Last year I wanted to refinance some of my small rental properties. Four properties, a hundred grand here, two hundred grand there… but you would have thought that I was seeking to solve the mystery of world peace. The process was grueling. It required the exchange of over 200 emails back and forth with the lender and took six months to complete. It reminds me why I have such distaste for financing residential 1-4 unit properties.
Fast forward to mid-2015, and I just closed a $10.75 million acquisition loan on an apartment complex. This took half as many emails, only 60 days, and about half of the time and brain damage. It truly is easier to borrow large sums than small sums. But there’s a catch—to borrow at this level, you have to have a solid plan, a solid track record, and a solid team. These components aren’t required in residential 1-4 lending, but you also aren’t born with them. They must be developed. So while it may be easier for some people to buy and finance large multifamily property, it isn’t easy for everyone. Still, it can be, with the right preparation and planning.
If you have been following along with my series of articles on the myths of multifamily real estate, you’ve already learned why multifamily property is easy to value and why economy of scale is a great reason to love multifamily property. Or perhaps you have learned that both of those statements are more myth than fact, in which case it’s time to evaluate, and perhaps debunk, the myth that multifamily is easy to buy and finance.
Finding a Needle in a Haystack
If you follow some of the gurus, you might be led to believe that owners of apartment complexes are advanced in their real estate investing careers so most of them are ready to retire. When they sell, they’ll want to loan you the money to buy it. They’ll probably even want to give you 100% financing or at least carry back your down payment or just simply give you a master lease so you don’t even have to get a loan.
If you live in the real world, don’t believe it! While there are always needles in haystacks, you’ll never create a large business searching for them. While some owners of smaller multifamily properties may lack sophistication, be frustrated landlords, or be looking for an easy exit, you will spend a lot of time trying to find them and even more time convincing them to sell you their property with creative financing. Do you ever wonder why so many budding real estate investors get frustrated, say that the business is impossible, and give up? For many, it’s because they are chasing the needle in the haystack, and it wears them down.
The Untold Truth
So here’s the truth. The only way that buying multifamily property is easy is if you overpay for it, or if you have dump trucks full of cash that you are seeking to deploy and don’t care about maximizing your return. If you are disciplined, you will spend a lot of time looking for a good property in a good area at a good price. It’s hard work. My average effort to purchase one property requires that I underwrite around 100 deals, make offers on ten, and buy one. There is nothing easy about that.
If I were looking to get both a good deal AND creative financing, my odds and my effort would go up exponentially because now I’m looking for not only that one in 100 deal but also the one in 100 owner willing to play ball—giving you one in 10,000 odds of success. Even worse, the owners who are willing to play ball are usually the ones trying to get a price that the market doesn’t support so they are willing to use creative financing as the bait to hook an inexperienced investor into a property they are trying to get out of. You could call it the Greater Fool theory. Don’t be a fool.
I’ve been in the REI biz for over 25 years. So here is some practical advice if you want to be around as long as I have and if you would like to be in the large multifamily asset class someday. Forget about trying to buy apartment complexes as the start to your career “because they are easy to buy and finance.” Instead, start small. Buy houses, and like in Monopoly, progressively move up to larger and larger properties over time. Document your track record and produce success.
When you have enough experience to handle the responsibility, recruit investors to take the journey with you and produce results for them. As you grow, your investor base will grow and will allow you to continually scale into larger and larger properties. This is exactly how I grew my business from a shoestring financed by credit cards to a $50 million business fueled by over $25 million from accredited investors. When you have investors, you don’t need creative financing. You don’t need that one in a million seller. You can spend your time looking for excellent properties knowing that you can perform when you find that one in a hundred. And lenders will want to make you that loan because you are now an experienced operator with a track record and capital to back it up.
So is multifamily easy to buy and finance? With cash from your investors at the ready, it’s much easier to buy. Just make sure you are disciplined and buy smart. With experience from having built your business over time, lenders will be ready to finance your multifamily acquisitions. So this myth is true, but only if you are properly positioned. If you are trying to get into the multifamily game too early in your career this myth is absolutely debunked.
Investors: Do you agree? Disagree?
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