How to Bust into Multifamily Apartment buildings?

18 Replies

Hello Everyone,

I currently own one four unit apartment that I purchased for $193,500 and rents for $2300/month. When I bought the proerty it appraised at $217,500. I paid only $3,500 down for the property using an FHA loan. My interest rate is 3.5% with a 30 year fixed loan. I do not plan on selling this since it is such a low rate. I have increased the value of the property by raising the rents. ( when I first bought it rents were $2,085/month). I have the goal to bust into large apartment complexes 5+. I am 25 years old and have 19k in the bank not including 10k in reserves for the property. What are some strategies you use to get into this space? Do I keep buying smaller multi family properties like duplexes and eventually sell to 1031 exchange into higher units? Do you refinance and pull out money? Try to find sellers to do owner financing? What would you do in my situation? How long did it take you to get where you are?

Thank you for your time and responses! 

I'm not there yet, but working on it.  My mentors suggest you want to have about $100k to get started as a solo owner in the my MSA.  Might be less in the midwest.  

All the options you mention are potentially viable.  You could also do some flips using hard money and cash partners to generate some additional capital.

I'm buying SFRs to generate cash flow and capture equity that will allow me in a couple years to have the capital to jump into MF if I cash out a property or two.

@Matt Heath great plan, I own a 44 unit in Atlanta and 48 unit in Ohio. Those were the first apartments I purchased. Right now I'm in contract on a 138 unit in North Carolina, so you can go larger quicker!!

All the strategies you mentioned are great, you can't go wrong by selling and 1031 exchanging into a larger deal, pulling out cash to put down on your next property is also a great strategy, and if you can find seller financing go for it.

The best tip I can give you is probably work backwards for each tool. See how much money you can get for a sale (1031) and see what you get out of your property on a refi. This will allow you to find the purchase price of your next deal. Work backwards to target a price range of you next purchase. Then in that price range find the deal that meets your goals. 

As far as timeframe it can happen quickly!! If you have any questions let me know, I would gladly help anyway I can

Originally posted by @Matt Heath :

Hello Everyone,

I currently own one four unit apartment that I purchased for $193,500 and rents for $2300/month. When I bought the proerty it appraised at $217,500. I paid only $3,500 down for the property using an FHA loan. My interest rate is 3.5% with a 30 year fixed loan. I do not plan on selling this since it is such a low rate. I have increased the value of the property by raising the rents. ( when I first bought it rents were $2,085/month). I have the goal to bust into large apartment complexes 5+. I am 25 years old and have 19k in the bank not including 10k in reserves for the property. What are some strategies you use to get into this space? Do I keep buying smaller multi family properties like duplexes and eventually sell to 1031 exchange into higher units? Do you refinance and pull out money? Try to find sellers to do owner financing? What would you do in my situation? How long did it take you to get where you are?

Thank you for your time and responses! 

 Mark, we are slow investors.  We went from 0 to 81 units in a little over 10 years.  That being said, all our buildings are solid, are appreciating in value and cash flow...in Michigan!

Do all of the above. There is no single way to purchase, no single way to grow. We purchased six separate deals and no two of them were the same, but they all built on each other. We were told about the first one, cold called on the second, were contacted by a frustrated landlord for the third, responded to an MLS listing on the fourth, received a call from a friend who was contacted by a broker on the fifth and had the same broker give me a pocket listing on the sixth.

Put it out to the universe that this is what you do (apartment investing) and deals will start to hit your radar.  

Why do you want to get into larger properties? I have a 20 unit apartment and many 1-4 units and the returns on the 20 unit are less and it's a bigger headache. I look at bigger properties for sale all the time and the returns look terrible compared to what I get on smaller properties.

If you're looking for a short-cut to wealth with larger properties it's probably possible but it's also highly possible you'll lose what you have worked for so far.

@John Cohen

I would love to speak with you on how you got started and about your experiences! I would love to hear the details on your deals. How much money you needed down, cap rates, ect. I am not familiar with what the criteria is for commercial multi family is with acquiring a loan. Does it depend on the specific bank as to what down payment is? Do you ask for the trailing 12 months to analyze each deal?

