How to start investing in multifamily ?
Investor · Cupertino, CA · Member since 2016 · 83 posts · 9 votes
Hi @Sameer Jain, if you're an accredited investor, you have other options to invest into multi-family properties only availble to 8.5% of the US population. You might consider investment into DSTs (Delaware Statutory Trusts). They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. Feel free to connect with me here on BP, happy to help. - Leslie
I don't think anyone can answer whether it is the right approach for you. Just make sure you're not over leveraged after you cash out. As for multifamily, do you mean duplexes and 4 units or like 20-50 unit apartments? You can also invest in larger apartments via syndications if you're an accredited investor. You have a lot of options.
Hi Sameer,
As Michael suggests, there are several options but let me mention large apartment investing. There are some real advantages w/scale and a concept called forced appreciation (value add approaches) that make large apartment investing attractive. Many shy away because it seems to big to swallow going from SFRs and small MF to larger deals. One way to get your feet wet is through syndication. Sponsors simply look for accredited investors that can partner with them to own large apartment communities. Many are able to generate attractive cash flows in the 10% range and deliver 20% IRR over say a 3-5 year hold period. I would advise looking at value add projects in the best markets (jobs, population growth exceeding natl averages) and sponsors (general partners) that have built a solid track record. You can do this as a passive investor but I also like to share that w/intention, you can still learn a ton from these deals when or if you ever want to do this yourself one day. PM me if you'd like to share some ideas and options.
Hi @Sameer Jain, if you're an accredited investor, you have other options to invest into multi-family properties only availble to 8.5% of the US population. You might consider investment into DSTs (Delaware Statutory Trusts). They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. Feel free to connect with me here on BP, happy to help. - Leslie
Sameer,
When you are saying best approach, what are you really asking? Cash out and refinance is an effective strategy if you are looking to continue to build your real estate portfolio. Ultimately only you can decide if you prefer to continue doing the same thing or look at bigger properties. I mentioned above that in my opinion right now, unless you are extremely talented, experienced and have the time to analyze deals and find markets that are attractive, its getting more challenging. It's not 2012, you need to be more disciplined and selective that ever before. My thoughts are that if you are accredited, it might make sense to take some cash and invest it w/the folks that spend 100% of their time finding the best markets, attractive value add properties and have been doing it for a long time. I have a post (see link below) that challenges conventional BP wisdom of DIY only. I love DIY too but found a hybrid strategy and getting access to larger deals is really opening up the play book for me. Just planting a see that it might be something to look at. Btw, I have SFRs, duplex and fourplexes, in general, if you want cash flow, the fourplexes outperform. But the 320 unit and 296 unit apts I recently invested in are expected to perform much better in yield and IRR at this time in the RE cycle. Why? Forced appreciation and scale.
@Sameer Jain Your definitely asking some great questions!! I would love to jump on a call and answer some of these questions in more detail. I like the idea of cash out refi into some larger deals, but first have to ask what are you looking to accomplish? Getting that equity out and putting it to work for you is an amazing idea.
@Account Closed may be able to offer advice on this topic ...
@David Thompson Great insight, thanks for a different perspective, I like the mold of diversifying how you invest, it is similar to how I am looking at a new business adventure I started, While the returns of selling the product myself are greater, by letting someone else take a share of the pie and having them do the leg work my returns are INFINITE. Money made for little to none work!
Thanks BP!
Exactly, leveraging others can exponentially grow your wealth, nice Zach !
Thanks for great response . Can someone suggest me some good markets to invest in multifamily apartments ? In parallel I am also looking to invest in apartment building through syndication ? Where can you get financing to buy multifamily ? Any ideas
Choose cities in safe and economically diversified areas with above-average income and population growth. It's can also be safer to diversify your investment properties across the country.
Remember Monopoly Game? I think its three green houses can be traded up for one Red Hotel/Apartment. Time to trade up I think. Looks like you are getting some good advice here from other members. Next step, go get educated in apartment buying / syndication / financing. BP is good to for asking questions, but you won't learn everything you need to learn on here.
