Beginners Guide for Investing in Multi Family Real Estate – Pros & Cons

Wasim Faranesh Image
Wasim Faranesh

Owner of Faranesh Real Estate and Property Management

Beginners Guide for Investing in Multi Family Real Estate

Hey, everybody Wasim Faranesh with Faranesh Real Estate and Property Management. I’ve been noticing a big trend in the market and it’s the purchasing and renting out of multifamily units, specifically residential, not commercial multifamily. So what that is, that would be anything two units to four units, that’s not considered commercial. So for an example, I’m actually standing inside a multi-unit fourplex that I own, I own a couple of them. And I’m going to go through today and show you different upgrades that I do. And then I wanted to go over with you guys my thoughts on multifamily in general and investing in multifamily properties, specifically the pros and cons of them. Now, even though I own them, there are cons in owning multi-units, and I own both multi-units and single family. And there are advantages and disadvantages to both. So let’s start with the multi-unit pros.

What are the positives of owning multifamily? Well, number one, you can scale faster, right? If I’m an investor that wants to build a portfolio, right, right away, I bought this building and I have four rental properties. So if you’re looking to invest and grow a portfolio quicker multi-units is the way to go. Especially maybe you want to invest a lot of money, then it makes more sense to buy multi-unit properties. So that’s one advantage.

Own more units with fewer loansAnother advantage are loans, right. So if I’m getting loans on my rental properties, again, you can scale faster and get fewer loans with multi-units So for example, if I’ve got four, fourplexes, that’s 16 properties, 16 units that I’m renting out, but only four loans. Right? If I compare that to condos, townhouses, or single family homes, to get 16 properties, I’d need 16 loans, which you can’t even really do that you can’t get them. So that’s another advantage right there. You own more units, and you have fewer loans out. Another advantage is the cash flow, right.

This is a fourplex that we’re standing in right now. I’m in one of the units. There’s three other units here, this units obviously vacant that I’m standing in, but I’m still collecting, I’ve actually got two units vacant that we’re remodeling. But I’ve got two other units that are bringing me in cash flow. So I’m never without cash flow or just about never without cash flow on this property. It’s always generating rent. So my plan specifically with this building is I had four units, I had one vacancy, I had another tenant vacate, I sent them notice to vacate, and I remodeled to, to bring the rent value up. So this unit and another unit are going to go on the market, probably within the next week, I’ll fill these in with a higher rent, then I’ll likely ask one of the other tenants to vacate do the same thing and repeat, remodel and rent for a higher value. So that’s another advantage as opposed to a single family home. The tenant moves out, I’m doing a remodel, I’m not getting any cash flow. There’s no income being generated on that property.

Another advantage, and this is for novice investors. And it’s almost they call it house hacking as a term that they use. If you’re a new investor, right, and you want to scale quickly, you can get an FHA loan on a fourplex like this, move into one of the units right qualify for an FHA loan, which is a lower down payment and rent out the other three. If you do it smart and use a smart agent, you can probably structure it in a way where not only the other three units are paying the whole mortgage, but you should have a little bit extra cash each month or be cashflow positive. So those are really the main advantages that I see owning a multi-unit. But there are some disadvantages and I’ll go over those next. So I’ve gone over some advantages with you on multifamily.

So let’s go into some of the disadvantages of owning them. Number one, they’re more expensive. So especially with the trend that’s going on right now, buying multifamily in Las Vegas is very expensive. There’s a lot of demand for them, investors from all over the country, even all over the world are calling and asking agents Hey, can you find us multi-units? So it’s more expensive than owning a single family home. Also, there’s lower supply, especially in Vegas. Until recently there really hasn’t been that much of a need to build multi-units in Las Vegas as opposed to California because how housing is really affordable. So there’s not a need to build them as opposed to say in California in your higher income areas to get affordable housing, they had to build duplexes or threeplexes or fourplexes. Here we built condos, we built townhouses, so there wasn’t a need for multi-units. Now we’re seeing that trend change, but we’re seeing it change more with apartment complexes, large apartment complexes. So still, there are not that many multi-units, residential multi-units in Las Vegas, or Henderson. I even believe cities like Henderson have certain restrictions where they don’t allow them in most areas. And same with Las Vegas.

