Real Estate Investing in Five and Ten Unit Buildings

Investors who move up to commercial grade buildings -- those housing five or more apartments -- can make much more money than investors that stick with residential grade properties. Although there is no guarantee that bigger buildings will produce more profits, logic points to the fact that larger properties offer more earning potential because more units should produce more income. However, bigger buildings also can mean bigger headaches. Before you move into a larger building, you must make sure you are ready for the added risk and responsibility.

Many first-time investors have bought residential grade properties, but a lot have purchased larger units as well. Six unit buildings are an ideal size for investors with sufficient time and knowledge who want manageable properties that offer enough rental units to produce substantial positive cash flow. Six unit buildings cost more than smaller buildings and require more attention due to the number of units; however, they usually provide enough income basis to carry a vacancy without generating a negative cash flow. Investors who have experience as landlords definitely have an advantage when it comes to being successful with rental properties, but it is possible for novice investors to learn as they go.

If you decide to get into the big leagues of larger buildings, you will compete with many experienced investors. The good news is that this tells you that you are on the right track to finding the money in real estate. The bad news is that you may not be prepared to face the level of competition. Don't be frightened. Almost any adult can learn to compete for larger buildings. You don't have to be a seasoned investor to make money with commercial grade properties.

Getting into bigger buildings can require you to have more money than you would need to buy, say, a duplex. Due to the larger price tags, the down payment requirements are higher. However, with the right approach and some seller financing, you might be able to get into a larger building with even less cash than you would need to buy a smaller residential grade property. Keep in mind though, that closing on a larger building with little to no money isn't always easy.

One advantage to buying larger buildings is the fact that the financing can be much more creative than the financing for residential loans that will be sold on the secondary mortgage market. Commercial lenders sometimes will stretch normal lending rules to make a deal. When you buy a building that meets commercial status (including a residential apartment building with five or more units), the property can stand on its own. This means that income from your job may not be as important as the building's history as an income producer.

If you have no experience as a landlord, the lender may be leery. You have way to make the bank rest more comfortably, however. Suppose you retain a proven property management firm to handle the building for you. This overcomes your lack of experience, both in the real world and on paper. Paying a management company will eat into your profits, but it may nudge the bank to offer you the loan.

If the building produces enough income to cover the cost of a management firm, the bank shouldn't hold your lack of experience against you. Typical management rates run about 10% of a building's gross rental income, plus charges for specialized services, such as renting vacant apartments, managing subcontractors performing maintenance and repairs, and so forth. Once you own the building and demonstrate your ability to oversee the property management firm, you can purchase more buildings. In time, you will have the experience needed to make bankers relax when you want to buy and manage a building yourself. The advantages of hiring a management firm are many, with the only major disadvantage being the cost.

Being the landlord of a single-family home can be more difficult than managing a 12 unit apartment building. Real estate management varies from property to property and from tenant to tenant. First-time investors often think they can handle a triplex, but not a six unit building. The additional three units point to more potential problems, but the problems may never occur. Don't fall into the trap of believing that small buildings are easy to manage and larger buildings are difficult. This assumption has no real basis. Ease of management is related to the quality of your buildings and tenants. If you have the time, money, and drive to make your properties work for you, don't let building size hold you back.