How Big is Too Big For a Beginner?

Question

Justin Case · Answer

I bought $1,000,000 purchase as my first purchase at 26.

Research the hell out of it. Run all the good and bad scenarios on a spreadsheet.

Be sure to have enough Management Reserve

Measure all potential risk.

Joe Fairless · Answer

@tom

@Tom  Scott  Here are my thoughts to your questions:

Re: what are the chances a complete real estate novice could put together a deal in the 1-2 million dollar range?

You're only limited by the limits you set on yourself. Yes, it's possible to do it. It's been done before.

Is it feasible to try to buy a complex of that size with essentially no experience?

Experience and knowledge are two different things. You need knowledge and, if you don't have experience, you need to surround yourself with people who have experience. I also wouldn't dismiss your business experience in related fields because that can be applicable as well.

How would you finance something that size?

Way too many options to list out. I recommend you speak to some mortgage brokers and learn about all the different loan options out there. I'd also read some commercial real estate financing books.

Overall, sounds like you've got an ambitious approach which is great! Now I'd focus on acquiring knowledge on all aspects of the process and building out your team with people with seasoned experience.

Ben Leybovich · Answer

Pass it - it'll never get financed...

But that's not your main problem.  A bigger problem is that you just don't have the experience to do something like this.  The basics of investing are as follows:

a. Don't loose

b. Win

The first is a function of your analysis, which in tern is a function of your experience.  The upside doesn't matter unless the down-side is protected.  You can be the smartest tack in the box, but if you have never pinned a single thing then the only thing you know is the inside of a box - you don't what you don't know; this comes with experience.

So - stop thinking about it.  It would be wrong for you to take anyone's money - very immoral indeed.  And, the banks are very unlikely to consider you as a lendable commodity as well.   Growth take time and that's OK Tom...

Michael Lemieux · Answer

Wow, lots of interesting posts here. I always like reading post by @Joe Fairless , same is true here. Thanks Joe. I've got a similar, although MUCH larger project in mind. I've got some advantages, in that mine is a neighborhood that I can take bit by bit.

Although he had some backing, (dad in the bus.), Trump's first project was Trump Tower in NYC @ 29 years old.

I haven't proved it to myself yet, but I love the "go big..... go home" idea. Good luck.

Joe Fairless · Answer

@Tom  Scott  your deal is very similar to one I'm evaluating in the Cincinnati MSA. A couple questions that I'd think through if I were you:

- how to finance?

- why hasn't someone else developed there?

- cost of development vs. return from income?

- capture rate (# of eligible renters / existing units + any new apts being built). You need it less than 10 and ideally less than 5

- in Option 2, can you make it have separate entrances? And maybe connect the two via walking paths - that way you can command different rents while sharing some amenities

So, so many other things to consider but those are my initial thoughts.

Robert Leonard · Answer

@Tom  Scott  there's a great story in the book "The ABCs of Property Management" by Ken McElroy about a property that sounds a little like the one you are looking at.  Not the same scale, but the same mismanaged state of the property.  I highly recommend the book for insights into what to consider when looking at multifamily properties.  It's a quick read, but probably won't help your immediate question.

I think @Joe Fairless nailed it when he said surround yourself with people who have experience.  That's how you overcome your own lack of experience and learn from professionals.

Paul Timmins · Answer

@Tom  Scott

Welcome. Congrats on looking at the deal. Student Housing can produce 4 times more rent. Fill in the foundation below.

Check out the Start Here page http://www.biggerpockets.com/starthere

Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.

Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having over 70 past ones to catch up on.

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and rehabbers.

Two Great reads, I bought both J. Scott The Book on Flipping Houses,The Book on Estimating ReHab Costshttp://www.biggerpockets.com/flippingbook

Consider checking out HUD homes for small multi's owner occupied gets first crack.

You might consider Niche or Specialized Housing like student housing. Rents can be 2-4 times more. Remember you don't have to own a property to control it.

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good Luck

Paul

Michael Blank · Answer

@Tom  Scott  I think you thinking big out of the box is a good thing. Don't ever change that. Most people make the opposite mistake and limit themselves by thinking small.

On the other hand, the practical advice and caution by others in this post are worth paying attention to also.

If you're going to raise money, read posts from @Ben Leybovich   and myself on the Bigger Pockets blog 'cause we tend to write about apartment building investing and syndication. Read 'em from cover to cover and you'll get a ton of information. Then, as @Joe Fairless advises, build an "advisory board" of other experienced investors and leverage their expertise.

Good luck, you're on the right track !!!

Tom Scott · Answer

Wow guys thanks for all the input. Right now it is all theoretical but I am going to do some homework and try to see if it could actually work. The property has been on the market a while and they keep dropping the price so I am guessing the place probably isn't cash flowing because of poor management.

The strange thing is that the project is so large that if I did manage to get investors and proceed, there would really be very little risk to me other than my credit and lost time should it fail. I have nothing other than sweat equity to stand as collateral for the property so financially I would have very little exposure.

Tom

Jean Bolger · Answer

You sound like a smart guy, and the fact that you're thinking bigger than most new investors is great. IMO, the question "how much money do you have to put in?" is probably the key here. Followed closely by "How much money can you afford to lose?" I'm not joking, nor am I trying to imply that you would necessarily lose money. But I would caution against a risky and complicated transaction (which this would be, for a newbie) unless you've got LOTS of reserves, because what you don't know yet  will cost you, both in time and money. You're just not going to be able to do as fast and efficient a turnaround the first time as an experienced investor would. (how do I know? I'm in the middle of my first major turnaround right now, lol) And if losing a considerable amount of money at this point in your career would cripple you in terms if being able to dust yourself off and find another deal then I'd suggest you back away and get a few "sure thing" deals under your belt first.

How Big is Too Big For a Beginner?

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