The Power Of Multiunit Properties - Posted by Paul
Posted by Paul on November 11, 2001 at 12:48:52:
Like many of you, I have invested in both single family homes and multiunit properties. I still own both. It was my opinion early on that single family was the way to go, because they were easier to sell, and you would be dealing with a retail buyer when you did sell them. I also thought they would appreciate more over time.
Then I Had Vacancies…and That Changed My Mind Over Time
If I have a 25 unit building, with 1 vacancy, I have lost only 1/25th of my income…but with a single family, I have lost 100% of my income. Nothing sucks more than having to make a payment, spend money to fix up the property again, spend money on ads to re rent it, and take the time to find a person…this takes time, costs money, and is OFTEN OVERLOOKED when investors lay out this terrific plan of buying single family homes.
Single Families Are OK, But Should Be Traded OR…
Lived in! I think if you have single family homes, you have a few choices. With the new tax law which allows a single person to take up to 250K in equity tax free (500K if you are married) from the sale of a primary residence that you lived in 2 of the last 5 years, new options are presented. YOu can move into your rental for two years, sell it, take your cash( you still have to pay the gain on the depreciation though as I understand it, and it must have been a rental for some time… see you CPA).
YOu can sell multiple properties all at once, trade them into a more expensive home, rent it for 1 year, then move in. This gives you an opportunity to get your cash out of your rental stock and avoid the 20% federal long term capital gains tax, and in california, an additional 9% state tax.(again see your CPA for Details)
Trading Up To Multi Units
Then of course, you can trade up into multi-unit properties. YOu can start with simple 2-4 units, but eventually you will go to larger units. I traded a 4 unit building and a house I sold in 1999 into a 14 unit building
that now has a positive cash flow of 5 figures monthly most months. How? Rising rents in California,(and the properties rents where low when I bought it). When I have a vacancy, I have lost only 1/14th of the income, not 100%.
Economies Of Scale
WIth multi-unit, everything is in one place, you have 1 water bill, one garbage bill,1 mortagage payment etc. WIth a bunch of houses all over, you have a bunch of water bills, etc. Its easier to manage, and costs are less. You don’t have to drive all over town or the county to do repairs either.
Where to Go From Here
If you have aquired a bunch of single family or small units 2-4, look to sell some and trade up if you have some good equity. This is called a 1031 tax deferred exchange, and you will have to let the title company know this iswhat youre doing, and get an accomodator( a third party for the exchange…ask the title company, they should know). Try to buy properties that have undermarket rents, and I would suggest you stay under 30 units. A good starter is 6-15 units. Look at the price per unit, number of bedrooms, condition etc. Plan on putting 25% down, which will be your equities combined. Compare to other sales and the area.
I have had much greater success with buying larger units. Remember, if rents go up on 6 houses, thats 6x the rent increase. But if those houses could be sold, and you could get say 20 units, you are now looking at 20X the rent increase(ie $500 for 2-bedroom, rents move to 600…100 increase x 6 is 600 month, 100 increase X20 is 1200. month).
OVer the years, larger buildings can make you much wealthier and give you much better cash flow, with fewer negative months.
As always, be sure to inspect well, get a termite report, and spend time on your due diligence(look at records etc)
AND LASTLY…Never Raise everyones rent all at once…do a few at a time, over time…otherwise you risk them all getting together against you…which you DO NOT want!
Successful investing to all…
Paul