Good Luck
You understand the SFR and condo model. If you spend some time getting up to speed on the apartment model, you will have more clarity on your question. You could read a few books on apartments, listen to apartment podcasts, and, most importantly, analyze many apartment deals yourself and through apartment brokers. You will then have more clarity and can decide which asset class you prefer. There are also apartment coaching programs, if that is your cup of tea. Depending on your financial position, you may be able to do both SFR/condo and try a small apartment through refinance of existing properties and/or the use partners. That would give you real life experience on apartments and you can then decide once again which model (SFR/condo/apartment) that you prefer and pivot accordingly. Researching a new asset class is not an exhaustive process but it takes more than a couple of weeks. Nice work on asking the right questions and starting that process. The picture becomes more clear and your REI team grows as you move through the process.
I prefer apartments due to the professional vendor support, among other reasons, but all the classes you mentioned are great and there are strategies, markets and investors that are suited for each.
Hello! My fiance and I just closed on our 1st investment property. It's a 2 BR 1 BA condo in NJ. We paid cash for it. We would like to get into multi family next. Any suggestions about leveraging the 1st property to go for the next one? Thanks!
Thanks for tagging me @David Faulkner.
@Sameer Jain, it depends on what you're trying to accomplish and risk tolerance. There are a couple of things I'd like to share and hope you find it helpful.
1) Being accredited is cool, but it also means you're on your own if you lose all of your invested money. You don't get the same protection compared to a B to C transaction from Uncle Sam.
2) Syndication has its positives and negatives. You give your money to someone to invest and you have no control over it. The yield tends to be much better than the stock market or even hard/private money lending. However, there are some conflict of interests IMHO. Your goal is to get consistent yield while the syndicator wants to stabilize the asset and exit within a few short years because that's when s/he gets paid. Without exiting, there's almost no payday for the syndicator. I used to syndicate apartments myself, but I got away from it. Now, my partner and I only invest for ourselves.
Invest in a 250-unit apartment sounds cool, but you're talking about 100-unit turnover per year with 5% vacancy assuming each unit takes 1.5 months to rehab, marketing and lease up. That's a turnover of 8 units/month or 2 properties per week. It's a JOB. I would rather own 25 units free and clear in the Bay Area and call it a day. It's no longer about quantity, but quality to me.
As you're in Cupertino, consider reaching out to @Sandeep S., buy him lunch and pick his brain. He retired from corporate America earlier this year. If he likes you enough, he may let you test drive his new Tesla. :o)
Best of luck to you.
Thanks @Account Closed - I will be happy to meet and talk RE and you don't have to buy lunch for me :) I am also in Cupertino so it is real convenient.
If you want to grow your RE portfolio - taking equity out of your existing properties for that purpose is a no-brainer. Where to invest is a more difficult choice and a lot depends on your goals, your investing style and your strengths. Minh and I fall in the camp that believes that although making investments in bay area and making sense out of those is hard but once you figure that out - the results are much superior than any other typically available options.
Some interesting points shared but let's be consistent. All win with an exit. It's essentially a 3-5 yr hold and turn, reinvest in another value add opportunity. Additionally, we are not asking the limited partner to have a "job", that's the beauty of it. The job is for the property manager foremost . Sounds like you self managed which is not my recommendation. I would also argue that you are missing out on an attractive asset class if you are only going to invest in "controlling assets" as you point out, it's a job, so large apts which are an attractive asset class are not attempted. As I originally commented, too many BP folks want to know the best strategy and their isn't one. You tell me your recommendation and I can tell you several reasons why it might not be right for certain investors. No strategy fits all and their is no best strategy and that's the beauty of REI.
I am not a accredited investor as of now but I think I will qualify to become one if required. I am not looking to go for 100+ unit in first go. I am thinking of buying 4-10 units building using buy and hold strategy to increase my current cash flow on monthly basis .I have invested both in bay area and TX market. I am currently looking to buy a multifamily in Sacramento area as multifamily in bay area is too expensive at this point numbers will not work if I buy them.
Syndication is another good strategy to get good returns but I think you do not hold any tangible real estate by investing through syndication.
