First Time Investors, Don't Know How to go About This

Multi-Family and Apartment Investing
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First Time Investors, Don't Know How to go About This

Chad Smith
New to Real Estate · Member since 2022 · 2 posts · 1 vote

Like the title says, my wife and I are first time investors and have never purchased a home let alone invested in multi-family. I've watched dozens of the Bigger Pockets Podcasts and I have gained a ton of knowledge but I still have the feeling of "not sure how to go about this". I found a 70 apt, 140bd, 70bth complex asking 3.1M (yes, I know this is a HUGE step especially since we have never done a single family let alone something to this size) in an area that is exploding in population due to the city's military growth 5 minutes away. The military are experiencing a housing shortage in this area so we know tenants wouldn't be hard to find. Quick background, we are vets and did live in the area (not anymore) where this complex is so we know fairly well what rent goes for, the population growth, how high the demand for housing, etc. We have almost 3% of the asking price to put down. I did the numbers on the BRRRR calculator as best as I could given the information provided by the listing and some other sites and if we purchased this for asking price, rehab some to half the units for 300K-400K, and refinance appraising at 4M, the ROI is 22.5% with 19K positive cash flow. obviously, the numbers are good IF 1. I did the numbers right and 2. if we could even get a loan that high encompassing the rehab costs which I don't think we could. My questions are for more experienced investors then we are, is this possible for us to go after this and/or are we out of our depth and should stick to single family to quadplex for our first investment? Thanks anyone who has taken the time to read this or reply!

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Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
4y

You usually have to have 20-25% down on purchases…. 3% isn’t going to cut it with a commercial loan. You then have to have reserves behind that 20-25%.  Also know that commercial loans are typically amortized over a shorter time… typically 20 or 25 years, not 30… so your principle payments are bigger than with a residential 30 year mortgage.

I personally think you are WAY out of your league… the lack of that experience would also weigh negatively with a lender.  You need to start small… something with 1-4 doors.  Get your feet wet… figure out if you even like landlording… it’s not for everyone!  

Plus, you can’t Refinance until you rehab, which by your numbers is going to take $300,000 it sounds like you don’t have. 
lots of other questions… your positive cash flow of $19,000 - is that monthly? Or yearly?  Did you include a maintenance reserve in your calculations?  Did you include a management fee in your numbers - beyond the principle, interest, taxes and insurance?  What about utilities expenses? Who pays the water bill? and overhead expenses, like an office worker?

We would need more info to analyze everything correctly, but I don’t think it would change my suggestion that you need to start smaller.


all the best… randy

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  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    4y

    You usually have to have 20-25% down on purchases…. 3% isn’t going to cut it with a commercial loan. You then have to have reserves behind that 20-25%.  Also know that commercial loans are typically amortized over a shorter time… typically 20 or 25 years, not 30… so your principle payments are bigger than with a residential 30 year mortgage.

    I personally think you are WAY out of your league… the lack of that experience would also weigh negatively with a lender.  You need to start small… something with 1-4 doors.  Get your feet wet… figure out if you even like landlording… it’s not for everyone!  

    Plus, you can’t Refinance until you rehab, which by your numbers is going to take $300,000 it sounds like you don’t have. 
    lots of other questions… your positive cash flow of $19,000 - is that monthly? Or yearly?  Did you include a maintenance reserve in your calculations?  Did you include a management fee in your numbers - beyond the principle, interest, taxes and insurance?  What about utilities expenses? Who pays the water bill? and overhead expenses, like an office worker?

    We would need more info to analyze everything correctly, but I don’t think it would change my suggestion that you need to start smaller.


    all the best… randy

    3Reply
  • Chad Smith
    OP
    New to Real Estate · Member since 2022 · 2 posts · 1 vote
    4y

    Fair suggestion and I agree that we need to start small. I did take in consideration all the numbers such as maintenance reserves, management fees, taxes, etc. but we did not know about amortized over a shorter time for a commercial loan which will for sure skew the numbers. Thanks for replying so quickly. 