Another disadvantage is, you’re gonna find that they’re mostly in Las Vegas, because they’re not building new ones and because there’s such a low supply, they’re older buildings, so they need a lot of rehab. Most of the times you won’t find anything built before 1980. They’re even as old as the 1950s. So when you buy a building that’s built in the 1950s, or 60s, you’ll find that the plumbing a lot of times needs to be changed, they might have used cast iron plumbing, and that starts to disintegrate. And then the whole building needs to be re plumbed. And that’s a very expensive expense. And it’s something actually it’s a tip, if you are looking to buy something like that over here, I strongly advise my investors to get a plumber, not just a home inspector but a plumber to maybe run a camera down the lines. Something like that can be if you have to replumb the whole multi-unit, a fourplex you can be talking between 80k-120k. So it’s not a small expense.

Another advantage or disadvantage, it depends on how you see it is a lot of multi-units don’t have HOAs, right. So I know this sounds great to investors, hey, that saves me on the expense. I don’t have to pay an HOA. But the building that I’m in right now has an HOA. I prefer multi-units with HOA because it holds the tenants and the owners really hold the owners to make sure their tenants are accountable to a certain kind of living standard. It keeps the community looking clean and good and keeps trash from from outside of the complex and yard. Also, HOAs cover a lot of things. That’s what some investors don’t know on multi-unit. So this HOA that I’m in covers the exterior painting, it covers the roof, it covers shared forming. It covers the landscaping, it covers the common walking areas, the concrete if something happens, so it covers a lot of things. So HOAs cost money, but there are benefits to them. So personally, I think they’re good to have. So those are really some of the disadvantages of owning multi-units.

Now I’m going to take you around this multi-unit and show you what kind of remodels or what kind of remodeling I suggest when you buy a multi-unit. Now this this specific unit that I’m going to show you is a little probably over rehab but I’ll go over my mindset on why I did things a certain way that I did. So I’m going to walk you through this multi-unit. It’s a two bedroom, one bath and I’m going to go over the upgrades that I did and what you’ll generally find when you buy an older property that’s a multi-unit.

Cabinets and countertopsSo we’re in the kitchen right now obviously now when I bought this place it this is a total gut and remodel. As you can see I did all brand new shaker cabinets and new countertops and I did all stainless steel, brushed nickel finishing. Now a lot of investors will say, “Hey, Wasim, can’t we just paint the cabinets and put in new countertops?” You can and that’s something that you can do. I find it nowadays with the cost of cabinets and countertops they’re actually pretty reasonable, right? So the cost to just paint the cabinets might be 30% of what it costs to just put in new cabinets and I’m not a big fan of adding new countertops onto old cabinets right it’s still a dated look. It doesn’t last as long. Eventually you’ll have to change the cabinets and then you just wasted the countertops because a countertop isn’t something you can just take off and put it on a new cabinet. Most of the time when they try to take it off it will break. So I use quartz countertops it’s really good for renters. I use all brushed nickel stainless steel finishing the reason why I do that I like black finishes more on properties that I flip. I think it’s a better look. But this is more durable, it’s better for tenants. The calcium buildup is easier to clean off of brush nickel. Then say some of those gold pictures or black pictures. So it’s this, I designed this unit to be renter friendly.

You’ll notice on all the ceilings, I removed all the popcorn ceiling, and I added recessed lighting, I think it’s a much more modern cleaner look, I don’t have to worry about switching out light fixtures in the future. So it’s an expense but it’s an expense that you do once and honestly how I designed this unit, this is probably good for 20 or 30 years to be a rental until it’s dated again and maybe needs to remodel. But you can probably even still extend it at that time.

Here’s another tip that I like the blinds. So I use these type of blinds with the slats instead of the vertical blinds because if this breaks, I can just replace one of them, I don’t have to replace the whole line. So when you’re going through renters, it saves on the cost, you just change out one or two or three of these, and then the mechanism stays intact. So that’s a good tip that I like to use.

You can see the floor I did all tile. I know this is an expensive expense, but it’s a one time expense. And if you’re buying a multi-unit to own it for many years, I think it’s an expense that’s worth doing. I like it way better than vinyl flooring. I like it way better than carpet. I did it in the whole unit. I like it better than laminate. Those are all three of those products that I just mentioned carpet vinyl, laminate, in my opinion, they’re really not renter friendly, this is renter friendly, you do it one time. If you have somebody good that installs it should last 20-30 years with no problems. I buy a little bit extra just in case there’s a crack tile, I can just replace the crack tile, instead of replacing the whole flooring. With something like carpet, you might go through it with one tenant for one year and have to replace it the next year. That can happen and oftentimes the deposits that you’re collecting are not sufficient.

