent increase it's very easy to scale out some changes in the building on it you can make major economies of scale tax in a building like this by doing things like putting the utilities into the tennis names or billing the tenants for some of the utilities for the building charging them a few bucks to a contra for contribution to water water sewer that kind of stuff you can put in laundry and make some of the economies of scale effects on this size building you're not going to see on small property single-family homes even the smaller stuff like down there like duplexes triplexes towards the lower end of the spectrum you're not going to see as much but we can get into 15 20 minutes you can make some effects that I felt really big over here but you can play with some of that economy of scale by making an incremental shift per unit multiplied by the amount of units you have can make some change so over here drastic drastic changes like ten dollars a month times 100 units that times 12 months a year can make a major major effect in your income but here it's reasonable it's money you know what we're talking about so so talking about more the more the pros on the mid-size stuff when it's this place here but not as much as it does over here and that is these deals you can get more creative in order to finance them the financing terms that hide actually get better over here I find that banks will do some work seventy to seventy-five percent loan to value on smaller stuff like this once you get in to bigger property you can probably negotiate eighty percent learn to value you can get something called a non-recourse loan which are probably not going to get down here but a non-recourse loan is awesome on this side we're not a recourse loan means is that the property is the only collateral main thing they can come after if the property goes south we throw a personal guarantee that as long as you operate the property properly and you do what you're supposed to do as an operator and most they can come and cake is the building they can't come after and take your car in your house and you're their assets from the cash you're having a personal checking account or anything like that so that's a great thing that kicks in up here not going to see that down here okay the again the economy of scale but it's on a bigger scale on this side again things like raising rents things like reduction in expenses multiplied by the amount of units that you have you know it's all just bigger numbers so you can say to save 5% on your expenses and your expenses or a couple hundred thousand dollars it could end up getting a lot of money so any effort to be good or for the bad has a larger effect so bear that in mind also it's kind of common to write that down but it's also a con that like a that if you know if you're real good taxes go up dig up a lot on a building like this whereas realty taxes go up you know a couple of thousand dollars or even five percent or something like that on a building like this it might not kill you but a building like this a five percent to 10 percent real estate tax increase could really really cause a major problem with the building so again that could be a con but let's let's say mostly it's a pro let's think positive right so on the on the con side for small this is something that really plays on single-family homes but it still shows up here and that's the effect of vacancy okay okay so if you've got a twenty minute building in you a 5% vacancy rate like oh okay attention tree average 5% what's 5% of 21 that mean that one of your units can go vacant what if cube loved you you know what what is three of them to you know oh okay you're 50 percent naked see if you lose three tenants believe it from a guy that opens the 20 unit apartment building you can have three years ago vacant at the same time that's possible and it's very bad for your cash flow to does that we're at I also have larger assets on this side and just it's something that's in your budget to have larger the vacancy just doesn't play as much over here as it does over here vacancies like just part of the equation like as a bogey that I have in this range they're rarely fully occupied but they also cash flow they also do well you expect to have one two units it bacon on a building like this whereas the building like this you have a couple of vacancies you can be cash negative or way way WAY lower on cash flow right it depends on how you buy them of course by right everything like that but use the factor higher vacancy rates on a smaller property and don't get me started on smaller assets at single-family homes they get projecting a flat percent vacancy rate on a single-family home that's pretty much like a roulette right you might get ray you might get right and you'll probably be a zero percent vacancy keep the tennis tend to live longer in single-family homes but once they move out you know give you a lot more to 5% I betcha the effects of agency ohmic on side work small and the other thing that's interesting here they're hard to evaluate and that plays in a couple of different ways okay now if you get lucky here's one way to their heart you evaluate and that's our unit layout okay meaning if you find this one unit building that's built as 20 units and it's cookie cutter everything all the units are the same and it's like a garden will arise as they call it it's very easy it's okay this is one of the bones if you see one unit you see them all that conversation typically plays over here if you see want to be like a model unit Nell with the same area like that where you can look at one apartment say okay I'm going to spend $3,000 to turn over these apartments and pretty much for all intents and purposes they all look the same and so the cost of turnover is predictable these ruins might not be that way they may not be built as that it might not be they might be a conversion meaning they might have been a larger building that was converted to be a 20 unit apartment building so the layouts might not be identical there are these buildings are also hard to compare to other assets because the quantity of 20 unit apartment buildings in your town or picking your department buildings in your town is going to be living to be low and the factors that people use although they get thrown around all over the time and all these multi-families things like cap rate and net operating income that really used evaluate these guys get used to valuate these kind of properties but they don't play you know why they'll play because stuff like this affects a vacancy and just other things that you don't really get a real economy of scale a big economy of scale for properties of this size so it makes them harder to evaluate people try and squeeze them into cap rates and you know using that for any income evaluate stuff like that but I find that so these they can be a little cyclical a little bit up and down so that the range of predictability of these buildings is just tougher to adjust tougher to have okay so the far and away the biggest common for these types of buildings competition you know I should get a go whole reason why this is but just understand that mid-size multifamily has been a good investment for a very long time having to do with conditions that arose always since the you know the crash of 2007 right a lot of people went back to renting so that drove up prices over here those prices have not come down interest rates have stayed down and they've become and still are a good investment for a lot of capital a lot of places for people to go with a lot of money to have you know a large amount of equity invest this is considered to be a safe place to be so people that weren't normally in mid-size multi are now in midsize multi that used to be in other places like stocks and everything like that so there is competition here that used to be here in this space because of some of our you know friendly run to the rack and run to the back of the room gurus and stuff like that there's become a lot of newer investors that you know folks like you and me that are in this space because people have read books on it and everything like that or take it a few seminars on the tides multi that want to get in so for all those reasons and for just the general economy right now and it's your Straits and all that there's a lot of competition in mid-size multi it's common to get outbid to have these properties go to best and final and stuff like that so that's a downside big downside because if there's a lot of competition then you're going to have to pay more which means you may not make as much money as you would be paid or or less or maybe had a five of these versus one of these might be a better deal you know just a tip but there's a lot of competition on this side with this variable competition on this side so the other thing that plays in mid-size multi which if you get the right mentor is to get the right coach if you get the right people that you wash if you read the right amount of books and get all over bigger pockets this doesn't play but it can and these deals are complex there's things like capital expenditures you have to set aside money for it to don't save money on buildings like fishing locating the lab because eventually your $50,000 roof is going to start leaking and if you don't save up to have a money to take care of that in the future you're going to you know be underwater literally they you've got to you know follow the market for rent to make sure that you're competitive on your rents moving forward you've got to constantly analyze these assets and they can be way more complex than assets like this are they're rewarding it can be but there's a lot more factors that play in the profitability in the long term success in management of buildings like this first building because I'll be property management asset management like running the number of spreadsheets projections you know rainy day money that whole thing prefer a sand with this okay so these are my thoughts there's way more a conversation that we can have on this but for as long as this video is gone I'll spare you going for the conversation I'd love to have it in the comment section for you guys to leave some comments down below and to get in some chatter about these assets versus these assets please please PLEASE debate me on some of these let's get into a healthy conversation I'd love to hear from you as always is my honor and planning ahead you guys watch these videos so thank you for watching only and if you watching this right now as always I appreciate you and have a great profitable week

Channel: DeRosa Group

Views: 44,145

Keywords: multi family, multi family purchase, multi family real estate, apartment building investing, how to buy multi family properties, buying multi family home with tenants, multi family real estate investing, multi family real estate investing for beginners, matt faircloth, bigger pockets, Derosa group

Id: pYEh-AVyiyM

Length: 15min 36sec (936 seconds)

Published: Thu Apr 13 2017