[ This article was written by Tom Rosman, Commercial Partner at One South ]
Recently, I had coffee with one of my original clients (and BEST!) and we talked about the purchase of his first small apartment buildings in Richmond VA back in the early 1990’s. We laughed and reminisced about the transaction, how far we had come, how little we knew back then and how much better our hair used to be.
I found it interesting that his most powerful memory of his first deal was the anxiety he had at the time about purchasing the property. Knowing how many properties he now owns in and around Richmond, I found it surprising, but in retrospect, I forgot how scary it must have been. He and his wife were very nervous about going out on the limb for a purchase and construction loan to renovate the small apartment building and said that it was probably the most difficult transaction of his investment career. He did say that investing in real estate got far easier on the subsequent deals, but for some reason, the first one really had him nervous.
This individual has gone on to acquire several more properties, generally on a larger scale (more units/far worse condition/larger and more complicated debt) than his first small apartment building. Somewhat ironically, it reminded that the small multi-family property is a great way to start a property portfolio as the recovery has brought many first time investors back to the market. A duplex, triplex, 4 unit or a 6 unit make great initial purchases and the low interest rates have many convinced that acquiring now will be a great financial decision in the coming years. Managing small apartment buildings is not that hard and with Fannie Mae and Freddie Mac mortgage products available for buildings of 4 units or less, financing is easy and relatively inexpensive. Generally speaking, the commitment and risk level is not overly daunting and if being a property owner is not the right path, they are fairly easy to sell, for all of the reasons listed above.
This not to say that owning property is easy; it requires work. Making the decision to own a small apartment building is a serious one and the process should be respected. Talk to other owners and do your homework. A potential entrant to the property ownership side of the ledger should interview property management companies, lenders, inspectors and brokers who specialize in apartments to help them understand the market. While every interview in the world will not substitute for actual experience, a buyer can get a good feel for what to expect.
In the Richmond, VA area, it is good to keep in mind that there are numerous neighborhoods where an owner can find small apartment buildings – The Fan, The Museum District, Jackson Ward, Carver, Uptown, Carytown, Shockoe Bottom, Church Hill, Union Hill, Bellevue, Ginter Park, Barton Heights and Westover Hills.- these are all neighborhoods where small apartment buildings can be found. The era when these neighborhoods were built was a time when small apartment buildings were still a staple of neighborhood development. If a property has been well maintained, it generally will have a stable tenant base and not require intense management. Properties closer to VCU will tend to be occupied by students (which changes the game a bit) and, as one would expect, properties in the Fan or Near West End will probably be a bit more expensive. Overall, there is generally a good stock of these properties to choose from, but availability ebbs and flows as people enter and leave the market.
The small multi-family buyer, who decides they like the benefits of smaller properties, often keeps buying the 2 to 8 unit buildings and grows his/her portfolio in that manner. As they become smarter and more experienced property managers, they streamline their procedures to optimize their investments. Others, like the client I mentioned above, use the smaller buildings as a building blocks to eventually purchasing larger apartment complexes and other more complex investments including Historic Tax Credits, mixed use properties and conversions. They also begin to understand the financial markets better and begin to use ‘conduit loans’ and the larger scale permanent debt offered by HUD, Fannie and Freddie to really impact cash flows.
Owning property has been a vehicle for wealth creation to many. From the smaller properties discussed above as a college investment funding option to 1,000+ unit portfolios as the primary provider of income, being an owner of properties can be a great path. Beginning the process with the purchase of a small apartment building, is the best way to find out if the path is the right one.