Now I still haven’t put in appliances in this unit. I’m going to put all stainless steel appliances, a lot of my investors will ask me, “Hey, Wasim, what about used appliances.” I personally though I have vendors that sell used appliances., in my rentals, I buy all new appliances all the time. The reason I do this on a used appliance, you might only get a 90-day warranty. You’ll find that a lot of times the appliances they’re giving you might be and I’m not exaggerating, 10 years old. So come day 91 They break down and then you have to switch it again. The cost of the used appliance is about I would say a third of a new appliance, but you probably have to replace it five times more than a new appliance. So I think just invest the first time and the new appliance and it would last years and years and years.

Let’s walk through here finally. So I’ve got two bedrooms and one bath on this unit. I’m just going to show you the bathroom. So again, I did a new toilet and you can see the shower I did it’s a fiberglass and kinda like a plastic trim. Now I used to use tile I used to do a tub and all tile in the showers but I stopped doing that. First of all, it costs probably twice as much if not more than that. And then you got to really worry about the grout lines and leaks and water going through the wall with a plastic finish like this or I don’t know if it’s plastic or fiberglass. You know it’s leak resistant. It’s all just really three pieces here. So I don’t have to worry about changing this out or having to send my tile guy to fix some of the tile or the grout. So this is something that I really liked to do. Also all the baseboards whenever I do tile I redo the the baseboards. Sometimes people will say, “Hey, Wasim, can’t we just leave the baseboards and put in tile?” Well that’s not a good idea because if you look the baseboard actually sits on top of the tile, right? When you install tile and you want to install it properly, you really want to set the tile up against the wall and then put the baseboard on top of it. Sometimes you’ll see I’ve been in other houses where we had to redo the tile and it wasn’t done that way they push the tile up against the baseboard. Then you have to almost pry out that baseboard to get it out and then it leaves a gap. So the next baseboard that you have to put on there needs to be bigger so that it fills that gap. So these are some upgrades. These are just a few.

I also like to it’s hard to see but I’ll try to show you right here. This is a big tip, I’m glad I didn’t forget about it. All of my hoses on my like angle stops and under mounts, I always change them. To save for leak, these are steel, I like to use these do it once the worst and most expensive damage in a property can be from water damage, right. That’s where your biggest expense. So when I do something like that, even though a lot of times it’s going to take a plumber or a really maybe a more expensive handyman to do it, the cost that it’s saving me if there are damages, it’s really a huge cost. So it really pays off. So these are just upgrades that I like to do on my properties. I’m not saying that every investor has to go all out like this. Again, I’m more of a mindset, let’s do it once, let’s do it right. And then let’s not have to do it again for a long, long time. But there are other I don’t want to call them shortcuts. But yes, they are shortcuts that you can take, if you don’t want to spend that much money, or you’ve got a smaller budget, and still want to get some kind of return and I can share those with you, if you call me and I’ll go over them personally.

tankless water heaterOkay, one last thing I’m going to show you. And this is really uncommon. This is the first unit that I’ve done it in, but we’re gonna see how it works and we’re gonna see, hopefully it pays off. So I put in a tankless water heater on this unit. Usually the water heater would stand here, it’s a big thing, maybe 30-40 gallons takes up most of this room. This is the washer and dryer room. But on this unit, we said hey, let’s try one of these tankless heaters, I got a good deal on it, it wasn’t much more expensive than a water heater with a tank. So we’re testing that out with this, you don’t run out of hot water, your tenants not calling and saying hey, the water heater is not producing enough hot water and mainly leaks again. So a big expense that you see on a lot of properties, especially multi-units, where you’ll find a lot of times that the water heaters either maybe in a kitchen cabinet on the older units or in a room like this or in a storage closet. If they leak, it causes a lot of damage in the property, you end up having to possibly get a mold remediation company in there, the tenants get freaked out because the word mold comes up and remediation company and you end up cutting most of the drywall out having to redo floor. So that’s again why I do the tile floor. Because if water gets on here as well, you know we send somebody in to just kind of back it up, suck it up. And maybe I’ll only have to replace a little bit of drywall, not a lot of it. Because it’s not going to just soak up and again with the tankless water heater, that’s why we’re trying that we want to prevent leaks as much as possible. You can see here again, I did steel hoses here on the washer, I did steel hoses. So you know these are just tricks of the trade from experience.

Being a property manager for so long, I see where most of the expenses go on rental properties when there are damages. So what I’m doing is all preventative upgrades. So hope you like the unit. If you have any questions on maybe investing in multi-units or a property that you own or upgrading one of your properties, feel free to reach out to me. Make sure to hit the subscribe button if you liked this video and I’ll keep bringing out content like this.

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