How do I buy a 20 unit as my first property and not get burned?

Question

I've got my eyes on 2-3 apartment complexes on LoopNet that have made it past my BS filter. These all have a unit count in the high teens or low twenties. I have some specific targets in mind for cash flow and cap rate. Besides that "numbers first" mindset, I'm kind of out of my league.

My gut says I shouldn't move on these specific properties, because they're in states that are losing population and none of them are in the best part of town. So, I'm starting to look for similar properties in other states that are doing better economically. Bearing in mind that this will be my first acquisition, what do I need to know and do to get all my ducks in a row? I don't want to waste anybody's time.

Right now, I'm reading David Greene's book Long-Distance Real Estate Investing but I'm not sure that's going to cover all of my bases. I read a different book specifically about apartment investing several years ago, I think it was Crushing It in Apartments and Commercial Real Estate, but to be honest I need to re-read it.

The essence of what I'm getting from Greene's book and what I remember of the apartment book is "build a team and systematize everything." Okay, noted. But, I'm struggling to answer more basic questions:

* I do have a down payment for a property this size, but I'm fuzzy on the exact percentage the bank is going to expect. Is it 20 or 25% down?
* How many months worth of expenses do I need to tack onto that to make my numbers work?
* Is there anything like a pre-qualification phase like there is with a residential mortgage?
* For the more experienced among you, what is an instant deal breaker even if everything looks good on paper?
* If I identify a possible deal, is it bad form to reach out to the property manager directly and ask about the property's pain points?
* Are there any regulatory burdens I need to be aware of for properties of this size?
* What tips do you have for building a team and systematizing stuff.
* Where do I go other than LoopNet to shop for apartment buildings?

I'm keenly aware of how little I know and how badly I could hurt myself by acquiring the wrong "deal." Any direction on how to get started down this path would be very appreciated.

Emma Powell · Answer

Great questions, and a great way to learn more is by looking at and actually planning out how to buy actual assets, even if you end up passing on them.

For your questions:

* I do have a down payment for a property this size, but I'm fuzzy on the exact percentage the bank is going to expect. Is it 20 or 25% down?

It depends on the lender and the property, you'll see in the 65-85% LTV range, with 70-75% being most common. Just start collecting lender quotes, or get one broker who can shop a lot of lenders.

* How many months worth of expenses do I need to tack onto that to make my numbers work?

Plan on 12 months of principal and interest in cash reserves. A Fannie/Freddie loan will actually take this cash and put it in escrow. You won't be able to get a loan like that as a first-timer, you'll need a partner who has done that loan before and then sign on it with them. For bridge/private/bank loans, they'll want to see net worth of at least the amount of the loan and liquidity as 10% of that loan amount. For conservative underwriting, working capital of at least $1,000 per unit unless the complex is really large, is a good starting point. You'll need to pay for your own construction on a Fannie/Freddie loan, or with a construction/bridge/hard money loan you'll pay up front then get reimbursed for the construction costs

* Is there anything like a pre-qualification phase like there is with a residential mortgage?

You can get a letter from a lender to show to the seller/broker to help your offer. But there's no seasoning of funds on commercial loans. They're private and less regulated, so you'll see more variety in terms, however.

* For the more experienced among you, what is an instant deal breaker even if everything looks good on paper?

If the numbers are good, I'll go through a lot to make a deal work! Deal breaker is if I'm not able to raise capital or find someone who can sign on a loan if I don't have the net worth or cash myself. Another one is if the building inspection throws my numbers with unexpected repairs and seller refuses to retrade after not disclosing those issues up front. I also don't like rigid sellers who will not work with me to get reasonable extensions for lending and capital raising: I want them to be in it with me rather than itching to move onto the next buyer. If the purchase and sale agreement PSA is really seller-sided, that gives me pause. No warranties, low liability limits, rigid timelines, no extensions pre-negotiated, hard EMD up front for an older building I haven't vetted yet that they won't disclose on, stuff like that.

* If I identify a possible deal, is it bad form to reach out to the property manager directly and ask about the property's pain points?

The broker will get all this info for you, or if direct to seller, you just ask first. If the PM doesn't know it's for sale, you could be in hot water with the seller.

