Investing in Apartment Complex

23 Replies

Hi Guys,

I have been on BP for a year and a half now. My wife and I currently own two SFH rentals in Sacramento and Parma. We stopped making offers on SFH/MFH because of offers kept on getting rejected (Parma/Lakewood).

Recently an idea popped into my head. Why continue to invest in SFH or duplexes and why not invest in a 40 or 50 unit apartment complex? The goal is the same retire early (60 years old). However, I am aware that commercial is a different ball game.

I'm seeking advice from other investors who changed their strategy from residential or commercial. A good or bad idea?

Please help. I am happy to share any information.

Thanks,

Amir

Hi @Amir B. , a few points.

1. Expect many rejected offers for apartment complexes too. The market is hot for MFH so there is a lot of competition for deals. Don't think it will be much easier than SFR.

2. The reason why most don't make the jump is due to financials, either your net worth, liquidity, or the ability to raise money. Requirements are different for commercial loans so just make sure you're prepared for it.

3. Because of the above financial requirements most people end up doing partnerships, joint ventures, or syndications. Some people like to be the sole boss running a deal. If this is you then you will need to figure out how to get an apartment all on your own.

4. For me at least, overall it has definitely been the right move to go from SFR to MFH.

@Amir B. Solid info. provided by @Michael Le

The biggest impediment for most people is personal balance sheet. Even experienced syndicators look to loan guarantors to ensure that their operations are running smoothly. 

The current real estate market is hot. Period. Prepared to have many rejected offers. 

Apart from learning/educating, you can choose to work with experienced Sponsors by investing in their deals. This will give you a behind-the-scenes look. Plus, Sponsors will also be more eager to answer your questions when they're trying to woo you to invest in their projects.

Before beginning, I would suggest developing your investment criteria and risk-return expectations. Otherwise you will be drinking from a fire hose of information. 

@Amir B. - I made the transition from residential to commercial a few years ago and I love it, because of the more passive aspects involved.  Is everybody and their brother looking for an apartment building now? Yes, but that doesn't mean you can't get in the game.  My group bought 2 good size deals last year in this smokin' hot seller's market (full disclosure- we did underwriting on about 500 deals though) and there's no reason why you can't get a piece of the action.  Plus like the other guys said, you can be totally hands-off if you like and just be a passive investor.  There's a number of syndicators on this forum, who I'm sure would be glad to potentially work with you.

@Chris Tracy @Michael Le @Omar Khan

Thank you guys for your valuable input. We are definitely not rich enough to invest in our own. We are considering partnering with a few family friends. Looking in the Sacramento County market. 

@Amir B. - just FYI... a typical minimum investment amount is $50k (to be a passive investor in someone else's deal).  I wanted to give that to you, so you have a goal to shoot for.

Amir,

I started investing in SFR's in 2009 and had a mini portfolio of 4 total properties. Later in 2015 after significant appreciation I started making the transition into cash-flowing commercial real estate, specifically large apartment complexes.

The way I made my transition was to start investing as a passive investor with an experienced operator via syndication. After a few months of education and learning the ins and outs of the model and the commercial multifamily industry, I started partnering up with more operators and building my network of investors. Today I run a private equity investment firm focused on commercial real estate and along with my operating partners and investors now own 1200+ units worth almost $100MM.

So for me it was a good idea to change the strategy. But that doesn't mean it's always a good idea for everyone.

Are you looking to become an active investor and build a company around your investments? eventually buy large apartments and be a syndicator?

Or are you interested in partnering up as a passive investor with experienced operators and just get your checks every month/quarter?

Whatever your answer is, it will get you thinking on if and how to proceed into the commercial real estate world.

All that being said, my general answer is YES, it is a good strategy.

First step should be to start educating yourself about commercial real estate, how its valuation is based on profitability and not strictly on comps, how to leverage the power of partnerships to get large deals done through syndication, how job and population growth start playing a big role when evaluating markets to invest in, etc. The resources out there to get your education going are pretty much endless, from BP, to podcasts and coaches.

If you have specific questions you want answered shoot me a DM and I'd be more than happy to chat further.

Good luck!

@Amir B. I made the transition a couple years ago after realizing that ten turnkey rentals would never get me to where I wanted to go.

