Duplex first or learn larger multi-family partner deals?

Question

I have been listening to a ton of podcasts and audiobooks on multi-family. I can see that MF is definitely the direction I would like to go. However, being a noob, I am curious what everyone has to say regarding where I should start. Should I do a smaller MF, like a 4 or duplex, or jump right in and go for something larger? I'm thinking walk before run, wear out the training wheels kind of path first. Could you let me know what pitfalls I might run into? Why would I start off in one particular direction or the other? Thank you!

Ivan Barratt · Answer

@Rodney Thompson great question. I started with a duplex and now own ~2,000 units. It's a great place to start IF that's where you're comfortable. FYI: multifamily is entirely different than 1-4 family (I got to learn that the hard way).

My advice; take action and start wherever you are comfortable. The key is starting and building momentum. Fail small and fail fast! Grow from there.

Maxwell Manatt · Answer

Hello Rodney,

That is a good question.

I agree with most of what Hadar has to say. Ideally one would start off immediately on 100 unit plus apartment buildings. But many factors make that unlikely for most.

If you are willing to put in the work bigger commercial apartments can build wealth much quicker and sustainably than there smaller counterparts.

The default rate of Fannie Mae/Freddie Mac multifamily loans was less than 1% during the 2007 recession (Cash Flow Performance of Fannie Mae Multifamily Properties: Evidence from Repeated NOI and EGI Indices*).

If you can buy big apartment properties that cash flow and put them on long term agency debt its a very safe investment and if you can increase income and decrease expenses you can drive huge capital appreciation. Furthermore it is very possible to buy these properties with little or no money out of pocket. In today's environment there is so much more money out there than good investments. If you can underwrite a good apartment deal and put it under contract it is it is very likely you can find a JV partner to put down the money or help you raise it via syndication. Another positive factor is that big multifamily properties lend themselves much more naturally to onsite staff and maintenance than small multi family properties.  So no plumbing leak calls at 3 am, no spending the weekend painting and no running to show the vacant unit at lunch break.

All that being said Big properties mean more moving parts and more risk for loss. It is certainly not easy to put together a big deal and find the partners and investors to take it down for a first time investor. Not to mention finding a good deal. Their are countless stories of experienced syndicators that are underwriting hundreds of deals to make one acquisition in today's competitive environment.

There are certain skills and resume items you need (maybe not need but it makes it much easier) to take down a big property. Here is a short list, probably not completely comprehensive:

-Sales, relationship building and negotiation skills

-Ability to read and understand most contracts and financial documents

-At least a working understanding of common commercial real estate terms and concepts

-An understanding of how commercial debt can be structured, what the different loan types and who the different lenders are

-Money to fund deals (either in the bank or relationships with passive investors ready to write checks)

-Multifamily ownership Experience to sign on the loan and to make raising the money easier (probable possible without, but much better with)

-Net worth and Liquidity requirements to qualify for the loan. (typically loan guarantors, as a group, need to have net worth equal to or greater than the loan amount and need to have certain amounts of liquid capital post closing)

-Experience in turning around a value add in 12-18 months successfully. (Can help a bunch if your deal is value add)

-Experience in Underwriting deals and due diligence

-Organizing and systematizing skills

-Operations and administration skills

-a great understanding of construction and contractors (Boots on the ground is a huge plus)

If you can already do a few of those things you may want to consider partnering up and starting to hunt for deals.

But if you are a mortal like the rest of us small multifamily properties are a great place to start making mistakes.

Cheers

Steve DellaPelle · Answer

Hi Rodney,

I would highly suggest starting small if you are new to the game. I bought a 4-family with little to no real estate experience and in hindsight I wish I had gone with a duplex to get my feet wet first. There is SO much to learn and the best way to learn is by doing. Sure, you'll make mistakes BUT you'll learn from those mistakes and you'll continue to grow and evolve.

It is also a great way to start your investor career as having one property under your belt can be used to purchase your next property and so on and so forth. (Cash-out refinance, HELOC, etc.)

Best of luck!

Hadar Orkibi · Answer

Good Day @Rodney Thompson for sure you need to educate yourself enough before you start investing in larger/ commercial MFR apartment buildings.

It is rely depend on your knowledge base, availability of founds, the market you target and few other things.

1. Knowledge Base: podcasts and books are great way to learn but they don't cover everything you need to know to start with. Joining an education program, Mastermind or partnering with an experience investor could be of good value.

2. Availability of founds: That's no to hard to understand, larger buildings cost more.

3. the market you target: some markets don't have that many larger buildings, some have more smaller MFR, the residential type 2-4 units.

Although im in the market to buy larger buildings, my markets offer far and few between., so buying say few 4plexs in reasonable proximity works for me.

of course you have to buy well, and know the different between adding value, appraising and financing the 2 types.

There is another option, and it is to join a syndication or partner with an investment group on larger deal as passive investor, this way you would learn the process of investing in larger communities. there are pros and cons dough.

I hope that gives you some food for thoughts.

Duplex first or learn larger multi-family partner deals?

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