Transitioning from Residential to Apartments

29 Replies

Hello All,

I currently own a 6,000 square foot triplex in Los Angeles, California that I am doing Airbnb on two of the units and renting one. I have been cash-flowing very well for the past few months but prior to buying I was very interested in owning Apartments. I went ahead with the triplex because I though it would be good to get my "feet wet". However NOW my interest in Apartments is back and I've been looking at a few deals in Long Beach, California. I want to pick all of your great apartment investors brains as to how to approach now my first Apartment deal. 

First off I don't have a huge portfolio yet obviously so I'm curious how do I approach the banks? 

Do I need to go into my first deal with someone who currently has apartments?

Also I have been meeting with some local investors who are interested but will that be enough to to get full funding for the deal?

I greatly appreciate your guidance on this and any strategies you have to go step by step closing my first apartment deal would be great!

thank again

@Lionel Henderson if you don't have the finances to cover whatever size property you're looking at, then you're going to need someone to be at least you're balance sheet partner. Even if it's non-recourse, banks and mortgage brokers and agencies need to see you can cover the loan anyway.

If you're worried about the lack of experience, it's definitely a good idea to look for more experienced operators and try to work out some sort of a JV structure that works for both of you.

When you start to talk to investors, at some point you have to ask what they would be willing to put behind a deal if one came up. If they balk at that, they'll balk when a deal actually comes up. They might low ball or overshoot what they'll actually do, but thats a different issue entirely. You also need to set their expectations. Say something like, "if I had a deal in x, y or z market that was a 3-7 years hold, made you an average of 8% cash on cash and a 15% IRR is that something that you would invest in?". That way when you have a deal like that you know who to go to. OR they might say no I need at least 10% COC and the IRR doesn't matter as much, or maybe the want to be in and out after 2 years, or maybe hold for 12 years, or want an 18% IRR, etc. My point is you won't know until you ask or you set their expectations accordingly from the very beginning.

Hope that helps!

@Lionel Henderson I don't know squat about securing financing in the LBC (lived there for a few years) but I'll give you my perspective from going through the whole "lend me money for a 5+ unit apartment".  I wouldn't be overly worried about approaching a bank.  If you're looking at deals in Long Beach and have an agent there, I'll guess they can give you 3 names of people in the commercial division of local/regional banks.  After all, his/her previous clients have to have gotten financing from somewhere as well.  Call them up and say that you're working with _____ and looking at an apartment building in ____ and he/she suggested they call you.  You can at least get an overview of the process, maybe meet with them, ask for any preliminary paperwork to fill out, etc.  

What could put a monkey wrench in your plan is when you mention "meeting with some local investors that are interested".  Are they fronting you the money?  Going to be equity partners?  Going to be HMLs to give you time to go through the financing process?  Are rehab dollars involved?  Are these local investors interested in signing off on a full-recourse loan?  Will you have any money in the deal?  Etc.  So there are another 50 questions that will come up just from that line of thought.  

I have zero idea how happy/sad/confused the second paragraph would make that commercial loan officer.  Maybe they are happy to help you work through that.  Maybe it just sounds like a lot of fluff and that you're wasting their time because you don't have a 'plan'.  I never had to address any of those things because it was just boring ol' me with W2's, bank statements up the wazoo, PFS filled out, and a pile of other "stuff".  

@Lionel Henderson i went from 10 turnkey rentals to 625 mfh units in 2017. I can tell you it took a couple of years to transition and it’s not best for everyone.

@Chris Grenzig Thanks for the response!

I've had a few investors overshoot on me and had to learn that when you start asking more closing type questions the answers change so I thank you for that I'll keep that in mind.

Also yes I love the structure of the questioning you providing I'm going to utilize that with future meetings. Setting the expectations from the beginning is very important. I've come across many who are just looking for a 7% return on a 2 year investment. Now I'm at the point of structuring deal accordingly. Any advice on best ways to structuring proposals to investors?

thanks Again Chris  

@Andrew Johnson Glad to meet a local ex LBC resident :) 

I absoutely agree and I would prefer to not even mention any of that to the bank but have the deal sealed up and going in a partners on the deal. These are good question Andrew

I appreciate input the I'll definitely keep that in mind when working through the process. 

@Lane Kawaoka Wow Lane amazing growth congratulations!

I understand that its not for everyone but it's for me and I appreciate your input.

Do you have any tip from going through the process that I can take from your journey?

thanks Again 

P.S. 

I'm available to be your apprentice :) 

HI Lionel,

I know LBC probably looks like the last bastion of MFH available since the prices are so high in LA and OC but it really depends if you want to be an active investor or a passive investor.

They both have their pro's and con's.

Being active you can make much higher returns while being passive you can make decent returns too with a lot less systems, headaches, and management. 

If you have a knack at creating systems, hiring, and putting good people in place to operate  or manage an active investing operation then you might be better suited for passive investing.

The downside with passive is that you make a lot less returns and have little to no control over the asset.