    0Reply
  • Don McQueen
    Real Estate Agent · West Olive, MI · Member since 2016 · 9 posts · 3 votes
    4y

    I'm in agreement with Randy on this one.    I always look for history and experience in some regard.    Scaling the business as I like to think about it in my "normal" job.    You need to show lenders and partners that you are going to be capable of pulling off such an investment.    Maybe you have some investors or some background that you didn't mention in your note.   Certainly, I appreciate and like the moxy by going big but you may want to consider your foundation and strategy around the long term.  Best of luck in your journey.    

    1Reply
  • Brent Romeo
    Investor · Seattle WA · Member since 2021 · 8 posts · 5 votes
    4y

    You are definitely out of your league. I love where your mindset is at though. A Multifamily apartment complex over 5 units is a commercial property. The way you are approaching this if from a single family mindset. Biggerpockets has about 50+ hours of multi family mentor podcasts. I would start there if you are interested in learning more about large multi family. Also consider purchasing the biggerpockets multifamily millionaire books. The first one is for smaller multifamily and the second is about larger multi family. There are a number of other great books. Joe Fairless Apartment Syndication book is probably the goal standard

    1Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    4y

    @Chad Smith, while I typically agree with others, I also know people who started and have been successful with larger projects right from the get go.

    Where I agree with others is that you may not have the basic knowledge to know where your holes are, i.e. the financing side. You will need typically 20-25% down, and in today's market and going in yields, you will likely be even lower due to DSCR. Additionally, loans this size will require the guarantor to have a 1:1 net worth, and likely about 10% liquidity. So with 2.5mm loan, you will need 2.5mm net worth and 250k of liquid assets to show a lender to secure the loan.

    1Reply
  • Shalini Kadaveru
    Investor · Northern California · Member since 2020 · 33 posts · 17 votes
    4y

    @Chad Smith, Have you tried to bring in an experienced operator to the deal? Since this is your first deal, an experienced operator will remove obstacles that you might face in securing lending, raising capital, and asset management. Of course, you will make less but don't try to hit the ball out of the park on your first deal. While the returns will be lower, it could be a great learning experience that will set you up nicely for subsequent deals. Use Biggerpockets and attend local REI meetups to locate established, experienced operators in your area.

    1Reply
  • Joseph Gozlan
    Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
    4y

    Military bases in town sound great on paper but there are a few things to consider then looking at military towns:

    1) military bases DO close once in a while. Unless it’s a navy base that relays on a natural resource (marina) the risk is real. Even huge bases were closed before. 
    2) the closer you are to base the higher the crime yet (usually). Why! Because 18-20 y.o. Kids are stupid, getting in fights, consume drugs & prostitution. Sounds bad but it’s real.

    3) legally, if a military member is deployed, you HAVE to release them from the contract and if 40 of your 70 units has military personnel, you could find yourself with 40% occupancy.

    Just food for thought… 

    0Reply
  • David Bain
    Agent · Honolulu, HI · Member since 2017 · 97 posts · 48 votes
    4y
    Quote from @Chad Smith:

    Like the title says, my wife and I are first time investors and have never purchased a home let alone invested in multi-family. I've watched dozens of the Bigger Pockets Podcasts and I have gained a ton of knowledge but I still have the feeling of "not sure how to go about this". I found a 70 apt, 140bd, 70bth complex asking 3.1M (yes, I know this is a HUGE step especially since we have never done a single family let alone something to this size) in an area that is exploding in population due to the city's military growth 5 minutes away. The military are experiencing a housing shortage in this area so we know tenants wouldn't be hard to find. Quick background, we are vets and did live in the area (not anymore) where this complex is so we know fairly well what rent goes for, the population growth, how high the demand for housing, etc. We have almost 3% of the asking price to put down. I did the numbers on the BRRRR calculator as best as I could given the information provided by the listing and some other sites and if we purchased this for asking price, rehab some to half the units for 300K-400K, and refinance appraising at 4M, the ROI is 22.5% with 19K positive cash flow. obviously, the numbers are good IF 1. I did the numbers right and 2. if we could even get a loan that high encompassing the rehab costs which I don't think we could. My questions are for more experienced investors then we are, is this possible for us to go after this and/or are we out of our depth and should stick to single family to quadplex for our first investment? Thanks anyone who has taken the time to read this or reply!


     I love to see the motivation.  What market are you working on this in? 

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