6 Family Property

First off, I've been sneaking around the shadows of this site for quite some time. I'm amazed at the wealth of knowledge everyone has here, and the willingness to help each other out. So, I guess this is my "official" HELLO to the entire DG family. That being said, I have a quick comment on the 6 unit/family properties.

I'm from North Dakota, and while lending requirements/standards are different from state to state, I know that here, if you look at anything over 4 units, you land squarely in the realm of "commercial". A higher down payment is required (usually 25-30% versus the standard 20% of most conventional lendors), and interests rates can be higher (serious CON).

BUT: if you LIVE/owner occupy one of the units, as long as it is 6 units or less, you can qualify under normal, non-commercial requirements. Also, if you haven't used it yet, a 1st Time Homebuyers Loan WILL usually cover this, so long as you live in one of the 6 units (serious PRO). I had the opportunity to do this several years back, and I regret not having looked into it further. Another PRO is that most people who own multi-unit properties ARE ALREADY investors, so they are more open to creative ways of financing; because they THINK like investors. They know that it makes sense to ask for seller financing, or lease options because they've most likely done it themselves (possibly on the very unit they are trying to sell now).

Another thing to be aware of is the time and energy in managing the unit. While one or two units or single-family homes may be feasible, most people don't have the time to answer countless calls, complaints, requests for repairs, letting someone in because they're locked out at 4 AM, show the units if one becomes vacant, collect rents, or evict if necessary. A management company may be necessary, or one may already been in place. Be sure to not overlook management costs (which in my area is 6-7% of the gross COLLECTED rents). BE SURE YOU STATE "COLLECTED" rents!! Or you may be paying a full management fee for all 6 units, even though only half of the tenants are paying on time. By stating "collected" rents, it motivates the management company to make sure all rents are received in a timely manner (sorry, I digress).

As far as why investors haven't snatched it up, there could be a ton of reasons (they don't know about it, there could be problems with the property, they may have their capital tied up in other deals, etc etc). I wouldn't dare attempt to list them all, but that shouldn't be your focus. Your focus should be that THEY ARE available, and that means you could land yourself a great deal. If you do your "due diligence", you should be able to discover if it's on the market due to "problems" or whatever else.

I'm currently looking at about 3 multi-unit properties and have thought that exact same thing. "Why isn't someone else snatching these up?" But, regardless, the opportunity is there for you now. If you wonder why for too long, you'll then be asking yourself, "Where are all the 6 family properties?" Better to play your hand instead of wonder why you're empty-handed. Best of luck with your future endeavor!!

I am looking to expand my real estate investing in order to increase my passive income. I have a couple single family homes that obtain a few hundred dollars/month of positive cash flow receiving 12% ROI. However more recently, I have been looking more into multi-unit apartments as well and the ROI is much much higher but was wondering, if you or anyone else would recommend sticking with single family homes vs multi-unit apartments secondary to appreciation, less headaches, higher occupancy rate, etc. Just wanted to pick yours and anyone else that has an opinion on this matter. I would rather not occupy one of the units if possible and would hire a property management group in order to be completely hands off. Thanks in advance

I'm glad to hear that you've already got some properties that are bringing you positive cash flow. Good job! As far as determining which one is "better", I really can't rank them. Sometimes the better deal is the single family residence, for the reasons you stated. You do tend to have a lot less turnover, and in many cases, the appreciation is better on single family residences as well. For example (I know you don't live in North Dakota, but it's where I've done my market analysis, and I'm hoping it can at least give you a good beginning point), here in the Minot, North Dakota area, multi-unit properties appreciated approximately 5-6% for the annual year of 2008. But, single family residences appreciated 9.1%.

One advantage of multi-unit properties is the purchasing power for the time and energy spent on the deal. Let's say it takes you 2 weeks to purchase a single family residence that brings you a positive cash flow of $100/month. In that same amount of time, you could buy a 6 unit property that brings a cash flow of $200-300/month. Both are great, but as you can see, depending on your market, the "number crunching", and how you structure your offer, BOTH single family residences and multi-unit properties can be great. Another nice thing is that while management fees may be anywhere from 5-10% of the gross collected monthly rents, the more units you give them to manage, the more likely they are to charge a lesser percentage (kind of like car insurance rates on one vehicle versus three).

