No value-add MFR left, how about turn-key as a new strategy?

10 Replies

I've been absorbing as much info as humanly possible for the past year about multi-family. I've been looking and analyzing properties for 6 months. I don't have any experience in MFR; just SFR. The MFR market is crazy out there right now and the more people I speak with who know what they're talking about the more it seems that now is just not the right time for a guy like me to be looking for value-add buildings. I'm thinking my new strategy should be to look for a good starter property that a previous investor has already turned around and buy it as a turn-key MFR. I wouldn't realize any forced appreciation myself but could park some of my own money into it and effeciently run it for a few years until I have gained some experience and the market cools down (or bursts). I would need something that was secure and could at least give me a nice ROI where I could essentially protect my capital and have a nice cash flow to continue to build more. At the same time I could begin to find investors who would now see my track record and lenders would be more open to work with me as well. Everything I have been studying has been the value-add model and using investors to secure capital. I've never seen anyone on here talk of turn-key and not using outside investors. All my analyzers and courses have been this model so I'm not sure how I would go about looking for properties with this new strategy. Now I wouldn't have a 5-10 year exit strategy to refi or sell to pay back said investors. What might this new exit look like? I have about $150,000 tied up in mutual funds that I'd like to put to better use and I'm about to unload a single-family which should put around $75,000 in my pocket. I work a full time job and overtime with my family so I don't have nearly enough time to devote to the value-add/investor model that I've been trying to work with. I see lots of adds for turn-key SFR all the time but prefer to focus on MFR for economies of scale and time compression. I'm assuming I'd look at GRM for du/tri/quads and still look at CAP for anything bigger but now these numbers would be in a much different range for a place that needs no work and has solid tenants and management. Does anyone know what these numbers might look like, where I might start to look and if it's even a viable option?

Have you considered other markets with someone on the ground like Illinois. The value adds do appear to be a little more scarce do to the market and increased interest in them but they are still available.   I'm looking at a smaller 12 unit property now that needs some updating, repairs and tenants.  It has really great potential.

Karl 

Karl, I'm open to any market if it makes sense. I'm also open to partnering. The general consensus I receive though is that the market is very thin. My biggest obstacles are time and experience. 

Value-add Multifamily is out there. If it weren't, I wouldn't be closing on one this week.  I think you nailed it, however, in your own post. What you need is experience. Raising money from other people to buy an apartment complex is far less likely when you don't have experience and a proven track record. Unless, of course, you happen to have a lot of wealthy friends & family that believe in you so much that their willing to risk their hard-earned money while you practice a new craft.

Perhaps you should look for smaller value-add properties that fit within your own financial resources. Utilize these to build a track record and go bigger each time. There will come a time when other people will see your success and want to be a part of it. Maybe it's just a couple of people and they can only take you to an incrementally larger property. Fine, it builds your track record even further and if you do a good job you will grow organically and capture the interest of larger slugs of outside capital over time. 

Can you buy stabilized deals?  Sure, but owning a turnkey property doesn't build a track record of successful value-add execution.  But, it does at least give you experience owning apartments, which is at least a start and better than no experience at all.  Experience opens a lot of doors...investors, sellers, brokers, lenders...they all want to work with people who are proven.  And most of all, experience brings you to a place where you can properly underwrite an acquisition and seperate what really is a good deal from what the uninitiated think is a good deal...or improperly throw out as a bad deal.

@Mark Neiger I would first resolve the internal conflict of not having nearly enough time to devote to finding a value-add deal vs. trying to find a value-add deal. It takes a lot of quality time to get a value-add multifamily deal. That being said, there are deals out there (I'm closing on a 250-unit value-add in Houston on July 31st), but it takes relationships and experience.

Here are two specific recommendations: 

  • Look for angles into deals that other people don't initially think of - for example, Master Lease - When I first got started I did a 168-unit deal and raised money from my friends who knew me from different areas of life (i.e. full-time job, flag football, brother's friend, alumni board I'm on, etc.). And the deal was on LoopNet BUT nobody had approached seller abt doing a Master Lease - he was fine with it and we closed. 
  • Partner with a local mgmt company and give them equity in the deal. They must have track record of implementing value-add deals. This will get you deal flow plus another local partner in the market seeking out deals for you. Ideally they also invest some of their own money into the deal because this will help align interests for the deal - which will also help you with raising money. 

How do you think the turn key provider got the property to sell to you at a profit?

Odds are, the turnkey provider found a 'deal', put a significant amount of money into it, and is selling it at a profit.  Find a turnkey BEFORE the other savvy investors find it.

Calculate your Mutual Find returns, and never go below that number.

@Eric D. may I ask you what the "Mutual Find" returns are and how you calculate it/them?  Thank you in advance.

Buying turnkey is buying at retail, which isn't where the money is made on your end. I'd suggest sticking to the area near you. Maybe send out some mail to tired landlords of small multi's and you'll possibly find a gem near you that you just haven't uncovered yet

I love turn key on the other hand, I don't know much about MFR turn key but on SFR, I would buy them all day long as far as the number work out, I bought turned key from MLS and wholesaler before with more than 12% cap rate. put together a good financing in place to shoot your ROI through the roof and you will be set for years.

I believe that if the cash flow is solid, appreciation will come

I'm with Brian and Joe on this one, they are out there but it is very much a relationship game. 

We are in contract on a 97 unit value add here in Houston as well, and it is was brought to me by a friend who is a wholesaler. Yes it takes looking at a lot of deals, but they are still available.  You just have to make sure that you do your due diligence and stick to your numbers. 

Originally posted by @Joseph Nguyen :

@Eric D. may I ask you what the "Mutual Find" returns are and how you calculate it/them?  Thank you in advance.

 The OP stated "I have about $150,000 tied up in mutual funds that I'd like to put to better use".

That should be the comparison between what his turnkey RE investment might make and what he is getting now.

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