I join an apartment mentoring group and got around the players. We went on bus tours and learned how to analyze deals. I analyzed 500 deals in one year.

It took a while to transition. Let me know if you would like some tips.

@Amir B.

I was just up there looking to eat your lunch. I don't like Sacramento the yields suck 5 or 6 cap and you're paying 150+ a door. I don't know anything about lakewood other than it's very far and the drive is a good time in a fast car. 

SMALL BUILDINGS make the owners or managing partners work for the building.  

Most of the deals are off market and the people that offer them up in Sacramento are the big houses. NAI, Marcus and Millicap, CBRE. If you talk to one of their sales guys and you ask them who they typically recommend to get the financing done then you can get qualified through that person. 

It's all about relationship and the ability to get the deal done. If you can "pre-qualify" or rather get a terms sheet from one of their preferred lenders then they will bring you deals as they are shopping them around.  Since they know that you can successfully execute a deal. 

When I was talking to banks to fund my first 9 unit deal. They told me if you don't have someone in the deal with a net worth that is 1x or 2x the size of the deal they might not want to work with you under normal terms but will happily write a hard money loan at 7.X - 10% 

All these people that do a 75LTV loan from a local bank where they put down 10-15% the seller carries 10-15 is not a thing in major California markets. They might get down like that in Yuma, Needles and Bryon (read desert)  

Google / Facebook / IPO millionaires are to close and after the IPO they need a place to park their money, so carries are not a thing like they are in "fly over country"  

Look here for people that solo 401k / Solo IRA loans that might keep it in their portfolio as they usually have more flexibility in how they underwrite their opportunities. You can talk to these people as to help you with the numbers and give you a preferred rate and then shop them against the big brokers in house or preferred lender.

When someone has more than 10-20% of the entity that will be assigned to the property they might have to be vetted by the financing company the same as the managing principal. So ensure that you get the criteria from the lender so that you can avoid awkward situations like when you ask your family friend for their last 3 years of tax returns.   

Hi Amir,

From my perspective, since I started out just flipping houses. It was a great way to build capital but not to leverage my money nor time. If you want to retire commercial is the best option in my opinion. 

In hindsight, if I where to do it all over again I would have jumped in head first with commercial. 

Participate i with an experienced deal sponsor for your first rodeo. You’ll learn from that whether you want to run your own deal or passively invest and let the experienced syndicators do that for you. I love focusing on what I do best and letting my sponsors run my investments. I don’t get calls for repairs and I know my investments are with experienced professionals. But multifamily is the way to go for sure:

https://www.biggerpockets.com/blogs/10553/70328-5-reason-i-prefer-multifamily-apartments

@Lane Kawaoka Hi Lane, can you please DM me with info on Apartment Mentoring Group(s)? TIA!

@Lennon Lee  
I see you're located in South Florida but your portfolio is in Texas, I guess you've been finding it difficult like me to find good multifamily deals.

Are you actively looking down here as well?

@Amir B.

You are thinking correctly. I came to that same conclusion a year ago. I started looking at SFH but then I calculated how many houses I would need to buy to make decent money. I ended up buying a 54 unit and it has been the best decision. The downside is you would need more cash obviously to buy bigger but I can't really see very much downside at all.

@Jason Monroe . Interesting insight about the financing of MF. 

@Amir B. Investing in commercial is definitely the way to go, because you have more control of the asset value in the long run. Instead of letting comps determine the value of your asset (residential) , you can control the value of your commercial asset yourself by improving the NOI (Net Operating Income). You do so typically by increasing incomes (rents, ...) and reducing expenses. However, you need to understand how do it right. And partnering with people who have done it gives you a fast track to the know-how vs a trial by error approach.

@Omar Khan Why is the personal balance sheet an impediment? Are there net worth requirements for these loans? If so, what are they (typically?) I've heard that the loan can be no larger than your net worth, but that's completely unverified...

Thanks!

@Tyler Blackwell Net worth requirements. Most lenders want general partners net worth to equal or exceed (by 10-20%) of the loan value. Furthermore, they will also require a borrower to keep liquid cash on hand (operating account). 

Commercial lending is not as highly subsidized by the government (unlike residential).

