Is it possible to invest in large apartment complexes (100+ units) using other people's money?

Question

Hey everyone! So yea my question is pretty straight forward. I want to get into multifamily, but I don't have cash to start with. I hear about (and see, I've recently jumped in full-time into REI) hard money and private lending funding rehab deals all the time, but I haven't heard anything on how to utilize them for rental properties.

How does it work in terms of your investors? How do you pay them out, when rental property have a long term ROI? Is it even possible? Thanks!

Jaren Barnes · Answer

Thank you to everyone, Jeff finally got my question. Thank you so much for that!

As for Jon as well as everyone else, I hear you and I'm sorry that I didn't make it clear that I am in no way believing tomorrow I will get all the loans, and  money that I need to be the owner of an apartment complex. I know it takes time, and that wealth is built slowly. I just wanted to understand the process long term so I can start making steps in that direction. I will be starting with duplexes and move from there, but even that step is in the future. As for now, I'm working under a mentor and simply birddogging until I learn the ropes and build up capital.

I do want to say Jon, as well as everyone else, thanks for looking out for my best interest. I do not want to get over my head and having a track record is a must.

I'm really grateful for all your input and for BP in general this is awesome!

Jaren Barnes · Answer

@Chris, that's my question how do I turn a profit for investors via rental properties? What is the return for investors on a rental? How does all that work?

I am up for using conventional or FHA loans, but because I'm currently "self-employed," as a full-time real estate investor and don't have any deals under my belt as of yet, I'm doubting I'll have much luck getting them for now.

Jaren Barnes · Answer

@Dawn Anastasi, Thank you! This is exactly what I was looking for, but I'm still learning how to navigate my way around BP.

My question now is how does the process work? I see that he did it, but what percentage goes to investors and when?

Do you just look for investors who want apart of the residual income over a set period of years? How would that work with smaller properties like duplexes?

In rehabs its a lot cleaner, investors make their return once the house sells on the market after the flip.

When do investors make their return in rental properties?

Thanks!

Jaren Barnes · Answer

@Bill yea I appreciate the input. I am planning on starting with duplexes to build some credibility, I agree 100% that there's no way I will jump head first into complexes.

How would you suggest getting into renting duplexes with hard money/ private lending?

How do the investors get a return?

Jeff Greenberg · Answer

Before you are able to use OPM, you need credibility.  This usually means experience and a track record.  As stated above, this takes time.  There are also things that you can do to expedite the process.  Get educated, study the forums on this site, visit the book store and the library, attend REI clubs (the ones that believe in education not selling you something), find a mentor (someone that is doing what you want to do), learn to analyze deals, analyze lots of deals.

Your question was, how do you use OPM in a MF investment.  Here is how we do it.  Initially we use our money for the travel, ernast money, inspections, loan fees, lawyers fees, and other various upfront fees. Working with an SEC attorney we setup an LLC that will own the property.

A loan is taken out for 70-80 ltv. The investors will buy shares or units of the LLC through a Private Placement Memorandum (PPM) created by the SEC attorney.  The funds raised are used for closing costs, down payment, capex, funding operations, etc.

All of our upfront costs will be reimbursed at closing. Our company will manage the entity and will receive cashflow and equity.

As far as how the ownership, cashflow and equity is split up depends on the deal. I have seen deals from a 50/50 split to a 75/25 split in favor of the investor.  It all depends on how strong the deal is and what returns can be offered to the investor.

There are those that would be happy with all of a little pie, and those that would be happy with a small piece of a bigger pie.

Jon K. · Answer

Commercial mortgage. A big commercial mortgage.

Lenders around here want 20% cash down on commercial mortgages.

You're a self-employed real estate investor with no real estate investments? That's going to make even a residential mortgage for your own normal prized home difficult. How's your credit? Income? Savings? If you had other properties paid for, I would try to use them as "collateral" in this.

I can't imagine any private investors being willing to pony up money if you have  never been a landlord before... let alone "big" money for a 100+  apartment complex.

Start small. Gain experience. Build your credit more. Get some verifiable steady income. Get some experience as a landlord.

In a 100+ apartment complex, you would have huge repair expenses and almost certainly need to hire a few full-tim staff members (leasing staff, repair staff, etc.). Plus, have complicated taxes and would want an account, good lawyers, etc. Plus, huge insurance policies. Can you float those sort of costs in startup and on-going cash even with repairs and vancies?

I know someone who builds shopping malls. He gets mortgages for them. He has enough cash reserves to easily float the mortgage on *all* his shopping malls even if they were vacant for 6 months and needed every repair in the book. He started with one small shopping mall after his family loaned him $20,000. He took that $20K plus his own cash savings and get a mortgage. His first property was worth only a little more than the average family house. He got experience, built assets/credit, then built another mall after another. He started an LLC and built it credit and assets. Now each of his properties/malls are worth millions each. You don't do that overnight. It takes many years... unless you're rich to begin with and can be your own lender.

Nobody is going to lend you millions for a 100+ apartment complex with zero landlording experience and "self-employment" and no current property ownership unless you've steadily been making huge verifiable income a year and have a lot of cash/assets of your own. Even then, that would be difficult to qualify for a multimillion mortgage. Private investors aren't going to lend you millions with no track record for a 100+ apartment complex first time. That would be way too risky for them. One bad move and you could get sued for a fire, tenant injury,... anything. Other bad moves and they see no return on investment or even lose money or get sued by some injured tenant.

Look at how much cash you could put down on a property, how much would be left in reserves for when repairs/vacancy occur, and at your income and estimate how much of a mortgage you would qualify for. Chances are that's a smaller duplex or single family home to start with.

Unless you have a rich relative or friend willing to pony up huge money for you as a personal favor, you'll have to start small, gain assets, credit, experience, etc.

Chris Masons · Answer

James,

If you are going hard money on duplexes youa re going to need to show and prove you will be turning a profit and that the risk level is low.

I Think this will be difficult to do. You would need to find some fantastic deals with plenty of room to allow for the high pts and cost of a harad money loan on a 2 family home. NOt very typical but won't say it is impossible.

Also keep in mind you may be required to have som eof your own money in the game as well IE. soft closing costs Etc.....

What about trying to go conventional or FHA on a duplex?

best regards,
Chris

Ann Bellamy · Answer

They get a return because you pay them interest and points on the money they lend you.

Dawn Anastasi · Answer

Yes, it is. Just check out Brian's recent thread.