Some interesting points shared but let's be consistent. All win with an exit. It's essentially a 3-5 yr hold and turn, reinvest in another value add opportunity. Additionally, we are not asking the limited partner to have a "job", that's the beauty of it. The job is for the property manager foremost . Sounds like you self managed which is not my recommendation. I would also argue that you are missing out on an attractive asset class if you are only going to invest in "controlling assets" as you point out, it's a job, so large apts which are an attractive asset class are not attempted. As I originally commented, too many BP folks want to know the best strategy and their isn't one. You tell me your recommendation and I can tell you several reasons why it might not be right for certain investors. No strategy fits all and their is no best strategy and that's the beauty of REI.
David,
Instead of exiting to get all win, why doesn't the syndicator do a cash-out refinance, take the equity and go invest in the next asset? If you truly believe the asset will perform well in the long-run, wouldn't this be a better approach for the investors? Why does a liquidity event have to happen?
We don't self-manage, but we still have to look over the PM and his subs to be sure they're not over charging us on rehab. We can be more hands off, but we don't like to be over charged for anything.
Minh,
Good questions. If I use a house flipping analogy, whether we are talking a SF home or a 300 unit apartment community, the essential concept is the same (valuation albeit different but stay w/me here). A home flipper wants to fix up and market / sell asap. There are costs in holding and since the home is now looking its best, maximize value return by selling it. The home flipper has the primary purpose of once the asset is fixed up of selling and then rolling into the next flip. A backup plan would be to rent out the home and get some cash flow from it. An experienced home flipper will tell you they make more money turning and flipping than holding and renting out the asset.
With an apartment, most of the value add happens w/n the first couple years. A typical resident would see rents climb at a decent clip over a two year period as the apartment interior, exterior is renovated and improved property management increases desire and pride in staying. After two years, rents stabilize and climb just w/the market. So, like a home, this is the optimal time to do a cash out refinance and get investors back a large part of their investment. Investors like this because if further decreases their risk. We have assets that have returned 100% of the investor money in two years and the investor still is in the investment getting quarterly cash flow checks.
We still keep the apartment in the partnership and every quarter like clockwork the investor continues to get payments. From years 3 - 5, the general partner is looking for an attractive exit (sale) take the profits and reinvest into the next value add opportunity. Most of our investors will roll into the next deal. Most value add operators do this but you could find apartment community syndications that just hold these assets for yield, its just not the most optimal return for investors w/the value add plays.
Where is your Bay Area investment? Think twice before selling any investment prop locally, *especially* if it's in a prime location. If that's the case, you have locked in a low property tax base, and a fantastic (high paying, easy to find, easy to manage, etc.) tenant profile, which I would not want to loose. I'd pull money out of it to invest further. If you're not in prime locations, than that's a different story.
Yes do it.
And buy multifamily.
Leverage your capital.
Stay frosty.
@Sameer Jain Thanks for sharing your situation.
I would say that the key challenge when investing in SFRs (especially in the Bay Area market) other than the valuations are the actual management of these properties. How are you currently managing your rental condos?
Agree with other posters on here who suggest that from a return-oriented perspective, there are lots of very attractive multifamily investment opportunities, even here in the Bay Area in otherwise low-cap-rate-markets. I have worked with several real estate agents/brokers putting together multifamily deals in the 5%+ cap rate range. Let me know if you'd like to discuss further.
IM
@Sameer Jain Thanks for sharing your situation.
I would say that the key challenge when investing in SFRs (especially in the Bay Area market) other than the valuations are the actual management of these properties. How are you currently managing your rental condos?
Agree with other posters on here who suggest that from a return-oriented perspective, there are lots of very attractive multifamily investment opportunities, even here in the Bay Area in otherwise low-cap-rate-markets. I have worked with several real estate agents/brokers putting together multifamily deals in the 5%+ cap rate range. Let me know if you'd like to discuss further.
IM
Why would you bother for 5%?
@David Traeger Depending on your view of the market, for Silicon Valley capital appreciation and the extremely strong rental market (quality of tenants, v low vacancy, consistent job and income growth...etc)