How Do You Come Up With Large Multifamily Down Payments?
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Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
8yHi @Adam D.
I have 1031 all my pricey San Diego rental properties, since 2015 and 1031 exchanged them for 7 apartment complexes and 109 front doors. I have basically traded in $50,000 cash flow for $160,000 cash flow and rising every day. Of course, love the cash flow, but more importantly, I am in the process of increasing the NOI dramatically, thereby increasing the value of the property exponentially. I have a 24 unit, 21 unit, 15 unit, two 12 units, 10 unit, 8 unit, and 7 little single family rental properties too.
I have done this on an $80,000 W2 earnings per year as a Catholic School Teacher. In 3 to 4 years, I expect to 1031 exchange or refinance rinsing and repeating. Ultimate goal to defer, defer, defer, defer, defer, and die with approximately 1000 front doors and 3 or 4 large apartment complexes, and $750,000 plus cash flow per year at death. Then, my kid can inherit at a stepped up basis and then he can defer, defer, defer, defer, defer, and die and have about 5,000 front doors if he chooses to do so. Also, when he inherits, if he keeps at least 50% debt and continues on this path, depreciation starts all over again for him too!!!
Imagine if I reach even half my goals. WOW!! If I were you I would do the same. I have only invested together with my wife, mom, and dad on all of my deals but one. One deal, I took 2 of my friends along in an equity partnership on the 21 unit I mentioned above. So far, on that deal, after 12 months, we have replaced 15 out of 21 tenants with tenants paying $80.00-$100.00 a month more than the previous tenants and we have caught HUGE water and sewer waste, along with cut insurance costs by switching carriers etc... That one we only put $260,000 down and have already increased the NOI moving forward to $25,000-$27,000, increasing the value of the property $250,000-$270,000 after 12 months of ownership. The remarkable thing about it, is that we have not touched our reserves and only used our operating account to make ready those 15 units and other improvements. They were basic $1100-$1200 make readies when tenants moved out and a higher class tenant based moved in.
Now we have decided as a group to take some of our $60,000 in reserves off the table and start giving distributions as our operating account rises too after this repositioning is complete her in January-August of 2018. We are expecting $36,000 cash flow minimum for the next 3 to 4 year period too, before refinancing and taking all of our money out tax free that we invested or 1031 exchanging $700,000 of equity with loan paydown into possibly a much larger 2.8 million dollar complex. This complex a year ago we purchased for $900,000, we expect to pay down the loan to $550,000 and increase the value to about 1.2-1.3 million. Not to mention the over $150,000 cash flow we expect to take in the next 4 years of ownership.
I love this stuff, when done right!! Anybody that wants to talk shop, go to my profile and reach out to me.
What a country!! AMERICA!!!
Swanny
30 Replies
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yThe short answer to this is probably partners and private lenders and buying at a discount. One of the podcasters just bought a large portfolio of properties for 750k, using private lenders and 10 percent down. It appraised as is at 1.3 million. So that’s one way to do it
- Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes8yI have been thinking about this a lot myself. I am leaning towards trying to get seller financing, and have the seller agree to a lower down payment. It would all depend on the negotiation though.
- 8yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Adam D., the first time I did it, I sold two single family properties and did a 1031 exchange into an apartment building. I got a loan from a local bank for 75% of the purchase price, the seller carried back 10%, and the 15% down payment came from the exchange proceeds.
But finding a seller willing to carry is difficult in a competitive market (I did it in 2002, things are different now). And a lot of lenders won’t allow subordinate financing. So doing this is somewhat like finding a needle in a haystack.
So successful Multifamily investors tend to be cut from one of two cloths. One is the investor that has a lot of cash either from selling a company, equity in other real estate investments, a lifetime of savings, a trust fund, or whatever. The second is one that uses money from people in that first group who don’t want to buy the real estate themselves. This isn’t a private money loan scenario, instead the money is invested as equity. You’ve heard this referred to as syndication. But it comes in many forms, all the way from an individual using “country club money” to a large private equity shop backed by pension funds.
My first Multifamily from that 1031 exchange was 16 units, which was a start. But I achieved scale, around 1,500 units and counting, using the syndication model.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
You can use seller carry back, but most banks will want to see you put at least 10% down. You could also ask the seller to partner with you. If you have other properties you can get a line of credit or 2nd on those as well.
Check out the blog about getting into deals for little money
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
@Brian Burke Did you have any reservation with "sharing" your investment with other investors through fractional ownership when you first started scaling?