Originally posted by @Julian Sanchez :

@Lennon Lee 
I see you're located in South Florida but your portfolio is in Texas, I guess you've been finding it difficult like me to find good multifamily deals.

Are you actively looking down here as well?

 Julian,

I'm betting that everyone is having a hard time finding good deals. The market has definitely gotten hotter, cap rates have compressed, and more and more people continue to overpay just to "get in the game" which makes it worse for everyone.

That being said, we continue to find deals that meet our strict criteria and project very attractive numbers for our investors. I don't believe in sitting on the side lines until the next downturn. We think there are still good deals out there to be found, and having the right systems in place and continuing to nurture relationships in the marketplace allow us to uncover them.

Of course it's now a hundred times harder to find a deal that works, and DISCIPLINE is the name of the game. A very strict underwriting criteria with truly conservative projections is a MUST. 

@Amir B.

Hi Amir

the biggest piece of advice that I can give you is to find out your "why" in investing in multifamily.  Become crystal clear as to your purpose and to the type of vehicle you want to invest in.  I think multifamily is one of the best vehicles for passive income, tax benefits and growing wealth, but my why was to create a lifestyle that supported my business.

A strong why will counteract any bumps in the road, in my case, some pretty big pot holes.  The other piece of  advice is to find a mentor and join a community that caters to multifamily

Gino

@Amir B. I'm in similar shoes as you are and lately have been re-shifting my focus to multifamily.  I'm realizing that I can still continue to flip but for long term wealth MFH can get you there faster.  As others have mentioned, this requires discipline, a new learning curve, etc but it's worth it in the end.

By the way, I'm also in Sacramento and just recently took a trip to Cleveland, looked at Parma and Lakewood among other areas.

Originally posted by @Amir B. :

Hi Guys,

I have been on BP for a year and a half now. My wife and I currently own two SFH rentals in Sacramento and Parma. We stopped making offers on SFH/MFH because of offers kept on getting rejected (Parma/Lakewood).

Recently an idea popped into my head. Why continue to invest in SFH or duplexes and why not invest in a 40 or 50 unit apartment complex? The goal is the same retire early (60 years old). However, I am aware that commercial is a different ball game.

I'm seeking advice from other investors who changed their strategy from residential or commercial. A good or bad idea?

Please help. I am happy to share any information.

Thanks,

Amir

Well one potential hurdle to this plan is the availability of 40 or 50 unit buildings. Simply put they rarely change hands. These buildings often remain in the same ownership or family of ownership for decades at a time. With houses or duplexes you can simply check out the MLS & find many available for purchase. With buildings of that size it's just not possible.

I honestly have still found better deals on smaller property publicly listed than larger multi-faimly publicy listed. That could just be because the deals are made off market. The big problem with small multifamily in Sacramento is all the cash buyers from the Bay Area. It's common for Bay Area people to have a big wad of 1031 cash from selling a single family that they'll readily over pay for a small apartment in Sac just to not have to pay taxes on their previous sale. I'm not sure if that trend affects the big multi-family as well.

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@AmirB

Hey....   I have been a fix/flip finder since 2010.... in 2015 i got into finding MF for value investors....  essentially the same thing..  My point : With the increase income, i'm still not to happy with the SoCal numbers. I have seriously looked into Atlanta(For ME)....  Price points are like Los Angeles in 2008.... Population expected to double in the next 15 yrs.  Plus i'm building infrastructure there now....   Fix/flips & Property Mgmt.  You can buy a 20 unit for 2M with 100+K pre tax income on purchase.

Explore other areas if CASH FLOW is your WHY....   it is mine.   SUPPORT AND TEAM ARE KEY !!




Originally posted by @Amir B. :

Hi Guys,

I have been on BP for a year and a half now. My wife and I currently own two SFH rentals in Sacramento and Parma. We stopped making offers on SFH/MFH because of offers kept on getting rejected (Parma/Lakewood).

Recently an idea popped into my head. Why continue to invest in SFH or duplexes and why not invest in a 40 or 50 unit apartment complex? The goal is the same retire early (60 years old). However, I am aware that commercial is a different ball game.

I'm seeking advice from other investors who changed their strategy from residential or commercial. A good or bad idea?

Please help. I am happy to share any information.

Thanks,

Amir

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