As far as working backwards,  do you appraise the property first and then compare the refinance to the 1031? After doing that do you look for properties in your price range? 

Thanks again for your time and input!

@Jeff Kohl - what problems have you had with ccommercial multifamily? I want to get into larger pproperties because with larger deals comes larger values of income.

Originally posted by @Matt Heath :

Hello Everyone,

I currently own one four unit apartment that I purchased for $193,500 and rents for $2300/month. When I bought the proerty it appraised at $217,500. I paid only $3,500 down for the property using an FHA loan. My interest rate is 3.5% with a 30 year fixed loan. I do not plan on selling this since it is such a low rate. I have increased the value of the property by raising the rents. ( when I first bought it rents were $2,085/month). I have the goal to bust into large apartment complexes 5+. I am 25 years old and have 19k in the bank not including 10k in reserves for the property. What are some strategies you use to get into this space? Do I keep buying smaller multi family properties like duplexes and eventually sell to 1031 exchange into higher units? Do you refinance and pull out money? Try to find sellers to do owner financing? What would you do in my situation? How long did it take you to get where you are?

Thank you for your time and responses! 

 Matt, one of the issues you'll face as you look to bigger properties is obtaining mortgage financing.  At a certain point, the lenders will consider your personal net worth when providing financing, even if the debt is non-recourse.  Generally, speaking, a lender will require you to have a net worth equal to or greater than the value of the loan they are giving you, with ten percent of that liquid.

There are a couple of ways around this.  One is to partner with someone who has a stronger personal balance sheet than you, who is willing to sign on the debt with you.  This will require you to give up some equity to them.

Another is to avoid the problem by slowly building your net worth by sticking to properties you can finance with your personal balance sheet.  Of course, this will have the effect of growing your balance sheet, and after a few years, things will begin to snowball.   As your net worth grows, you can take on bigger and bigger projects, and your net worth will grow accordingly.  

You're 26 and you are off to an excellent start.  I did not get started until my 40s, so I envy you.  You have the advantage of time and compounding, so even if you just add 1-2 properties a year to your portfolio, you will have a very substantial net worth by the time you are 36, and this will allow you to take on even bigger projects without sharing with anyone (other than investors, if you need/want them).  I look forward to hearing about your progress.  Keep us posted!

@Matt Heath congrats on the success with your first property. Your next step is determined by your goals, skills and time commitment. 

If your goals are to increase a significant amount in a timeframe that is shorter than what you could personally fund then I'd look at deal syndication (that's what I do). If you have goals that allow you to use your own income then do the save, buy and 1031 approach. You can also 1031 with your investors if you buy with them via syndication. 

Re: skills, you'll want to follow the path that most closely aligns with what you enjoy doing. For example, if you enjoy the property mgmt of the process then perhaps you should focus efforts on building a property mgmt company in the multifamily space then build your portfolio by partnering with prospective clients. 

Re: time commitment, if you truly want to burst into the industry then it's going to take a significant amount of time every week to do so. Is this a #1 priority in your life? #2? #89? 

Once you have those things identified then simply find someone or someones who are doing it and learn how they are achieving the success then take a similar approach. 

Most my assets are in gold and silver investments should I liquidate that to use as leverage as a diversified portfolio by purchasing a multifamily apartment of at least 100 units. I am a former mortgage broker and would like to get in now into real estate as an investor. I work part-time as a mental health counselor and while money is great; I desire more... how many hours  is considered a good trade off for locating properties locally and nationally? Is there a software program that identifies lucrative properties based on data input? If so who do you recommend and where to buy the software or is it in the cloud -- a free web site?  I attended a free seminar David Lyndahl who was selling software for and a second hands-on course for $1500. What are your thoughts about these seminars -- are they hype?

Originally posted by @Raymond Ebbeler :

Most my assets are in gold and silver investments should I liquidate that to use as leverage as a diversified portfolio by purchasing a multifamily apartment of at least 100 units. I am a former mortgage broker and would like to get in now into real estate as an investor. I work part-time as a mental health counselor and while money is great; I desire more... how many hours  is considered a good trade off for locating properties locally and nationally? Is there a software program that identifies lucrative properties based on data input? If so who do you recommend and where to buy the software or is it in the cloud -- a free web site?  I attended a free seminar David Lyndahl who was selling software for and a second hands-on course for $1500. What are your thoughts about these seminars -- are they hype?

