How do I move from residential multifamily to commercial?

Question

My wife and I purchased our first property (a C-class fourplex) in 2017 which we house-hacked for three and a half years.  This spring we sold that property to do a 1031 exchange and bought two B-class fourplexes in a great area.  We are also house-hacking in one of the eight new units as well.  We have made the best use of FHA loans to get to this point.

The problem is that we will have to either find a way to significantly increase our income to make a 25% down payment on a $500,000+ property or wait until our properties appreciate enough to refi and free up our FHA loan for another purchase.  Either way it may take a few years unless we make some adjustments.

I am looking for advice on how we can speed up the process of adding another multifamily to our portfolio?  I feel like I need to begin transitioning to commercial multifamily and start using OPM to purchase bigger deals and solve my lack of capital.  However, it's intimidating to think of asking family members or investors to trust me to invest their money.  I feel like I need more experience and credibility before I can take that step.

Thoughts?

Shawn Regnier · Answer

Listening to (2) recent BP podcasts (#496 + 497) sounds right up your alley. Brian Murray was a special guest who just wrote the Multifamily Millionaire Volume I and II with Brandon Turner.

The podcasts addressed a lot of what you are asking here, so maybe give them a listen, and do what I just did today; order the two books from the BP Bookstore!

Emily Houser · Answer

Hi @Randy Mattila,

Always nice to connect with other investors in the PNW!  I can relate to you and your wife's journey of investing.  My husband, Josh, and I have been investing in large multifamily apartments since late 2017.  Before that we owned 29 doors; 5 single family homes, a fourplex and a 20-unit apartment complex in Oregon.  We were planning to continue down the path of investing in single family and smaller multifamily units, but decided in 2017 that we wanted to grow bigger faster so we started looking more into larger multifamily apartment syndications.

Josh ended up going to a Think Multifamily conference in Dallas TX in October of 2017 and he really resonated with Mark and @Tamiel Kenney of Think Multifamily, and we ended up joining their mentorship program!  For us, this was a pivotal point in our investing journey and we have fully transitioned to multifamily syndication since.  We've been able to grow our portfolio from 29 doors to about 2,900.  If you have any interest in getting on a call with us, both Josh and I always love chatting with other investors and sharing our experiences.  We have been general partners on several syndications thanks to our involvement in the Think Multifamily group.  It's been a fun journey to say the least :)  Feel free to reach out to me if you're interested in getting on a call.

Wishing you all the best on your investing journey!

Emily

Heath Thomas Jr · Answer

Hey @Randy Mattila, yes it sounds like you need to start transitioning to using OPM. l understand the hesitation, but did you not have some of these same feelings when you bought and house-hacked your first property? And look where you are now!

I started in real estate by asking family and investors to fund deals. I had no experience or credibility aside from what people already knew about me or how I was able to come across to them through networking. I would say you certainly have enough of a track record to get started, especially if you are thinking of starting with 5-10 units. The experience you have leasing up and managing your current properties is the same thing you will be doing in larger multifamily, so I do not think you should be concerned about having enough experience. Break down the returns you have earned from your current properties and be able to talk about them/increase them over the years. Also be able to talk about the pitfalls you have experienced and how you have resolved them. Being confident in yourself, aware enough of what you have done wrong in the past/risks in general, and cognizant of the returns you can expect to achieve are what I have found are important to most investors. I think you should be able to hit all three based on your current situation.

Michael Penny · Answer

@Emily Houser, I see you have property in my neck of the woods — GA.  I’d love to connect and see if my partner and I could add any value to what you and your husband are trying to accomplish.  My partner is a GC (renovated and repositioned thousands of apartment units/buildings) and has reciprocity in 15 states.

Michael Penny · Answer

@Randy Mattila, I see you are in Pasco, I am from Kennewick — live in GA now.  Very involved in multifamily, let’s connect and I would love to share what I know and see if I can add any value to what you’re looking to accomplish.

Mary M. · Answer

@Randy Mattila I used my own cash for the down payments and reserves  (from sale of another property) I financed the rest (apprx 60% of purchase)....     The thing is everyone has to start somewhere....  and with a little luck you can keep buying/selling and increasing your "wealth" as you go.....  I was able to go from  basically triple my net worth in about 7 years....  from both REI and from working at start ups.....My suggestion to you is first find out the facts...  then calculate what using other people money (ie not a mortgage but money from investors) will cost you.....  or to put it another way - will you earn anything more if you go this route as opposed to just using what you have and building from where you are?

There is no rush - number of doors is meaningless....   and if you really want to syndicate I suggest spending time talking to some that do this -  there are several folks here who you might reach out to.....   if you read the syndication forum you will figure out who they are.

Bernadeau C. · Answer

@Randy Mattila i am in the same boat. i am planning on going the JV route and then from there transition to syndication. as far as raising capital what i have realized is, you the investor are not asking people for money but rather you are presenting an opportunity to them where they can get returns that they could not get from the bank or the stock asset, moreover the opportunity is backed by a hard asset! Hope this helps!

Mary M. · Answer

I own 2 class B new build MF buildings in PDX.  Total of 20 doors and over 6m purchase price

To get the loans it required 25% down,  assets equal to or greater than the loans I wanted , cash reserves, and previous experience managing rentals If you want to jump over to commercial I would start by figuring out how much you can borrow. If you need a referral to a commercial loan broker I am happy to provide the name of the one I used      I also would do some fact finding as I personally would never want to be responsible for OPM ie - family friends etc. what if they want out? What if another Covid happens and you have to do a cash call? What if (fill in the blank)

To me the point is not how many doors do

i own, its more how do I best ensure I have a stable income (that hopefully increases over time) while keeping my nest egg safe

Randy Mattila · Answer

Hello @Emily Houser!  That is a great example of what I am trying to do.  I would also prefer to invest outside of the west coast states.  The landlord-tenant laws here have become much worse in the last few years and could potentially ruin an otherwise solid portfolio.

I have attended a few real estate conferences in the PNW but none that specialize in multi-family.  I will put that at the top of my to-do list!  In the mean time I would LOVE to jump on a call.  It would be great to speak with anyone who has real experience doing larger commercial multifamily deals!

Congrats on 2,900 doors!!

Heath Thomas Jr · Answer

@Randy Mattila that's awesome! You should probably be purchasing in an LLC regardless. I am a little rusty on the SEC rules regarding fundraising, but you don't necessarily need to go the syndication route. You can either get money from friends and family, or I think get 3 total investors without needing to syndicate (which requires a bunch of additional legal fees). This is NOT legal advice. Please confirm the guidelines for raising money, but I know it is possible without syndicating and will be much less expensive if you have a network with some money. You are not allowed to offer a specific rate of return, but you can show them your past returns and project what you expect to make on future deals. The flexibility of real estate is what makes it so awesome...you can offer any amount of equity, an interest rate or both! For a first deal, you will probably need to give up some equity, but start putting some feelers out with people and see what would get them interested. Giving up 30-50% is common, but if you can show you have successfully been able to do this type of deal (which you have), you may find people are ok taking some more risk on you.

That is smart to take PM off your plate. However, you can explain that you already have experience/know what to look for if things are going wrong, and have a vetted Pm that you already use and is capable of taking on the additional units.

It sounds like you have already put some thought into what you are looking for and just need to polish that off so you can develop an elevator pitch and longer presentation to get some interest in a deal. Good luck! PM me if you want to chat more.

How do I move from residential multifamily to commercial?

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