5 Ways to Jump Up to Large-Scale Multifamily Investing
So you’ve been reading about the wealth, glory, and life of ease enjoyed by large-scale multifamily owners/syndicators, and you wonder how you can join their club.
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You know who I mean. You watch him cruise by in his Tesla. You know he’ll be toking a big Cuban cigar and barking out orders to his staff from his hot tub when he gets back to his mansion.
Meanwhile, you’re struggling to manage a handful of tenants in a few single family homes or duplexes, and the thought of multiplying this hassle times 100 (or a thousand) seems unthinkable.
As a multifamily syndicator, author, podcaster, and BiggerPockets writer, I get one question more than any other:
“How do I get from where I am to the commercial/large-scale multifamily investment level?”
If that question has been rolling around in your mind, then you’ve come to the right place. My goal in this post is to give you an overview of five avenues to help you jump into the large-scale multifamily investing world.
At the end of this article, I’m hoping you’ll comment on which of these five on-ramps is most intriguing to you. This will give me an excuse to write more articles and take a deeper dive into any or all of these avenues, hopefully avoiding me getting canned by BiggerPockets.
First Things First: Are You Sold on Large-Scale Multifamily?
I’ve been involved in quite a few aspects of real estate investing. In the past, I’ve done residential sales, single- and multifamily flips, single-family rent-to-owns and rentals, financed an office building, flipped waterfront lots, developed a subdivision, built and operated a large multifamily project from the ground up, and helped build a Hyatt hotel.
I’ve made a good profit doing some of this. And I admit, I’ve lost money on some of these projects as well. (Hey, I started the How to Lose Money Podcast, after all.)
I’ve repeatedly told my son, my employees, and anyone who will listen (not my wife) the following about large scale multifamily:
“If I’d have known all along what I know now, I would never have done anything else!”
As I write this, I realize that I’ve said this in different words before. I looked back in my BiggerPockets archives and found that I wrote an article on this topic earlier this year. It’s warmly titled Warning: Your Single Family Rental Portfolio Might Just Be a House of Cards.
I think my title irritated a few folks. It was a bit harsh, but hey, that’s how strongly I feel about this topic. To save space, you can go there to read my “whys” for jumping from where you are into the large-scale multifamily realm.
I also wrote an article affectionately referring to multifamily as The Perfect Investment. (I heard there’s a great book with a similar title.)
As for the “how,” let’s take a stab at that. When I talk to investors looking to climb the ladder from single families (or small multifamily) up to commercial-level multifamilies (I define this as about 80+ units – where you can afford an on-site property management team), our discussion typically focuses on the following five areas.
1. Be a Multi-Millionaire
This reminds me of the old Steve Martin gig. “You can be a millionaire and never pay taxes. Yes, YOU can be a millionaire and never pay taxes. You say ‘How can I be a millionaire and never pay taxes?’ First, get a million dollars. Then…”
Seriously, if you've ever tried to do a large multifamily deal, you've realized that you've gotta have a very healthy net worth to get commercial debt. Total net worth needs to be up to the total amount of the loan with liquidity of up to one year of principal and interest payments.
That is the total for your ownership team, and it can apply to recourse or non-recourse debt. Which means that an alternative is to have a rich uncle, or someone who believes in you enough to cosign on the loan. There are people who will do this for a fee. And you may even get them to bring capital along as well.
2. Climb the Ladder from Duplex to 100+ Plex
Is 100+ Plex even a word? I couldn’t find it in my Webster’s 1828 dictionary.
Though this term may be foreign, this process should not be alien to BiggerPockets readers. This is probably the most obvious route to large-scale multifamily success. But it may be the slowest. And hardest.
When looking at multifamily deals in the Dallas area in 2015, I had the opportunity to meet the owner of a 132-unit complex in Arlington, Texas. He told me how he started in 1992 with a $1,000 down payment on a $60,000-or-so duplex.
This guy fixed it up, rented it, and sold it. He took the proceeds and bought a four-plex, rinsed and repeated. Same with a 12-plex, then a twenty- or thirty-something, and so forth, all the way up to the sale of his 132-unit asset for about $11 million. He was preparing to trade up to a larger complex next.
