What's the best way to put together a Multifamily deal as a newbie?

Question

Hello BP members,

I'm seeking to put together my first multifamily deal and would like to get some feedback on where to start? I would like to buy and hold apartments from 5 to 15 residential units.  I would like turnkey properties, however, I have managed several renovation projects and would be comfortable with that process as well if the deal brings a better return.

Any suggestions is appreciated.

Thanks,

Detra

Frankie Woods · Answer

Hello @Detra Harris .  Given that 5+ unit complexes puts you in the commercial real estate realm, you know will be dealing with seasoned investors that rely on the numbers to value property vs. comps.I think by buying turnkey properties, it really limits your ability to find smoking deals.It’s not impossible, but certainly much more difficult.However, you may be able to find a turnkey property that has poor management (unlikely) and force appreciation by improving on that fact without doing much else.

J. Martin · Answer

@Detra Harris

There are definitely a lot of routes to go, but @Frankie Woods is right. The returns will always be (potentially) higher with distressed properties.

In MF, I see lenders typically looking at the financial capacity of the property (from 1.15 to 1.3X cash flow relative to debt service on multifamily (MF), along with the borrower's experience.) 65-75% LTV.

A popular method is also finding a seller who will finance part of your purchase (seller "carryback".) This is oftentimes an older owner who may want less work/tenants, but still wants an earning asset to provide income for their daily expenses in retirement. This is a great way to do it with little cash down.

Many MF properties never come on an MLS, compared to residential, so after checking LoopNet, definitely contact a MF broker at each of the major commercial brokerages in the area you are looking. CBRE, Cassidy Turley, Cushman & Wakefield, etc... You should also talk to @Alan Malicse and @Joey Budka in the East and South Bay, respectively. They are commercial real estate brokers. I believe Joey has found @Minh L. a deal..? Maybe they can all help out with some advice.

What is that you have, and what do you need? Cash equity? Someone with experience in MF? I know some of these from speaking with you, but sharing what you have to bring, and what you need will have an influence on the best approach..

It's always nice if you can get a distressed property to have higher potential returns, but balance that desire with your experience, ability to absorb risk, etc. As I said, one of the best ways to get started is to do a great deal, and start establishing a track record. Having one disaster could ruin that for a long time. Make it count!

Good luck Detra. It was nice meeting you at my meetup, and hope to see you again soon!

Detra Harris · Answer

I think you're right Frankie Woods.  I've been reading a lot on this topic and it appears investing in distressed properties is the way to go.  J Martin also provided some great resources and tips.  Thank you both!!

Detra Harris · Answer

Thanks J.  I do see the value in starting with class C - D properties, however, the missing link for me is how to finance renovations.

I will be meeting with Marcus & Mullichap tomorrow. I'm considering placing my RE license under their leadership.  They have a great platform for senior and affordable housing developments, which is in alignment with my credentials. In the meantime, I hope to continue to receive feedback and resources from local investors such as yourself, Frankie, Alan, Joey and Minh.

I'm offering property management services at no cost on my first deal.  This is a value often underestimated by investors.  I am confident that I can increase the value of investments within 3 to 6 mos by 30% to 50% -- and I have a proven record of doing so.

My investment objectives are to use private investors for cash requirements, recover any of my own invested cash within one year, provide property management at no cost through the holding period negotiated with investors.  I'm seeking a consistent cash flow for a five year period; a goal of $2k per month the first year, expecting to be at $10k by year 5, therefore, it is my understanding to seek properties that are positioned for rapid appreciation to best meet my goals.

Yes, I would prefer to leverage our investment dollars by obtaining a loan.  65% - 75% LTV seems to be the standard with conventional lenders.  I would prefer seller financing for my first deal as this would be a win win situation for myself, investors and the seller.  I am also looking at private money loans.  I recently came across crowdfunding which I find interesting.

I'm going to target class c properties, 5 to 15 units, at least 25% vacant, at least 8% cap rate with a ROI of 16% to 25% for investors or 1.15 - 1.3% cash flow as you mentioned.  What do you think? I will use this guideline before moving forward with any due diligence on the property and presentations to my investors.

I would love to work with someone who is seasoned with experience and who has cash equity.  I want to learn and willing to do what's necessary to avoid mistakes and undue risks.

Thanks again J!

Detra

What's the best way to put together a Multifamily deal as a newbie?

Most Popular Reply