Go Solo OR with a big Multifamily investor

Multi-Family and Apartment Investing
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Go Solo OR with a big Multifamily investor

Sanjoy V.
Atlanta, GA · Member since 2017 · 70 posts · 16 votes
I have been trying to find a decent deal with good cash flow and cap rate in Texas for a year and seems less and less likely; Dallas and Austin. Worry about OK city, although tempted sometimes to commit there. The caps are inflated, too much competition, I have been outbid several times or no one contacts me. Looking at less than 45-70 units in the 3-5mil range. Like the value add strategy but not sure what time commitment it needs? Even if I can manage to get something impossible in the current scenario. I am very busy, the question is, is it worth to go solo or is it best to invest with a bigger multifamily group or those online crowdsourcing deals, which claim a minimum return of 8% plus some IRRs at 17% give or take. the risk is still passed on to the investor. You have no true asset. How does this compare to you actually buying something on your own and give it to Mgmt company? When you do on your own, when you sell, I think you do better? Or no. Can anyone analyze the risk vs benefits with doing solo vs investing in a multifamily group, what’s the standard return and IRR. Plus you are directly investing cash into these, vs with a loan you just need 20% of the value; although cash on cash should still be the same, I guess. I am looking for advice, cause looks like I am quite discouraged by the market and it’s hard for a first timer to break into this. I like the balance of cash flow and appreciation. Thoughts on what the BP experts would do in this situation? Thanks so much!
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Omar Khan
Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
8y

@Sanjoy V. Regardless of what avenue you choose, there are NO minimum guaranteed returns. The 8% preferred you refer to is for guidance purposes. Ideally, you should be getting that but if the deal goes south, in all likelihood, most Sponsors will not step in to invest their personal capital (regardless of how "trust worthy" they sound/look). 

Assuming you are a high W2 earner in a demanding, full-time job. Hence, even if you buy a property outright, you should be prepared for headaches in dealing with property managers. Experienced developers/syndicators face the exact problems. Either you will get nickle-and-dimed (expense will be inflated, tenants will be turned over quicker) or other service related headaches will occur i.e. managing your manager can become another full-time job. This isn't to dissuade you but to provide perspective as there is a big learning curve. 

If you work with a syndication group (full disclosure: I am a syndicator), you will not have to deal with the operational headaches. The sales pitch is: mailbox money/passive income. But we all know there is no such thing as mailbox money/passive income as you have to pick the right Sponsor, the right market and the right project. But it is less work than outright management. In most cases (read the PPM and legal docs before sending any money), the Sponsor has managerial control but you, along with other investors, are an equity owner in a building through your investment into the LLC that owns the property.

From a valuation perspective, I would urge you not asses properties simply off cap rates, IRR or cash-on-cash only. Each metric, like all metrics, is open to abuse and can be manipulated. In particular, the cap rate should be considered as a measure of risk and NOT solely as a measure of return (when acquiring).

E.g. Class A type properties have lower cap rates than Class C type properties. Why? Because the market views Class A type properties as less risky and hence is willing to pay a premium for them.

Specific investment strategies like value-add add another layer of complexity. For example, if your plan is dependent on renovating 50% of the units by the end of 2 years, so that you can re-finance, what happens when the renovations go behind schedule? Do you have enough cash in the bank to withstand a few months/years of performance below forecasts? You have to look at these and other issues in granular detail before deciding what strategy to pursue. 

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  • Omar Khan
    Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Sanjoy V. Regardless of what avenue you choose, there are NO minimum guaranteed returns. The 8% preferred you refer to is for guidance purposes. Ideally, you should be getting that but if the deal goes south, in all likelihood, most Sponsors will not step in to invest their personal capital (regardless of how "trust worthy" they sound/look). 

    Assuming you are a high W2 earner in a demanding, full-time job. Hence, even if you buy a property outright, you should be prepared for headaches in dealing with property managers. Experienced developers/syndicators face the exact problems. Either you will get nickle-and-dimed (expense will be inflated, tenants will be turned over quicker) or other service related headaches will occur i.e. managing your manager can become another full-time job. This isn't to dissuade you but to provide perspective as there is a big learning curve. 

    If you work with a syndication group (full disclosure: I am a syndicator), you will not have to deal with the operational headaches. The sales pitch is: mailbox money/passive income. But we all know there is no such thing as mailbox money/passive income as you have to pick the right Sponsor, the right market and the right project. But it is less work than outright management. In most cases (read the PPM and legal docs before sending any money), the Sponsor has managerial control but you, along with other investors, are an equity owner in a building through your investment into the LLC that owns the property.

    From a valuation perspective, I would urge you not asses properties simply off cap rates, IRR or cash-on-cash only. Each metric, like all metrics, is open to abuse and can be manipulated. In particular, the cap rate should be considered as a measure of risk and NOT solely as a measure of return (when acquiring).

