How Should “Jerry the Plumber” Invest $1,000,000 in Portland Multifamily?

Jerry owns a thriving plumbing business that almost exclusively does commercial work .  His company is well established, his crews are trained.  At 50 Jerry is a dynamo who has so much energy that he fixes up houses after work.  He’s up to 8 rentals now.  They aren’t exactly next door to each other as he’s bought good deals where he could find them.  Jerry takes care of the Ts (Tenants, trash and turnover) after work. He could benefit from looking at investing in Portland multifamily as there are several challenges in his current investment plan:

• Efficiency:  Due to their varied locations managing and maintaining 8 properties after work can begin to be a rat race.
• Financing:  Banking rules only permit each lender to have 10 residential loans at any one time.  Under certain market conditions banks sometimes lower the 10 residential property loan maximum to 4. This will limit Jerry’s efforts to acquire new properties unless he elects an “all cash” acquisition strategy.  If it takes a high (or even 100%) amount of cash to acquire an asset you had better be getting a much higher percentage return on your investment or your yield percentages will drop.
• Non-scalability:  Jerry is just about at the limits of what he can take care of after work in varied locations.  If he wants to grow his portfolio and potential returns he needs to adopt a different strategy.

It’s a great time to start or expand your multifamily investments.  Contact Rick Bean of Rose City Commercial Real Estate to learn more about Portland multifamily and other good investments at: 503.577.1034, or rick@rosecitycre.com.

Options

You should have seen the “lights go on” for Jerry when I told him that his plan had great elements but he was placing his energies in the wrong  type of property.  There is no limit to the number of commercial loans you can have at one time.  Banks don’t say:  “Sorry, Sam Zell…no more apartments for you, you have more than 10 commercial loans.”  Residential investment multifamily is 2-4 units.  Commercial investment multifamily is 5 and up.

It would take time, but my counsel to Jerry is to sell off his single family properties, aggregate his equity and purchase a 20-30 unit apartment complex.  He can give one of his tenants a break on rent to be his on site “eyes and ears” and collect rents.  He can elect to do all the maintenance himself, which will increase his monthly cashflow.  If is tired of management and maintenance duties he can get help.  His total cash flow will be slightly lower intitally…and much higher in a couple of years.

An additional option would be for Jerry to by a property with need of some “lipstick” and use his crews to help turn it around.  After stabilizing higher rents it could be sold for a substantial profit, and by using a 1031 exchange the equity could be turned into a 40 to 60 unit property…complete with M+MBO.  (Maintenance and management by others).

Multifamily scalability

Costco is based on the principle that makes apartments a great investment: Do you want to pay $43.75+ deposit for 35 single bottles of water…or $4.99 + deposit for a case of 35?  Apartments are by nature a highly scalable investment.  I once worked as an intern for a man who was truly self made.  He started many years ago by buying a triplex.  Since then he has bought multiple complexes that have over 1,000 tenants each.  The best part of this story?  He still hasn’t paid the taxes for the gain on the 1976 triplex sale due to the advantages of 1031 exchanges…but that’s a discussion for another post.