I would recommend that you be sure to avoid the multi-unit properties that require commercial financing, unless you are prepared to deal with somewhat tighter financing restrictions. I know I kind of ramble. Sorry for that. Bottom line; I don't believe one is "better" than the other. It all depends on the financing you structure for each deal, how it fits into your goals, and what you are looking to accomplish. They both can be a really great deal.

One other note on multi-unit properties. While (in my opinion) they are great, one must consider the ability to rent them out quickly, and keeping them rented. Again, I use my target areas as an example. In Minot, we have not only a University, but an Air Force Base as well. These two factors, as Dean states in his book, are definitely MFs (major factors), and have helped this area to buck the overall national trend, and also helps to keep units rented out with very little "down" time/vacancies between leases. The last thing you want is to purchase an 8 unit complex that takes 6 months to fill. Again, knowing your market is key.

The 3-plex I am currently going to purchase (pending offer acceptance by seller) is walking distance from the University. Many students from Canada don't have vehicles they bring down, so it's definitely a major perk for them to be so close that they are able to just walk to the campus (especially during the cold winters). One of the units in the 3-plex consists of 2 Canadian students that pay for the unit year around, even though they're gone during the summer. Sorry if my answers and responses are pretty scattered and "shotgun spray" in nature. Hopefully though, the "splatter pattern" actually touched on the topic you wanted answered. Best of luck "realea"!

Joshia made some great posts.

4+ is indeed commercial. I have never heard of the loophole that 5-6U could also be residential if you lived in one.

You ask a really good question. I always thought that 5-20U buildings should be a big hole in the market. (Owner occupants are out due to the financings and the hassle and they scale is too small for the big players to get in. That really only leaves small investors as buyers.)

But I could never find great deals in this area. I still don't know for sure why this was. If I had to guess, I would guess it is just the number of buildings that fit the criteria. There just arent that many of the,.

Right now that's kind of my niche. Almost every property I'm going to be looking at in the next few weeks are going to be at least duplexes. Most of them are already tenant occupied, so that's a major benefit. Also, a couple of them have been on the market for 200+ days, so they're ripe for negotiating.

Thanks for the great information, I appreciate it. I am currently looking at a duplex and a triplex as well, both with tenants already occupied and atleast from the surface, it seems like a cash cow. How much detailed information do you receive from the current owner as far as proof of yearly expenses so you can better determine your ROI such as monthly expenses, common utilities, tenant turnover rate, etc? I have not bought anything other than a single family house so unsure what the standard protocol is. thanks for the great information
Tony

Joshua what about population growth?

Just a thought but I thought I saw the besides LA that ND is lossing population and do you think that would effect the ability to fill that duplex, triplex, etc?

What about the current rents?

Will they have to adjust to the current population trends?

Lower maybe?

I just wondered if anybody has ever brought this up anywhere on the board.

Depending where you live may factor into your rents. Here in Mass. it seems like apartments/condos/th are easier to rent quickly than SFHs. Other parts of the country seems that more people rent homes but not in Mass. That's why I have started looking at 2-3 amily houses. Any SFH I see I am thinking more of quick sales or double closings. But I always wonder about that too. Why do there seem to be so many good deals in some areas if there are already so many investors? Do they really still need birddogs finding them? Why dont they just buy them up themselves?

Stephen

Wow.. this is an eye opener. I have always found SFRs to rent faster and stay rented longer than apts. MUCH more stability. I never would have thought this was a regional/local issue.

I expect they would if they could find them. There are only so many hours in the day and only so many avenues that a REI can use to find properties. Birddogs value added is presenting the property all wrapped up. The investor spends ZERO time looking for it.