    E.g. Class A type properties have lower cap rates than Class C type properties. Why? Because the market views Class A type properties as less risky and hence is willing to pay a premium for them.

    Specific investment strategies like value-add add another layer of complexity. For example, if your plan is dependent on renovating 50% of the units by the end of 2 years, so that you can re-finance, what happens when the renovations go behind schedule? Do you have enough cash in the bank to withstand a few months/years of performance below forecasts? You have to look at these and other issues in granular detail before deciding what strategy to pursue. 

    7Reply
  • Lennon Lee
    Rental Property Investor · Miami, FL · Member since 2015 · 179 posts · 292 votes
    8y
    Originally posted by @Sanjoy V.:
    I have been trying to find a decent deal with good cash flow and cap rate in Texas for a year and seems less and less likely; Dallas and Austin. Worry about OK city, although tempted sometimes to commit there. The caps are inflated, too much competition, I have been outbid several times or no one contacts me. Looking at less than 45-70 units in the 3-5mil range.

    Like the value add strategy but not sure what time commitment it needs? Even if I can manage to get something impossible in the current scenario.

    I am very busy, the question is, is it worth to go solo or is it best to invest with a bigger multifamily group or those online crowdsourcing deals, which claim a minimum return of 8% plus some IRRs at 17% give or take. the risk is still passed on to the investor. You have no true asset.

    How does this compare to you actually buying something on your own and give it to Mgmt company? When you do on your own, when you sell, I think you do better? Or no.

    Can anyone analyze the risk vs benefits with doing solo vs investing in a multifamily group, what's the standard return and IRR.

    Plus you are directly investing cash into these, vs with a loan you just need 20% of the value; although cash on cash should still be the same, I guess.

    I am looking for advice, cause looks like I am quite discouraged by the market and it’s hard for a first timer to break into this. I like the balance of cash flow and appreciation. Thoughts on what the BP experts would do in this situation?

    Thanks so much!

     Sanjoy,

    I believe Omar up there has done a bautiful job at trying to answer your questions, so I'll just go ahead and address one particular thing you mentioned.

    You said you guess that cash on cash returns should still be the same whether you get a loan or you invest all cash. That is fundamentally not correct. When you use leverage (get a loan) to purchase a property you are only bringing a portion of the capital to the table, the bank is bringing the rest. So if you are only bringing 20% (which should actually be more like 30% for downpayment plus a cap ex budget, but lets go with 20% for simplicity) of the capital, you should perceive better cash on cash returns than if you were to bring 100% of the capital. Remember that cash on cash returns are the returns based on the cash you invested and not the total capital stack.

    Feel free to reach out via DM if you'd like to chat in further detail. 

    3Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    @Sanjoy V. In addition to the two solid responses from @Omar Khan and @Lennon Lee I'd add that you have to decide for yourself as to what your plans are. Your profile doesn't mention what you do other than the fact that you're an investor. So I can only guess that you might be a f/t flipper or SFH investor or another type of investor potentially considering to become an MFH investor or syndicator or thinking to do that on the side. Since you mentioned crowdfunding platforms, I'm assuming you may also be interested in investing passively. No matter what you decide to do, educate yourself in the new field first by reading books, speaking with investors experienced in the field you're getting into, listen to podcasts. Even if you decide to do it passively get an understanding how a particular investment type works.

    If you'd like to chat futher, happy to speak offline. 

    Good luck!

    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    If you got the cash to fund a 3-5 mil deal, you could always start smaller and develop a relationship with investor(s) looking for funding. You learn the process etc, they get funds, you both get your name out there and build a track history.

    0Reply
  • Mark Allen
    Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    8y
    Are you self-employed? This makes a difference on either strategy from a tax perspective.
    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Sanjoy V.

    Hi Sanjoy,

    If you're too busy, then hand it off to a syndicator. You need to invest time and energy in broker relationships, and when you do buy and "hand" off o the management company, you still have to manage the manager.

    you need to ask yourself, do you want to create a business and leave your current work situation or do you want to create some type of passive stream of revenue. The answer to that question will tell you if you should be investing, possibly with a partner or finding a syndication.

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    0Reply
  • Sanjoy V.
    OP
    Atlanta, GA · Member since 2017 · 70 posts · 16 votes
    8y

    No, I am not self employed; busy, beyond full time job.

    Is a turn key property better? Thanks for all your replies.

    There are people who have out of state properties and give it to Mgmt companies? I guess it’s that pride that I want to develop my own portfolio, hindered by lack of time and probably experience, market timing 

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y
    Originally posted by @Sanjoy V.:

    I guess it’s that pride that I want to develop my own portfolio, hindered by lack of time and probably experience, market timing 

    This is a good honest assessment and all three items you mention above are real. Keep taking action and you will find your answers. It takes a lot of time to find good deals or syndicators. I recommend doing both and maybe jump start it with passive syndication investing. You can also contact commercial brokers and explore NNN properties...direct ownership, less active involvement.