I've used private money, hard money, and land contracts short term but my strategy has always been to eventually own 100% of my real estate after refinancing. The idea of fractional ownership seems watered down to me. Don't you end up getting less a return if more people are involved? I think maybe I'm stuck in the single family and small multifamily mindset.
What are the advantages of a syndicate compared to buying smaller multifamily with 100% ownership?
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
The advantage is economies of scale of the larger properties. And as you're seeing now, most people can't afford to buy larger properties on their own. So in comes the syndication model. So is it better to own 100% of a $500k property that has to pay 8-10% for property management company, can't have onsite property manager, has to outsource all maintenance/repairs because no dedicated maintenance guy, etc. Or to own 10% of a $5M property that is more efficient due to scale?
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
The advantage is economies of scale of the larger properties. And as you're seeing now, most people can't afford to buy larger properties on their own. So in comes the syndication model. So is it better to own 100% of a $500k property that has to pay 8-10% for property management company, can't have onsite property manager, has to outsource all maintenance/repairs because no dedicated maintenance guy, etc. Or to own 10% of a $5M property that is more efficient due to scale?
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes8y
Hi @Adam D.
I have 1031 all my pricey San Diego rental properties, since 2015 and 1031 exchanged them for 7 apartment complexes and 109 front doors. I have basically traded in $50,000 cash flow for $160,000 cash flow and rising every day. Of course, love the cash flow, but more importantly, I am in the process of increasing the NOI dramatically, thereby increasing the value of the property exponentially. I have a 24 unit, 21 unit, 15 unit, two 12 units, 10 unit, 8 unit, and 7 little single family rental properties too.
I have done this on an $80,000 W2 earnings per year as a Catholic School Teacher. In 3 to 4 years, I expect to 1031 exchange or refinance rinsing and repeating. Ultimate goal to defer, defer, defer, defer, defer, and die with approximately 1000 front doors and 3 or 4 large apartment complexes, and $750,000 plus cash flow per year at death. Then, my kid can inherit at a stepped up basis and then he can defer, defer, defer, defer, defer, and die and have about 5,000 front doors if he chooses to do so. Also, when he inherits, if he keeps at least 50% debt and continues on this path, depreciation starts all over again for him too!!!
Imagine if I reach even half my goals. WOW!! If I were you I would do the same. I have only invested together with my wife, mom, and dad on all of my deals but one. One deal, I took 2 of my friends along in an equity partnership on the 21 unit I mentioned above. So far, on that deal, after 12 months, we have replaced 15 out of 21 tenants with tenants paying $80.00-$100.00 a month more than the previous tenants and we have caught HUGE water and sewer waste, along with cut insurance costs by switching carriers etc... That one we only put $260,000 down and have already increased the NOI moving forward to $25,000-$27,000, increasing the value of the property $250,000-$270,000 after 12 months of ownership. The remarkable thing about it, is that we have not touched our reserves and only used our operating account to make ready those 15 units and other improvements. They were basic $1100-$1200 make readies when tenants moved out and a higher class tenant based moved in.
Now we have decided as a group to take some of our $60,000 in reserves off the table and start giving distributions as our operating account rises too after this repositioning is complete her in January-August of 2018. We are expecting $36,000 cash flow minimum for the next 3 to 4 year period too, before refinancing and taking all of our money out tax free that we invested or 1031 exchanging $700,000 of equity with loan paydown into possibly a much larger 2.8 million dollar complex. This complex a year ago we purchased for $900,000, we expect to pay down the loan to $550,000 and increase the value to about 1.2-1.3 million. Not to mention the over $150,000 cash flow we expect to take in the next 4 years of ownership.
I love this stuff, when done right!! Anybody that wants to talk shop, go to my profile and reach out to me.
What a country!! AMERICA!!!
Swanny
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
@Michael Le @Todd Dexheimer @Michael Swan then why do single family and small multifamily even exist!? Is it so people like you guys can trick people like me into buying your properties so you can 1031 exchange into apartment buildings!? I've been bamboozled :)!
Seriously though, after learning about commercial multifamily it seems silly to do anything else. I always thought a large multifamily property with an on site property manager would be the idea investment but never understood how anyone could afford to do it. I think I'm starting to wrap my head around it.