I usually request, at the very MINIMUM the last (and current year's) expense report. Most investors also will have a Net Income report that outlines the overall income v. expense ratio, whereas the expense report will merely show the expenses (did a water heater have to be repaired, was there a lot of fixups to walls, flooring, appliances, etc.) I've found sometimes that a recurring expense can indicate poor tenants, although most management companies or owners worth their salt will have evicted these tenants due to their irresponsibility.

Vacancy is definitely a good question to ask (most owners I've spoke with are usually up front about this). But I'd still run a 5% or possibly a 10% vacancy allowance just to be safe. I also check if there are any prior agreements in place that could be a problem (owner's brother-in-law was down and out so he's now in a 3 year lease that is only 50% of the rent the unit could normally get).

If any owner refuses or stalls to provide at least a NOI report AND an expense report for at LEAST a year, I personally will walk away. No sense in working with someone who seems to be "hiding" something. If anything, lack of these items could show their inability to have effectively managed the place and track their finances.

Very good question. This is where market and area research come into play. While on average, ND IS losing population, there is also a large redistribution of population as well. Many of the smaller towns are experiencing a slow loss of population (such as Towner, Zap, Marmarth, etc). Where are they going? Some are leaving the state, but often times they are relocating to the bigger cities. For example, Bismarck is the largest city on the western part of the state. You do not see cities of equivalent size unless you travel all the way to the east end of the state (Fargo and Grand Forks). So, Bismarck is increasing due to it's 4-yr. private college, 2 year community college, and a growing industry (several new chains have popped up within the last few months, and on top of that, employment opportunites are booming). I go anywhere, and I see help wanted adds/signs posted. Minot is much the same way. Much of the city was comprised of "retirees", which is why Minot, for several years, had a backwards cost of living. Incomes were less, but cost of living was more due to this. But, the Airforce Base, and a major 4-yr. university saw a large influx of people looking for affordable housing (and looking through the Minot paper, I saw very few places for rent).

Current rents are running approximately $500 for a 2 bedroom, 1 bath apartment. There was recently a brand new complex put up by a REIT that was $1700 for a 1700 square foot "executive" apartment, and out of 100 units, almost all of them are filled (and that was only a few months ago since it opened). Demand is there for sure. Again, major factors (oil boom, Airforce Base, and the only university in the central part of the state) work to ensure a healthy supply of people looking for housing at least on a 4-5 year basis (new students, new transfers of military personnel, and oil field workers).

Population trends will affect rent. No doubt. If you have 200 people living in a town that has 500 units for rent, raising rents would probably be a form of financial suicide. But, as I explained above, doing the market and area research can prove a booming opportunity despite overall current trends.

Good technical information. Looks like you have been doing your homework. Thats good.

You have the potential to be the next big thing.

Get it done!

Thanks for the info Joshua. Just heard that with the lowering at least this time of oil. They are not in such a big hurry to mine that oil as fast with the cost being what it is.

I try to stay out of the city (Indianapolis) and buy in the burbs around it. I haven't tried a duplex or anything yet but the thought has been there.

Low oil prices have indeed contributed to the slowing down of the oil field work in the central and western part of the state. But I do know that as with many things, it cycles (the oil boom of the 70s and early 80s, then the brutal halt of drilling in the state...now booming again with the technological advances of "horizontal drilling"). And, since I actually work as a consultant in the oil industry, I have a keen feel for shifts in oil drilling activity. While it slows, the money is still steadily coming in. And, I also take into account many young families that are now doing much better with the income brought from just a few years working in the oil industry (average income of even "newbies" in the field is around $60K). For a smaller populated state like North Dakota, that is tremendous. There are even some people making over $1500 PER DAY. Now that equates into a major influx of economic growth! Many are using that income to propel them into homes, which is evident by the rapid expansion and demand of new home construction. SFR (single-family residences) are also a market that is booming quite nicely in the Bismarck area, although not as big in Minot. Research, research, research the market and area trends. I cannot stress it enough. Best of luck in the "burbs"!!

Great advice. Thanks for sharing with us. You know what you are talking about. I would love to hear more from you. Jeremy