    0Reply
  • Sanjoy V.
    OP
    Atlanta, GA · Member since 2017 · 70 posts · 16 votes
    8y

    actually that’s a good idea Mike, I started to look at commercial properties first and then with the whole brick and mortar stores going down, retail per se continues to take a hit with Amazon etc;, I guess we have to get Amazon proof tenants.

    commercial retail, don’t appreciate like MFs do. However if I am looking at passive MF turn key sort of without value add, I am may be in the same boat as 3-4% increase per year.

    Is retail construction worthwhile? Anyone of you has experience? If you reverse engineer and build the right product? Again same headache, time. 

    0Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    You seem all over the place right now. You need to focus but before you do that you need to really decide what you want at this point in your life. If you have an extremely busy job but you like it and want to keep it then you should do something much more passive - syndication investing, NNN properties, etc. You're afraid of Amazon so maybe something like a double net Family Dollar.

    If you're looking to go full time real estate at some point and want to build a substantial portfolio then you can start with something smaller that is manageable while you still have a job and then 1031 one that into something bigger when you are ready to make the jump.

    0Reply
  • Ivan Barratt
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    8y

    @Sanjoy V. keep getting educated until you know the answer without a doubt! FYI: when you invest in a crowd fund or syndication there IS a true asset for which you have a % ownership.  Keep learning my man. You'll always get a return investing in yourself!

    2Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    Come up w/ a real number and find the least time consuming way to get there... then scale it up w/ lessons learned each step of the way.

    Plenty of ways to make money in real estate, but don't get caught up in a numbers or money game. Value is far more important and it make take a few deals to understand it. One example could be time, maybe a prop mgt company is more valuable to you (because of your work) to handle the day to day stuff then it would be doing yourself.  Another one is maybe having the most doors is important to you even it cash flow is minimal.... you won't really know till you're in it.

    For the record not saying any of the above suggestions are bad or good... just that you might want to have a clear understanding before you tackle a bigger more complex deal.

    0Reply
  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
    8y

    @Sanjoy V.  Hope you took some time to ponder the above responses over the weekend.  It is VERY important not to rush this decision.  Maybe set a goal to further educate yourself for a couple of months while at the same time getting clarity on what you want to achieve.  Do not invest in anything until you are very clear on what your goals are and you've learned about the possible ways to get there.  From your posts in this thread it seems to me that crowd funding or syndications are the best fit.  They are the most hands off after you do your initial due diligence.  But we can't truly understand what is driving you.  Only you can do that.

    It's great that you recognize that pride is effecting you decision making process.  Once you are clear on your goal (e.g. make > 12% returns on my hard earned money with the least amount of effort .... or build a portfolio that I control and manage and eventually leave my job) then your pride is less likely to be a factor.

    0Reply
  • Sanjoy V.
    OP
    Atlanta, GA · Member since 2017 · 70 posts · 16 votes
    8y

    thanks for your response Steeve; is there a medium ground that can be achieved? Leaving job is not an option. May be a turnkey property or something; I think what I am unclear is the time and effort that is needed on a property despite having a Mgmt  company? 

    0Reply
  • AJ Singh
    Rental Property Investor · Orange County, CA · Member since 2016 · 513 posts · 374 votes
    8y
    Sanjoy V. You have an option of buying a package of sfrs from a turnkey provider as well. Plenty of threads on this site for you to Check their reviews You can choose a Texas City for investing turnkey and will be closer to managing your portfolio Yes, you do have to manage the pm co but it’s not an everyday thing. Maybe a couple of hours a week to review any work orders and monthly accounting statement Multi family are a good option as well. I don’t have interest in commercial leases but your point of amazon proof retail is valid
    0Reply
  • Dave Chapa
    Rental Property Investor · Katy, TX · Member since 2015 · 175 posts · 111 votes
    8y

    @Sanjoy V.

    My wife and I solo own our portfolio, that also consist of an 8 unit apartment in a high-end area. We use a PM to run all our properties. We just manage the PM and our assets while continuing to search for the next deal. It’s been great because I work full-time.

    As for value added properties, yes, it takes a lot of time. I was on my properties just about every day and spend hrs and hrs coordinating and ordering materials. If it was not for the fact that my office was within 5 mins from both properties, it would have been very difficult. I don’t know if I could have achieved the same results. However, moving forward I will have my PM or a contractor handle the renovations for any future value-added properties.

    What MF listing brokers are looking for are: Can this person close and do they have any experience in MF? The ability to close is High, and the experience comes in with the lender. They don't want to take the property off market for someone they feel that can't close.

