Ask an Expert: How big should your first investment property be?
Question: “The only home I?ve ever owned was a boat. For my very first property, how big of a multi-family property should I consider ? 4-plex to learn the ropes, or jump into an 8-12 (or more) units?”
Expert Answers:
Do yourself a favour: Get rid of your limiting beliefs if you want to succeed!
You can start investing in 50-suiters if you so choose to, but you must do your homework first. There is no margin for error in MF investing. You need to know beforehand what you’re doing. The process will be the same whether you buy a 10-unit building or a 100-unit building.
The biggest hurdle will be finding capital to buy the larger properties. However, if you know what you’re doing and you have sound and proven systems in place, it’s not hard to convince potential investors to invest with you as apartment buildings are low risk investments.
? Pierre-Paul Turgeon
The first thing to consider when jumping into the multi-family world is that there is no ‘testing the waters’; if you want to bite off something in the 8-12 unit range, you need to understand the costs of getting into this style of property (financing costs, inspection costs, etc.) and it is prudent to also have access to capital above and beyond the initial start-up costs. Bottom line: multi-family investing typically costs more to get going.
Second, financing on the two properties mentioned is completely different; your 4-plex would fall under residential lending rules, where 6+ units are commercial. Given that this is your first property, it would be wise to sit down with a quality mortgage broker to see how you look in the bank?s eyes. With residential lending, the bank is going to look at you more than the property; with commercial, they’ll look more at the property (but you’ll need to guarantee the loan and have enough net worth to qualify). In either scenario, you may need a partner on this project in order to qualify for the loan.
Third, and in my opinion, one of the most important things to consider with investment real estate is WHO will manage this? My assumption is that YOU would manage given you live there, and IF this is the case, you must understand the landlord/tenant laws for your area inside and out. I would suggest you go through the REIN Landlording Secrets Program as well because good management and good tenants can make your first multi a joy to own whereas messy management will result in a miserable experience (for you and your finances!).
With all that said, if you have access to capital, you can get financing on both, AND you have the management side figured out – and if you haven’t figured out the management side of your properties, you might want to look into similar services to this Tulsa commercial investment management that could be alongside you when investing in your first commercial property, no matter the location you choose, but I say buy the one where the numbers work!
But, I would suggest aiming for 2-4 unit properties first as they might be more plentiful in your area, less capital required, and a good size for your first property.
? Ray Reuter
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