To my knowledge, he was utilizing 1031 exchanges to defer taxes all along the way.
When I met his staff, I realized a few of them shared his last name. This was a family business, and they had given their lives to this process. Self-managing, marketing, and maintenance. Wow. Or yikes.
While I can’t imagine enduring this process, this is admittedly an opportunity for higher profits and wealth creation. He had leveraged a thousand dollars – mixed with 23 years of blood, sweat, and tears – to create a fortune for his family with a great income along the way.
3. Be a Deal Finder for Another Syndicator
Do you have connections to multifamily owners? Or can you make them?
Are you in a local meetup or REIA where you can make connections with multifamily owners who may sell?
Do you have the experience and drive to use direct marketing (for example online or mail) to drum up multifamily owner leads?
If you are in a position to refer deals to multifamily syndicators (companies who buy and manage multifamily assets using investors’ funds), you could be well-positioned to earn a seat at the table in their deal.
Please note that this is not an easy route to take. In these days of intense competition to source multifamily deals—in a time when deals are being tracked down like foxes in a royal hunt—it will be important for you to work hard and hopefully have an inside path.
And if you’re a commercial real estate broker yourself, you may want to consider taking an ownership stake in place of real estate commission. (I guess you’d have to discuss this with your broker and check regulations.)
When you bring a deal to a syndicator, you should position yourself to do more than just get a seat at the general partnership table. If you want to learn this business, you should ask them to allow you to shadow their team during the process. You should have the chance to learn everything you can about the deal and the route to closing.
Note that there may be SEC regulations involved in remuneration for this, and you could get into an arena of crossing legal lines in the real estate brokerage arena as well. You are responsible to assure that you don’t cross any lines or accept any fees that would put you at risk.
4. Raise Capital for a Syndicator. Or Invest Your Own
Do you have a lot of capital to invest? Or do you have connections who do? If so, you may be in a position to work with a syndicator to earn a seat at their table.
In the case of you bringing capital, you could just negotiate with them upfront. Tell them that you have many investment options and you’re looking to invest with a firm that allows you to look over their shoulder to learn the process.
This will probably work best if you are investing quite a bit above their minimum level, or can bring some additional value to the deal.
If you want to raise capital for a syndicator, realize first that you cannot be compensated for doing this unless you are a licensed financial professional. Even then, there are strict FINRA regulations that your firm will impose on you.
Of course if you’re licensed, you’re well aware of this. If you’re not, you need to get the facts.
So don’t expect to be compensated.
But if you know a syndicator, or get to know one, you may be able to convince them to give you a capital development role for their firm. Most syndicators are entrepreneurs, and can’t offer you a paid position. But perhaps you could work out a deal with them to offer you ownership in their deal in exchange for raising capital.
Again, to my knowledge, you should not do this for a percentage of the capital raised. This type of arrangement could be an SEC violation.
I don’t want to offer legal advice here, and I’m not. I’m just raising the issue and inviting readers to explore this arena.
5. Find a Mentor
You may be able to find a mentor. I did a podcast on this topic earlier this year. In it, I encouraged would-be mentees (another fun word) to offer their services to someone they hoped to be mentored by in order to add some value to their life and reduce their workload in some way.
But let’s be honest. Finding a good mentor – who is accessible and knowledgeable and helpful – will be a hard nut to crack for most of us.
Unless you want to pay for one.
There has never been a time in history when there are more real estate mentorship opportunities available. With the availability of technology and the realization that real estate is perhaps the greatest path to wealth on the planet (short of inventing a cool new app or scamming the world by selling semi-boneless holiday ham), opportunities for mentoring are plentiful.
I know at least a half-dozen multifamily mentors, and when I started in the multifamily stream I’m in now (class B, value-add, etc.), I hired an expensive, and very thorough, mentor.
The question is, how do you find the perfect mentor? And how do you differentiate the so-called gurus from the helpful mentors?
If there’s enough interest in this topic, as judged by followup comments and questions, I may write another article on this topic.
What about you? How are you scaling the ladder to commercial-level multifamily investing? If you’ve made the transition already, and have some wisdom to share – especially if it adds to or contradicts what I’ve said above – we’d all love for you to share it!