Commercial Investing Without Syndication

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Hey, everyone!! I’m interested in hearing some stories about people investing in apartments of 5+ units without syndication. I’m pretty sure Jake & Gino started that way but would love to hear more stories about how people successfully invested in the beginning without syndicating. Thanks!!

Proper seller financing.   Purchased my first three  7-10 unit buildings from tired landlords. They like the monthly, not the day to day.  

From the smaller mom and pops you can grow larger on your own without the loss of control that is a partnership or syndication.

Local mom amd pop owners of tired looking multis get a postcard from me.  They are all boomer + and live in the area. Most self-manage and have owned over 20 years, always free and clear.

Most were 10% down over 20 years at 6-6.5%.  This was a while ago, so 5% may be possible if you have references.

So, I think this is how most of us started. The thing is, any building not financeable with a conforming residential note can be considered commercial. This applies to things as small as a 3-unit mixed-use building with a store-front or a 5-unit residential.

That said, I wouldn't dream of syndicating anything under about $3M dollars because the overhead is just too high to absorb. This means that most of your 10-unit, 24-unit, and 50-unit buildings are commercial but not indicatable.

I do believe that most of us started there. 

@Royce Hodnett Lots of great advice here. I will echo @Ben Leybovich comment about not even thinking about syndicating anything below $3M. I have never understood why people who it and more so, why investors put their hard-earned money in those deals. 

Your best bet would be to partner up. I am not talking about partnering on capital only (although that helps). Often times, having a more experienced hand will help you avoid seemingly small mistakes that turn out into big issues later on.

Originally posted by @Royce Hodnett :
@Ben Leybovich Thanks for taking the time to respond! That makes complete sense. I realized that as I was learning more about syndication and what it all truly entails. Would you mind sharing one of your first experiences buying something commercial?

 I think you are over-complicating the issue. In terms of deciding whether a building is worth buying, it matters absolutely none at all whether you'll be utilizing commercial financing or residential. If you understand how to buy a 4-plex, you understand how to buy a 5-plex. One being financed with a commercial note and the other with a residential makes no difference.

I guess I am struggling to understand your hang-up... 

Mine was a 16 unit building that I bought with a 1031 exchange and some seller financing. 

I owned a SFR and a condo and sold both. The proceeds from both sales went to my exchange intermediary. Then I found this property through my broker.

The funds in my exchange weren’t enough for the down payment.  So my offer was bank financing for 70%, seller financing for 20%, and 10% down. 

After about 2 or 3 years I refinanced the property and not only lowered my interest rate but also got enough proceeds to pay off the seller loan. Now I had permanent financing with a 20 year amortization. I owned that building for 14 years and then exchanged out in another 1031. 

That was a great learning experience for me and taught me many lessons.  After doing a few more similar deals and a decade of experience I built the confidence to start syndicating deals. I wouldn’t have crossed the 2,000 unit mark this year if I hadn’t started with this one little 16-unit...

Originally posted by @Royce Hodnett :
@Ben Leybovich Hey Ben! Sorry if my last comment was confusing. I was just saying I completely understand what you mentioned in your previous message. Was just wondering if you had any interesting stories to share with a newbie. Sorry for the mix up!

 Hah Well, all of my stories are interesting, unlike @Brian Burke who's got one interesting story and then a bunch of syndication bore. We ain't got time for all my stories :)

I am blessed to own a 29 unit community.  Progression...started with a few flips, then a few value add 1-4 family rentals, then the apartment community.  Add value each time and the progression can continue.

With regards to the seller financing for either part or all of the funds source... how do you stipulate pre-payment / early payment of the loan? If the benefit for them is passive monthly income, won't they begrudge the fact that you're dumping all that money on them at once instead of spreading out? Perhaps I'm overthinking that but from a tax or estate planning viewpoint I wonder...

Originally posted by @Christian Nachtrieb :

With regards to the seller financing for either part or all of the funds source... how do you stipulate pre-payment / early payment of the loan? If the benefit for them is passive monthly income, won't they begrudge the fact that you're dumping all that money on them at once instead of spreading out? Perhaps I'm overthinking that but from a tax or estate planning viewpoint I wonder...

 Good to consider the seller's needs here as it pertains to their tax and estate planning needs.  Most sellers that carry after all have more than 1 property.

It depends on the seller of course.  My favorite one that has sold me multiple properties and has also become a friend and private lender gets asked by me before I do anything.  Last year I wanted to accelerate a 6.5% loan an additional $400 a month.  They appreciated my letting them know so they can make adjustmemts on their end if needed. They gave me their blessing though I didn't 'need' it legally. I would not have done it if it put them in a bind somehow.

Another seller had a 5yr balloon.  Only balloon ever. He was already like 80.  Obviously he was ok getting paid off.

Another one was disappointed and told me as much.  By refinancing when rates dropped last fall (to 4.25% for a 15)  I 'costed' him a $9k federal tax bill.  But we gotta do what we gotta do.  He only had the 1 rental.  Sorry bud, 6% was no longer attractive in this rate environment.   

Be considerate of your sellers absolutely as much as you can.

Originally posted by @Christian Nachtrieb :

@Steve Vaughan That's super helpful thanks Steve, much appreciated. 

 Sure thing!

Forgot to add- always ask for an early pay-off discount.  The 80yr old gave me $5k off just for asking and we're still friendly.  The other one said he'll no, that'll cost me $9k!  That's how I knew that one. LOL 

I doubt I'll ask my favorites for a discount but hope I get to. He just turned 80 as well :(  Hard to believe I've known him since he was 67. Some sellers can grow to so much more so always treat them right!

My story may not be very helpful, but I purchased 12 units with a 25% down commercial loan with my own capital.

As others have said, besides using your own money, your other option is seller financing. But you'll still need to bring some cash to the table.

If you don't mind me asking, why are you hesitant to syndicate? 

@Royce Hodnett no 1031 yet, one refi, the rest of the capital came from flips, cash flow, and savings from my W-2. I'd refi the apartment community now but I am currently investing passively in syndications and don't need to lever up for that.