    If I try to buy a large MF (50+) property, the listing broker will question my ability to close because all I have is a small MF (SFH don't count). Now, if I try to buy a 15 to 30 unit. Because I own a smaller apartment, they would be more open to deal, knowing I do have experience with closing a small MF deal. To go from a small MF to a large MF has its challenges. However, going from 0 to a large MF is even harder. Not impossible, but harder.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    8y

    If @Jeff Greenberg is available, he might be a good one to ask this too. I have thoughts on it personally, but I'm not as much in the bigger apartment/commercial space to feel much confidence about my thoughts. Jeff is definitely in that space that.

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    I suggest getting started on your own with a few sfhs. That’s what I did to get it started. It allows you to have a bearing especially when you do move to the world of passive investing.
    0Reply
  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
    8y

    @Sanjoy V. You can go find yourself a turn key SFR. There are some good outfits (and many not so good). I think you'll find the returns, even with the good guys, aren't so great in the end (despite what they promise). A true turnkey will be hands off, but if you're going to do that, then I think you'll find better returns and less stress with other passive investments. You can also get 1 SFR and self manage it, or even manage a local property manager, but again it seems to me you don't have the time.

    You can also consider that we often hear about so many that have made the jump from SFR to MF but you'll never hear about someone going from MF to SFR. Maybe house hacking a turnkey duplex is a better option for you.

    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    8y

    @Sanjoy V. The market is crazy in most places-it is going to stay that way for a while...................and you may need to lower expectations in today's market. For example you stated you want CF and appreciation-both are unlikely today so you need to pick which one. You said you like the 'value add' proposition; but you have no time. Pretty much leaves Turnkey and Syndicator choices for you, either that or Vanguard. Lower return and less work and not nearly as much fun IMO. Like others have said you need to decide and only then can you move forward.

    0Reply
  • Michael Bishop
    United States · Member since 2015 · 401 posts · 394 votes
    8y

    @Sanjoy V., whether it's "worth it" or not is more of a personal preference that you need to answer yourself. Just depends on current job, life style, interest in real estate, etc. With that addressed, just a couple of points I wanted to make on some things you mentioned:

    1. There is no minimum guaranteed return. As with all real estate, you can lose everything. That said, if you find a solid deal with a reputable Sponsor, you can expect some down side protection that alternative investments may not offer.

    2. To the "you have no true asset" point, depends on how you choose to invest. Syndications and the typical crowdsourcing platforms differ in that with a syndication, you (typically) own shares in the LLC that owns the property. So a bit "closer to home" with syndications.

    3. About directly investing cash; it can be argued that that is a benefit. You are able to scale up in to bigger MF deals that you otherwise wouldn't be able to take down alone. Sure, you don't own the entire thing solo, but even partial ownership offers a lot of benefits.

    4. Comparing risks when doing it alone vs with others will vary by person. I would venture to say that, most of the time, the successful Syndicators (or REITs) out perform Mr. Average Joe.

    I'm in Austin as well, always happy to meet-up for coffee, lunch, etc. so don't hesitate to reach out.

    0Reply
  • Diana Duncan
    Real Estate Investor · Miami / Fort Lauderdale, FL · Member since 2013 · 63 posts · 12 votes
    8y
    Originally posted by @Sanjoy V.:
    I have been trying to find a decent deal with good cash flow and cap rate in Texas for a year and seems less and less likely; Dallas and Austin. Worry about OK city, although tempted sometimes to commit there. The caps are inflated, too much competition, I have been outbid several times or no one contacts me. Looking at less than 45-70 units in the 3-5mil range.

    Like the value add strategy but not sure what time commitment it needs? Even if I can manage to get something impossible in the current scenario.

    I am very busy, the question is, is it worth to go solo or is it best to invest with a bigger multifamily group or those online crowdsourcing deals, which claim a minimum return of 8% plus some IRRs at 17% give or take. the risk is still passed on to the investor. You have no true asset.

    How does this compare to you actually buying something on your own and give it to Mgmt company? When you do on your own, when you sell, I think you do better? Or no.

    Can anyone analyze the risk vs benefits with doing solo vs investing in a multifamily group, what's the standard return and IRR.

    Plus you are directly investing cash into these, vs with a loan you just need 20% of the value; although cash on cash should still be the same, I guess.

    I am looking for advice, cause looks like I am quite discouraged by the market and it’s hard for a first timer to break into this. I like the balance of cash flow and appreciation. Thoughts on what the BP experts would do in this situation?

    Thanks so much!

    Hi Sanjoy, 

    Have you considered Florida? I can assist you with locating off-market multifamily deals and overseeing the Property Management. Reach out via DM if you'd like to explore further.

    0Reply
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