All the information you need is for free on here. Just search or ask if you can't find it. No sense paying $1500 

@Matt Heath

Hi Matt

What is your strategy?  Are you going to invest by yourself or try to partner? If you use a partner, you can manage the property and get a management fee.  You can raise money and structure your partnership in countless ways.

It all depends on your feeling a to the size of the property.  I own a 25 unit and 281 unit property.  Economies of scale are huge wit larger properties, you can afford to hire a team to help with running the asset.  It depends on your mindset. Do you want to be a landlord or do you want to grow a portfolio.  Start in your comfort level, but don't be afraid to look at bigger properties.

Gino

@Gino Barbaro - Wanted to provide an update since it has been several years. I have continued to invest by myself with no partner. I have grown to 24 units and am looking to purchase a 24-32 unit apartment Jan/February 2022. It has been frustrating as I would like to grow quicker, but have been using my own capital. I have realized that larger apartment deals make more sense to invest in because when you an increase NOI, you can substantially increase the value and grow quicker. Do you have any tips on trying to find off market pocket listings and negotiating them to get them below market? I have a couple of broker relationships, but I feel I have not gotten a solid deal as every deal i have seen from a broker the seller wants top market. I have also noticed that brokers are very unrealistic with their pro formas and they evaluate a deal based off where the market rent is and not what it is currently bringing in. Do you have any suggestions on how to negotiate through this?

@Joe Fairless - What has been your strategy to grow your portfolio in the multifamily space? Also you mentioned using the 1031 to grow. When do you know is the right time to either cash out refinance or to sell? I have not sold any property as It take so much work to buy and they still cash flow. I have gone the cash out refi route as my exit to buy however. I am concerned with the rising interest rates and if i refi i will be below the DCR threshold needed to be able to continue to refi once my ARM loan is due. Are there ways you use around this?

@Jonathan Twombly - Wanted to circle back with you as it has been a few years. I have continued to use my personal financial statement to grow as you have mentioned. I am looking specifically in the Wisconsin market, but am getting to the point where I want to substantially grow my portfolio. I do not have a mentor, but would love to connect to hear about your story. Would love to hear your strategies on negotiation for deals, underwriting, and growing a business. My dream would be to quit my job to start a business to buy apartments full time. 

@John Cohen - Would love to see where you are at with your current portfolio and how you go about finding your deals. Also, for property management, I currently pay 8%. How does the breakdown typically work for PM as you scale? Also, how do you go about finding quality PM companies? 

@Matt Heath Long time no talk!! Glad to see the growth. We have gone full cycle on 15 properties, and still own 12. About 2,500 units give or take. Deal flow is there, but GOOD deals have been tough to find. We are grinding like everyone else. Our management fees are 3% across the board on our sites, but we have much larger sites. Best way to find good management is referrals!! Also tour their properties and see how they run sites. 

@John Cohen - It has been awhile for sure!! Great to see you are still crushing it! Did you guys have to restructure or adjust how you operate your properties due to covid? Do you source most of your deals through brokers or do you do direct marketing? I have seen that a lot of the deals I have received through brokers have very unrealistic pro formas and are selling based off where the market value is for rents even though the rents could be $150 below market. Is this typical in the apartment space? Do you negotiate around this or do you just find distressed deals and try to get them 65-70% below market? 

Thanks for the insight on touring the properties that the managers run, I will for sure consider that! 

@John Cohen

Hey John , congrats on your new acquisition ! I’m striving to be in your position , I also love in the Nc area . If you can elaborate a little on your 40+ unit deals , how you found them , the analytics , how you financed them and all that good stuff . Currently , I’ve been looking for a 20-35 unit apartment complex in the 1.5-3.0 million , I’d say I’m liquid enough for DP and post liquidity but just wanted some guidance . Thanks John