@Michael Swan at this point I would be more than happy to 1031 my current single family homes and duplexes but I've always been worried about the time limits. How does one sell their current properties then find an ideal multifamily investment before the 1031 exchange time limits run out? Am I making this more difficult than it actually is?
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
@Adam D. You can get great returns on those. They're just not as scalable. So it's a good place to start for most people because most can't just jump into syndications.
As for making it more difficult than it is, no, you're not. 1031s do have real drawbacks and with it being a sellers market right now, you have to be careful not to run out of time before you find a deal that meets your criteria. Tight balancing act.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes8y
I'm cool with buying smaller properties. I own a 24 unit (2x12 buildings). But overall I have 154 units across 73 properties, so mostly single family and duplexes. Most of them have come from buying a package deals of someones portfolio. @Adam D.
My latest deal, 22 units (12 homes, 5 duplexes). Purchased $790k, as-is appraisal $1,265,000. Since I got such a deal on it my bank (local portfolio lender) let me buy with just 10% down.
Edit to add: my last few deals have all been 10% down. 3 other deals combined 3.64mm purchase, 4.68mm appraised. 112 units, 45 properties. I'd say that scaled just fine!
- Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes8y
The last 2 larger deals I have done. A 20 unit (2x10's) and a 22 (2x11's) were done with no money down and using only equity from other properties. After repositioning they both will appraise for over 400k more than purchase price. The 20 unit I actually realized the forced appreciation in year one due to an appraisal glych on the bank's end..
I realize this isn't the size you are asking, but repeat this a few times you would be there in no time.
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes8y
Hi @Adam D.
I never put up a little single family in San Diego for sale, until I negotiated, signed an LOI and was ready to sign a PSA for one of the Multifamily Apartment complexes I was buying. I don't like to have that timeline for a 1031 Exchange hanging over my head. I also did that due to my San Diego single family rental properties that were selling like hot cakes, over asking with bidding wars too. Best time to buy and sell of course is spring summer time.
I never felt that time crunch due to having my Multifamily Apartment complex already negotiated etc...
Those who fail to plan, plan to fail!!
Swanny
- Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes8y
Adam,
Is this a one time deal to ride off into the sunset or are you wanting to build a business and do large apartment investing ? If the latter, don't mess around w/creative this or that. Learn syndication and use OPM to do it. Carve out a nice piece for all your efforts, keep your investors happy and continue. It's a business like no other and the sky is the limit. Couple articles to inspire you and make you think bigger !
- 8yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Originally posted by @Adam D.:
@Brian Burke Did you have any reservation with "sharing" your investment with other investors through fractional ownership when you first started scaling?
I've used private money, hard money, and land contracts short term but my strategy has always been to eventually own 100% of my real estate after refinancing. The idea of fractional ownership seems watered down to me. Don't you end up getting less a return if more people are involved? I think maybe I'm stuck in the single family and small multifamily mindset.
What are the advantages of a syndicate compared to buying smaller multifamily with 100% ownership?
Did I have reservations about it? Heck yes! I was always the lone ranger, wanting to do it all myself and own it all myself. I started out with private money loans, credit cards & credit lines. I could keep all of the profits. Life was great. Or was it? Not so much, I was doing small deals, and after factoring in the high cost of private money and credit card debt service, the profits were going to the lenders anyway. I was doing well but not doing great.
Nevertheless, I was still apprehensive about having money partners and splitting up the pie. But I had no real alternative if I wanted to scale. I had no money of my own.
So if I would have kept up on my path of owning everything myself I'd probably own all of a couple million of real estate right now. There's certainly nothing wrong with that. But instead, I own a smaller percentage of over $200 million. As I look back, I made the right choice, for me. But this isn't for everyone, and there's certainly nothing wrong with doing it all yourself if that is a better fit for you.
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
Originally posted by @Austin Fruechting:
I'm cool with buying smaller properties. I own a 24 unit (2x12 buildings). But overall I have 154 units across 73 properties, so mostly single family and duplexes. Most of them have come from buying a package deals of someones portfolio. @Adam D.
My latest deal, 22 units (12 homes, 5 duplexes). Purchased $790k, as-is appraisal $1,265,000. Since I got such a deal on it my bank (local portfolio lender) let me buy with just 10% down.
Edit to add: my last few deals have all been 10% down. 3 other deals combined 3.64mm purchase, 4.68mm appraised. 112 units, 45 properties. I'd say that scaled just fine!