* Are there any regulatory burdens I need to be aware of for properties of this size?

All I can think of is fair housing and state tenant laws like evictions, support animals, etc. Know the laws! In Landlord friendly states, it's pretty easy

* What tips do you have for building a team and systematizing stuff.

Systems is just a word that makes a to-do list sound fancier than it really is. Create to-do lists, and you'll start to see patterns. Make those into standard operating procedure SOP lists. You'll be building spreadsheets and lists as you go along. Don't over-systematize before you know what you're doing, you'll likely change it anyway as you learn, and don't get too rigid where you can't be creative in solving problems. If you're disorganized, get some help with an executive assistant VA or intern; if you're a compulsive checklister, remember that things are always changing, so build in some flexibility.

* Where do I go other than LoopNet to shop for apartment buildings?

Crexi, contact all the brokers you find on those sites. Direct to seller for buildings this size by doing skip trace searches to track down LLC owners and contacting them or their attorneys, calling on hand made for rent signs is usually an owner. Larger properties the best source is brokers. For me, what's worked best is hanging out in places where owners hang out like REIA, conferences, so when they're selling I get first look.

Anthony Jeffers · Answer

Hello Jeff, there is a series of videos on YouTube by Peter Harris of Commercial Property Advisors. Excellent content that will answer all the questions you raised.

Taylor L. · Answer

Partner with someone who has done it before. You'd benefit by googling around about commercial multifamily loan requirements. You need to meet net worth and liquidity requirements, so 20 or 25% down alone isn't going to be enough. Additionally, banks I've dealt with are still requiring covid reserves.

Dealbreakers for deals that look good on paper is a bit of a backward way of looking at it for me. Paper is paper. Underwriting needs to incorporate everything you know about the property. If it 'looks good on paper' then you find it's going to need $100k more in cap ex than you thought, then the paper was wrong. I think the most relevant thing in that realm is the neighborhood. If it looks like you can get, say $200/mo rent bumps based on comps, but your property ends up being in a worse neighborhood, that's not good news.

Secret shopping is pretty normal. I wouldn't call and tell the PM you're looking at buying the place, but you can call and ask about potentially renting. After all, the PM might not know the place is for sale. Get info that way, as long as it doesn't violate an NDA.

The place to go other than loopnet is directly to brokers. Build relationships with them and get that deal flow coming in. Or go directly to owners via direct mail. With both of those you need to know what you're talking about, so take some time to talk to lenders and PMs and have some options lined up.

Justin Goodin · Answer

@Emma Powell Great points!

Erickson Sainval · Answer

Could look like a JV. Working through a properly structured LLC.

Erickson Sainval · Answer

You need to make friends with a commercial lender. They will be able to tell you exactly what they want to see.

Usually there are the big 3 things they look for: Liquidity(Down+Reserves+more), Networth (Equal or greater than debt), Experience in Real estate(multifamily helps).

If you not not have all of these things you will most likely need to partner and I would suggest partnering with someone. It would be best to partner with someone with the experience if you do not have it.

From there it is all about your Due Diligence not just on the property but the area surrounding it and the economics.

Once you have validated the deal I would suggest property management at first and manage the managers. Once you see how they execute, if you think you can do better go ahead and take it over (saves you money too).

Sit on that property and stabilize it. Take the time to understand the in and out of your property.

Jeff G. · Answer

@Justin G., right now I'm everything squared away for the pre-approvals. Basically, I'm in "hurry up and wait" mode.

Justin Goodin · Answer

@Jeff G. Any progress made on your potential deals? Let me know if I can help.

Justin Goodin · Answer

@Jeff G. I would highly recommend you educate yourself on the process. You can do this by listening to podcasts, reading books, and networking. I would say partner with a more experienced investor for your first deal. Many of your questions can be answered just from reading the Best Ever Syndication Book from Joe Fairless.

Jeffrey Donis · Answer

In regards to building a team. I would focus on finding other successful investors in your area doing the kinds of deals you are looking to do and ask for word-of-mouth referrals. This will help you find the most qualified and credible professionals so you can save time and money as you build your team.

How do I buy a 20 unit as my first property and not get burned?

How do I buy a 20 unit as my first property and not get burned?

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