Pros and Cons of Investing in Smaller Multifamily Properties
When it comes to residential and commercial investing, smaller deals often mean big business. Take, for instance, the talented active investor Tyler Sheff. Tyler seeks out residential properties with five to 50 units. Those investments have led to an extensive and highly profitable portfolio.
Tyler Sheff has been a real estate professional for more than 16 years. He’s based in Tampa.
In addition to his active investing, Tyler serves as a real estate broker and syndicator. He also runs a real estate education company called The Cash Flow Guys, and he hosts an informative podcast.
Why, though, does Tyler focus on complexes with 50 units or fewer? One reason is his natural conservatism as an investor. He’s careful and thoughtful with his money.
Moreover, Tyler has found that smaller multifamily properties represent a lucrative niche. Some investors are just starting out or have limited funds, and those people tend to avoid multifamily homes. Meanwhile, other real estate investors prefer buying larger properties. Thus, Tyler faces limited competition.
Challenges Tyler Faces
As with any type of residential or commercial investing, smaller multifamily properties involve a few tricky aspects.
First, before making a purchase, Tyler tries to figure out all the ongoing costs associated with the property. That way, he can ensure that the deal will be profitable.
For example, he always calculates that property management fees will cost 15 to 18 percent of the total annual income. In truth, they tend to cost only 10 to 13 percent. But, by inflating management fees in his initial computations, he gets a little leeway — and he often gets a little bonus money at the end of the year.
Another difficult task is finding a good property manager or management company. Some deals come with an effective property manager already in place. However, in many instances, Tyler must hire his own. And, in the past, he’s lost revenue due to poor or inattentive management.
Also, it’s easier to find larger residential properties than those with five to 50 units. Therefore, it takes longer to grow a real estate portfolio with the latter type.
Plus, when you’re investing in bigger real estate assets, you usually buy residential or commercial properties from large companies, hedge funds, or professional brokers. Those organizations and individuals sell assets all the time, and their selling processes are usually quick and efficient. And, because they rarely feel personal attachments to properties, their transactions are dispassionate and formal.
By contrast, when smaller residential and commercial properties come on the market, the sellers are often people who’ve owned them a long time. To a certain extent, pride and nostalgia could interfere with their business judgment. For that reason, negotiations can take longer, and they can be less orderly.
Park Your Assumptions
A benefit to buying smaller multifamily properties is that, if you have negotiating ability and people skills, you can often develop relationships with sellers. Consequently, it’s easier for you and a seller to arrive at a price that’s fair to both of you.
On the other hand, people at a large company or a hedge fund might not even bother negotiating.
Tyler says that a key to his negotiating is to never make assumptions, especially when asking questions. In most cases, when people ask questions, they already have an answer in mind. After all, making predictions and assumptions is human nature.
For example, maybe there’s a property you really want to buy, but you believe the asking price is too high. Many investors in that situation would pass on the property and look for another one, assuming that an agreement would be impossible.
However, if you meet with the seller and explain your situation fully and respectfully, a deal could very well be obtainable. Start by telling this person how much you’d love to own the property, how much funding you have, and how much profit you’d need to make from this deal over time.
You could also assure the seller that all your offers will be made in good faith. If you suggest a price that she or he feels is too low, that person shouldn’t feel insulted or angry. Instead, it could be a springboard for more dialogue.
Build a Rapport
You might show concern for the other person’s needs. What would make this deal worthwhile for the seller? Does this person want money for a certain purchase or for retirement? Is it emotionally difficult to sell this property? What special memories does she or he have of the place? By making the seller feel valued, you’ll earn trust and goodwill.
All throughout such a conversation, you’re never making assumptions. You’re always hearing the other person out, considering the responses, and evaluating them in an honest way. And you’re empowering the seller to make positive contributions to the conversation instead of just arguing back and forth.
For sure, it takes courage to be open and candid. However, by doing so, you can overcome serious disagreements more easily.
Later on, you might even visit the seller a few times to have coffee or go on a walk. You don’t need to talk business then. You could just socialize and try to form a bond.
In any event, such conversations are much less effective over the phone. If you can’t be physically in the same room as the seller, you could at least talk on a video call. Your face conveys all kinds of subtle emotions and visual cues, and another person can sense your sincerity by seeing you speak.
Learn from the Experience
With any kind of active investing, patience is helpful. With a smaller residential property in particular, a seller might reject your price at first, collect other offers, and then realize that yours was actually the best one. And, if a seller gets several offers that are about the same, that person might sell to you simply because you have a rapport.
As with anything else, practice and experimentation will make you a better negotiator, and failure can be a healthy part of the process. Just know that, if you enter such a discussion free of animosity and with a caring attitude, you’ve already taken a major step toward achieving your goal.
Of course, smaller multifamily homes aren’t right for every active investor; you might be interested in other residential or commercial properties. But, if you have a flair for building relationships, you may soon enjoy the kind of investing success that Tyler Sheff has enjoyed for quite a few years.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.