How Big is Too Big For a Beginner?

18 Replies

What are the chances a complete real estate novice could put together a deal in the 1-2 million dollar range? Is it feasible to try to buy a complex of that size with essentially no experience? How would you finance something that size?

Tom

What kind of money do YOU have??? You say put together a deal so are you talking doing a syndication trying tog et others to invest or do you have money of your own??

That will determine options on such a project. Whether said property is vacant, semi-vacant, or fully stabilized will be key as well.

Hope it helps.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

@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. 

Medium logo1Joe Fairless, Best Real Estate Investing Advice Ever | http://www.apartmentsyndication.com | Podcast Guest on Show #227

The details aren't clear yet, but this is what I know. There is an existing 3acre property with 36 units on it. Mostly 4plex and 8plex it appears to have been managed poorly and it is probably section 8, if it isn't it should be from the looks if it. The property is surrounded by much nicer apartment complexes that serve a hospital and university. Using the 2% rule the rents would justify a purchase price of 1.25 million. They want more but the place is pretty bad.

Here's the real tempting part. The land is zoned for 80 units per acre with only 2 of the 3 acres built on currently. I'm thinking you could build mid range student housing here and do pretty well. The issue I see is you would either need the cash to plow the whole thing under and rebuild or you need to try to stage the building in such a way as to allow the existing units to support the new construction until you can fill the new units and get rid of the old.

Each option has its challenges. Option 1 means you have to let leases laps before you can build and therefore need enough cash reserves to carry the property and build. Option 2 is problematic because even if you could build in stages, the new clientele is unlikely to want to move in right next door to the old tenants and their run down buildings.

With current rents in the area and building the land to max occupancy you're looking at a property worth around 6 million using the 2% rule. 80 units an acre is probably high, but even at half that your not doing too bad.

Tom

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.

@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

@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.

@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. 

Medium logo1Joe Fairless, Best Real Estate Investing Advice Ever | http://www.apartmentsyndication.com | Podcast Guest on Show #227

The hard part is definitely convincing people to invest with you when you don't have a track record. I would, generally speaking, start smaller. But I have heard of going big right off the bat.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Hi Tom,

I might have missed it but I didn't see the part where you mention if you have any money or not of your own to put into such a project OR are you trying to convince people to invest in  a project ( syndicating ) where you have no experience or  track record??

Really until this is answered speculation on everything else is a waste of time.

The type of exits to get the property to work takes a ton of experience to turn those around that you have mentioned. Unless you have millions of your own to try this I don't see you raising money for this deal. Talk to Brian Burke and Ben Leybovich about how hard it is to raise funds on projects that are much less risky than this one. 

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

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...

@Joe Fairless  Great posts!  

"You're only limited by the limits you set on yourself."  Wow, is this ever true!  Goes right along with my favorite quote of all time by Henry Ford which is in my signature :)

Ha!  Great minds think alike :)  That is also one of my favorites.

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.

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

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.

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

This post has been removed.

@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 !!!