SS40: Multifamily Real Estate Investing Strategies

Charles discusses a number of different ways to invest in multifamily properties.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

Multifamily real estate can be classified as housing with multiple units (2+ units)

The Different Types of Multifamily Properties
This can get quite comprehensive and includes:

Duplexes
Triplexes
Quadplexes
Apartment Buildings

Although anything consisting of several rentable living spaces fits the bill.

House Hacking; The Benefits of Investing in Multifamily Real Estate

Some argue that multifamily real estate investing is perhaps the best way for new investors to get started in real estate investing.

The benefits of investing in multifamily real estate and house hacking include the ability to live in one unit while renting out the rest, a less inherent risk given multiple tenants, and a greater number of financing options

There are multiple reasons for this sentiment, ranging from Federal Housing Administration (FHA) financing that starts with only 3.5% down and the ability to live in one unit while renting out the rest. An option not readily available with most other properties.

Investing In Value Add Multifamily

This strategy is typical of what you hear from multifamily investors. Purchasing properties that have undervalued rents compared to neighboring properties; usually requires renovation and new management in order to achieve higher rents.

Investing Yield Play Multifamily

This strategy is not typical and is usually reserved for larger investors that want to purchase properties that are in great condition; fully rented to good tenants

Tips For Investing in Multifamily Properties

For smaller properties; utilize the 1% rule as a simple way of calculating if a property appears to be overpriced.

It is also possible to mix some of the strategies to minimize risk;

purchasing a semi-renovated or updated property with some higher rents and some lower rents – proves the new strategy is working – proof of concept

If you have some reserves; maybe purchasing a value-add house hack is a great strategy for you

Purchasing a house hack that is totally updated with good paying tenants with one vacancy ready for you to move into (ideal – highly suggested)

Some other keys for investing in multifamily real estate are lining up your financing, figuring out your monthly cash flow and expenses, and the cash-on-cash return (also maybe the total return or IRR when investing in larger properties)

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing multifamily real estate investing strategies. And these are different strategies that you can employ in your real estate investing. And I go through three of the main ones while also defining exactly what multifamily real estate is for each of these strategies. So what is multifamily real estate? Well, it’s really any property with two plus livable spaces. And for this example, we’ll be talking duplexes, which are two units, triplexes three in this quadplexes, which is four and apartment buildings or apartment complexes also known as commercial multi-family, which is five plus units. Anything really with consisting of several rental living spaces fits the bill of being multifamily. So strategy one, how sacking now the benefits of investing in multi-family real estate with little money down. Now, the benefits of this strategy is investing in multifamily real estate and allowing house hacking brings in the ability to live in one unit while renting out the rest.

Charles:
And so there’s less inherent risk given multiple tenants and a greater number of financing options, which is really the key to the strategy. There are multiple reasons for the sentiment, you know, ranging from the FHA federal housing administration. It does financing with only three and a half percent down. So think about this, you’re getting alone. It’s guaranteed by the government government with 96.5% loan to value. And when you do that very little money out of your pocket, number one, but number two, it allows you to be able to live in one unit while renting out the rest. And this option is not readily available with other properties. So when you’re doing house hacking multi-family properties, it’s going to be two, three and four unit properties is what you’re going to be focusing on. I would truly focus on three and 40 unit properties because that’s where you’re going to have more cashflow and the ability of possibly making money when your house hack or the ability of not paying that much out of your pocket to live in the property.

Charles:
And you become a landlord, a homeowner and investor all in one transaction, which is pretty phenomenal. Number two is investing in value, add multifamily. And if you’ve done any research into multifamily, you know, about value, add it’s what all the large syndicators, private equity groups, it’s what their strategy is. And you’ll typically hear about it on every real estate podcast and show. Now you’re purchasing properties of undervalued rents compared to neighboring properties, usually requiring a renovation and new management in order to achieve the high rents. So when you’re looking at a property that might be might be owned by a firm or a family or whatever it is for several years, and they haven’t really managed it correctly, then, and you see a property nearby that has higher rents, but it’s probably in better shape, it’s better manage and you kind of model what your property could be or the prospective property could be versus that other property.

Charles:
And you’re using the comparable rent comparables from the other property to say, this is what we can get at our property. Once we do some work to it. And that’s the whole value add strategy. This is where you’re going to see the largest returns in multifamily in the shortest amount of time. So that’s why most investors will focus on this as their strategy would investing in multifamily real estate. Third strategy is investing in you’ll play multifamily, and this strategy is not typical. And it’s usually reserved for larger investors that want to purchase properties that are in great condition, fully rented to good tenants. And when I say this is not typical, it’s not a typical strategy that you’re going to hear on shows and podcast because the people that are employing this strategy of a yield play are people that are really buying property that have already been through a value add.

Charles:
So they’re purchasing it from a private equity firm. That’s gone through, they’ve done work to the property, they’ve put a new management they have rented it to good tenants. They’ve gotten rid of all the bad tenants, and now they have an asset that cash flows. It’s very consistent. It’s very solid. It’s very nice. And they’re going to sell it to a, maybe a life insurance company, or maybe, maybe a family office something like this, where that buyer now has minimal work to manage that property because ever all everything’s been done to it and they have an asset that’s going to really give them throw off good cashflow for them for years to come. So a couple of tips for investing in multi-family properties. And number one is when you’re dealing with smaller properties, like in the house hacking strategy, you know, utilize the 1% rule as a simple way of calculating.