I think I'll do something similar at least for a few years. It makes a lot of sense, and the option is always there to do syndication later on. How did you find your packaged multifamily deals? How would you recommend finding deals for someone who is just getting starting in commercial multifamily?
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
Originally posted by @Peter B.:
The last 2 larger deals I have done. A 20 unit (2x10's) and a 22 (2x11's) were done with no money down and using only equity from other properties. After repositioning they both will appraise for over 400k more than purchase price. The 20 unit I actually realized the forced appreciation in year one due to an appraisal glych on the bank's end..
I realize this isn't the size you are asking, but repeat this a few times you would be there in no time.
How were you able to do no money down? Do you mean the equity from your other properties covered the down payment or you literally didn't have to put anything down on the properties?
This seems like a good plan for my situation. I've looked at the equity of my properties compared to selling them and I think the most profitable option is to not sell the properties and use the equity to purchase a larger multifamily.
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
Originally posted by @Michael Swan:
Hi @Adam D.
I never put up a little single family in San Diego for sale, until I negotiated, signed an LOI and was ready to sign a PSA for one of the Multifamily Apartment complexes I was buying. I don't like to have that timeline for a 1031 Exchange hanging over my head. I also did that due to my San Diego single family rental properties that were selling like hot cakes, over asking with bidding wars too. Best time to buy and sell of course is spring summer time.
I never felt that time crunch due to having my Multifamily Apartment complex already negotiated etc...
Those who fail to plan, plan to fail!!
Swanny
Just got done listening to the Bigger Pockets podcast you were on. Ordered the books you suggested as well. Have you ever had a 1031 not go through and have to end up paying capital gains tax on your profit?
You mentioned on the podcast that you had a deal where the previous owners lied about the details of deal. How have you avoided making similar mistakes with other deals you've done? Any other big things to look out for in your experience when purchasing larger multifamily?
- 8yAdam D.Investor · Traverse City, MI · Member since 2014 · 19 posts · 20 votesOP
Originally posted by @David Thompson:
Adam,
Is this a one time deal to ride off into the sunset or are you wanting to build a business and do large apartment investing ? If the latter, don't mess around w/creative this or that. Learn syndication and use OPM to do it. Carve out a nice piece for all your efforts, keep your investors happy and continue. It's a business like no other and the sky is the limit. Couple articles to inspire you and make you think bigger !
Read the articles thanks David. I will continue to learn about syndication. It's probably what I'll end up doing down the road. Any other good resources on the topic you recommended?
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes8y
Hi @Adam D.
A few little single family we only owned for a few years and decided we needed more cash to reposition the Multifamily we owned, so we did some straight sales. Capital gains taxes on RE is still much lower than stocks or even W2 earnings. In California alone we pay over 12% state income taxes. Paying this taxes were not a big problem.
To answer your second question, I only go for true David Lindahl repositioning value plays and really look for the worst property managers ever (the owner) to buy from. They just do it all wrong and I know in an 18 month to 24 month period I can increase rents $80.00-$100.00 a unit and replace a low class tenant base with a stronger, higher class tenant base, while at the same time decrease wasteful expenses that the previous owner was not aware of our was just giving up and wanting to get out.
Adam feel free to go to my profile and call me. I love this stuff.
Swanny
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
Originally posted by @Adam D.:
Originally posted by @David Thompson:
Adam,
Is this a one time deal to ride off into the sunset or are you wanting to build a business and do large apartment investing ? If the latter, don't mess around w/creative this or that. Learn syndication and use OPM to do it. Carve out a nice piece for all your efforts, keep your investors happy and continue. It's a business like no other and the sky is the limit. Couple articles to inspire you and make you think bigger !
Read the articles thanks David. I will continue to learn about syndication. It's probably what I'll end up doing down the road. Any other good resources on the topic you recommended?
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
@Adam D. To Learn more on syndication David Thompson has a ton of great blogs, podcast interviews, etc. Check out his website for more information. "It's a Whole New Business" by Gene Trowbridge is a decent book. I have also been told that a few syndication conferences are worth going to. Joel Block has one as well as the The Real Estate Radio Guys and Craig Haskell.
I am not sure what your real estate experience is, but I would suggest doing several real estate deals before a syndication. Learn how to operate small to mid sized multi-family all while learning syndication. You can learn syndication by reading and conferences or in some way partnering with companies doing syndicate's.
- 8yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votesTodd Dexheimer I heard Gene Trowbridge speak at the old capital conference. His book is great too.
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