@Lionel Henderson

HI Lionel

Why do you want to jump into apartments if you have found a niche that is working and that is much less capital intensive.  I would look into these smaller properties and consider vacation rentals. I have partnered with a couple of guys here in St Augustine and we rebuilding 4 vacation rentals. The model is different than apartments, but they cash flow very well.

I would not be concerned with approaching banks just yet. Make sure you want to invest in Long Beach, and when you have decided that's the market, continue to build a team. Refine your business plan so you can share with local investors. Approach the brokers and let them know what you are looking for. Once you start getting deals, analyze to see which work.

I would consider either partnering with someone or raising capital for your deal.

Gino

Originally posted by @Lane Kawaoka :

Lionel Henderson i went from 10 turnkey rentals to 625 mfh units in 2017. I can tell you it took a couple of years to transition and it’s not best for everyone. 

@Lane Kawaoka  When you say 'it's not best for everyone', what types of things are you thinking of?  Thanks.

I only have experience on residential units , building less than 4 units. Read some where that if is more than 5 units have to deal with anual inspection and regulation more often. Any advices on those?

@Lionel Henderson I can say that the transition is a long play, and it requires building a strong team. You can still find ways to finance a large deal if you are able to raise the DP. 

 Do I need to go into my first deal with someone who currently has apartments? Yes, especially if you are raising capital from a network of investors for the first time

Also, I have been meeting with some local investors who are interested but will that be enough to to get full funding for the deal? Well, it depends on the deal size and the verbal commitments you get from these investors

Hope this helps, Lionel. Goodluck. Thanks! - Ola 

Hello Lionel. Great questions. I would recommend looking into the specialists in your area that deal exclusively in multi-family investing. I have properties in San Pedro and Long Beach and do a fair about of deals in those areas. If you're looking to connect with some locals let me know. I'd be happy to assist you. 

@Eric James  After over a few hundred investor consultants over the past couple years here is what I tell W2 employees. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool... but just remember why we got into this... To be free from a JOB. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

@Lionel Henderson learn it but it will take some time a couple year. You need to team up and partner. You are an outside until you do. Let me know if you need any help.

@Lionel Henderson Thanks so much for starting this thread and asking these questions! I'm in a similar position you're in myself and have a desire and a goal to start acquiring multi-family properties too. Been reading through some of the responses here and there's definitely some great stuff and some stuff I've benefited from reading through these as well. So thanks for asking and putting this out there! The responses are definitely providing answers to more than just yourself. 

And thanks to everyone who is responding! Y'alls advice and input is super helpful.

Additionally, if anyone would like to talk about investing/looking for opportunities in multi-family in Nashville, Memphis, Chattanooga and possibly Indianapolis I'd love to chat with you!

Wow everyone's responses are much appreciated thanks All

@Marquise L Davis I am very interested in meeting with locals thanks for your assistance.

I actually live in San Pedro and have seen a few good deals out here. I'll send over a connect request to you. 

I don’t necessarily think there’s a perfect formula to becoming an Real Estate investor! I took a real out-of-the-box path and it’s worked out great! I purchased my first multi family on a credit card and used Airbnb for the higher returns to pay back. Just an idea that came to me one day when I really wanted to get into real estate investing but didn’t have the capital to start it. Now I’ve got capital and plenty of investors but want to take it to the next level.

@Lionel Henderson Gary V says the first step is self awareness. Where are you in term of time money or knowledge.

After over a few hundred investor consultants over the past couple years here is what I tell W2 employees. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool... but just remember why we got into this... To be free from a JOB. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

@Lane Kawaoka Thanks Lane thats so true your knowledge is much appreciate and I respect Gary V very much so that advice will be taken and used.  

thanks again for all of your responses!!! :)

The multi family investments that seem to have pretty good returns are value add plays. But, these arent passive investments either. Lots of work. Those that arent value dont seem like a good enough return to me, from what I have seen.

Congrats on your triplex success @Lionel Henderson

To answer your questions: 

  1. Depends but you certainly won't to have a relationship or start building one with a commercial lender. Make sure you understand the difference between recourse and non-recourse loans and how they apply to certain properties. 
  2. You will greatly benefit from partnering with someone who has apartment experience. With the help of my partners I closed on my first apartment complex a few months ago:  https://www.biggerpockets.com/blogs/8160/67620-purchasing-our-first-apartment-complex
  3. Depends. What kind of deal are you looking at? 

How can I help you?

Thank you @Jay Helms

You story is inspiring and congrats on your first Apartment complex!

I read your story and I can definitely relate thank you for sharing.

How did you structure a 9 investor deal great good?

I'm also curious what was that deciding factor to move into the the apartment side of RE?

I'm looking at deals here in southern California any where from 8 - 16 units yes they are much more in cost however number are still good for LA areas. I saw your in Florida and I'm also told that is a very good market. Would you purchase out of the state at this point in your career?

I appreciate your time.

-Lionel Henderson

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