Charles:
If a property appears to be overpriced. Now every strategy is going to require different calculations. If you’re in house hacking project and that’s what you’re looking at, I probably won’t really worry about value adding it or doing any type of value, add calculations or any type of large spreadsheets like that. It’s a much simpler process. We are really going through and saying, this is what my monthly payment’s going to be with the mortgage and then the insurance and taxes and everything like this and interest in whole nine yards. And then this is what I can rent every floor for, which is renting right now for this is what it rents. I’m looking online and I see some other private homes for rent or units for rent around the area. And this is what they’re getting. And it’s a very simple, easy way of getting an idea of what you can rent units for.

Charles:
And you can utilize the 1% rule is just a way of figuring that out and knowing if you’re paying a little bit more for it. And that comes with the cashflow portion. If you’re in a very expensive market, the 1% rule is not going to help you out too much, but you can also figure out if I have a triplex, I rent out two units and they’re taking care of most. If not all of my, my fixed expenses, like with dent, insurance, and taxes, then he might say, I just have to put a little bit of money into the property every month to cover the rest of any other expenses or, or anything like this. But it’s also might be less expensive than renting. And that’s where you have a win-win win because you now have an investment that’s going to decrease your living expenses by owning it.

Charles:
You can also make some of the strategies to minimize risk, and this is very interesting. So purchasing a semi renovated or updated property with some higher rents and some lower rents proves the new strategies working is a proof of concept. So we’re selling a property right now, actually, and we’ve renovated most of the units, but we haven’t renovated them all. And the reason for this is that we got a good price on the property when we’re selling it, but it also proves the point to the next investor that listen, there’s some we’ve left some meat on the bone for you. We have a proven proof of concept, proven business plan for this property and shows you that these units have been rented out at this higher price. We did this work to it. It got us this rent. It’s very straightforward. You can now for the rest of the units, you can also do this work in, rented at this price.

Charles:
And it shows you that there’s people that are actually there that liked the units that are actually paying for these upgraded units. And that’s a great way of selling your property. Sh it’s it’s one thing, if you say, Hey, these rents are at 900, you can get 1100 for it’s different. When you say, Hey, these rents are at, most of them are at 1100. We have some left at 900 and you can still raise them and capture some of that value that we haven’t done in our business plan. Next is if you have some reserves, maybe purchasing a value-add house on a house act is a great strategy for you. And this would be something where, you know, with FHA, they’re going to have a lot of requirements on what you can buy and what needs to go through inspections. But if you buy something and you know that you know, I have some money, but I’m still going to go for three and a half percent down.

Charles:
And, but I’m going to do some work to the property. And I know that the are selling these units are renting across street for our higher price. Fine. That’s a great strategy for you where you can able to purchase a property, use some of your own money to do work on the property and then re rent them out. Now, this is going to be a little bit more of a strategy, and also you’re going to be living with these tenants, or you should be legally because that’s what FHA requires that you actually live in the property. You’re going to be living with these tenants that you’re probably not renewing leases with. And it’s gonna be your first property most likely. So there’s a few things that you’ll have to overcome in this. It won’t be as quick as a, just a turnkey, which is our, my next tip, which is purchasing a house act as totally updated with good paying tenants with one vacancy ready for you to move in is ideal.

Charles:
It’s highly suggested. So pay a little bit more for a property. It’s not going to be really a value add. It’s not going to really be a a yield play either because you’re actually living in one, but you can go into a property. And even if it looks like it’s already been updated and there’s good paying tenants, cause that’s what you’re going to be told. They’ll still be things that you have to do. So always go in with an additional reserve fund, but it’s a great way of how you did like my second property. I purchased as a three family about a block away from my first one. And it was much more like this. Now it wasn’t a house hacking that property, but it was really turnkey. The property was in great shape. I did a few things over it, over the, over the next several years, but most of the work was already done and I didn’t really have to put any money into it in the first few years.

Charles:
And that’s a, that’s a great strategy for someone that wants to get into a property. Doesn’t want to put up too much money. You might as well just finance it if you can and knock it over your head. And and then live in one of the units and you become an investor and a landlord all at once. So some other keys for investing in multifamily real estate are lining up your financing, figuring out your monthly cash flow and expenses. And that’s really important for house house hacking. When you could also look for your cash and cash return, but it’s a little different because you’re not going to have a full, accurate cash on cash return. I would work out the cash on cash return when I rent out my unit. So if I say, I’m going to live in this house, hack this triplex for five years.

Charles:
At the end of five years, I’m gonna rent out this unit that I’ve been living in. Then I can figure out kind of what a cash on cash return will be after everything’s rented. And that makes sense, even though you don’t know what rents will be in five years, you have an idea, but if you’re getting into larger properties and you’re getting into yield plays, you’re getting into value. Add, this is where the, you need to know total return or your estimated IRR, right? Your internal rate of return when investing in larger properties. Cause Lance, when your investors are going to look at that are going to be putting money into the deal, but keep everything simple. When you’re doing a house hack, you’re really just lining up your financing, which is number one, and then find preferably a triplex or quad of that you can purchase rent out of the other units and live in one of them. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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