Questions from an aspiring apartment building owner and lessor:

13 Replies

Hello! I am a young aspiring entrepreneur from Los Angeles, California. I was recently told by a large company's ex CEO that multi-family real estate investing was a really lucrative type of money making, especially in the very metropolitan and dense Los Angeles. I've done a little research, and have come up with some basic questions that maybe some of you could answer for me:

  1. 1. I am currently 19 years old, and in college studying Business. If I really make sure my credit looks good, would it be realistic for me to think that I can buy my first property by the time I graduate(3-4 years)?
  2. 2. Will I be able to get a large enough loan for a property in Los Angeles, average prices ranging from $1.5 - $3.5 million for a 10 unit property?
  3. 3. I want to find a loan where the collateral is the building. I dont want the bank to come after me if things don't work out as planned. How can I go about this?
  4. 4. Would it be possible for me to get investors to help me put a sizeable "down payment" on the loan that I take? Where do I look to find investors for this type of "business"?

If you have anything else to tell me then by all means go ahead! I am an information sponge at this point. I have a strong drive and I am willing to do what it takes to get where I want to be. Thank you!

Originally posted by @Tyler Fernandez :

Hello! I am a young aspiring entrepreneur from Los Angeles, California. I was recently told by a large company's ex CEO that multi-family real estate investing was a really lucrative type of money making, especially in the very metropolitan and dense Los Angeles. I've done a little research, and have come up with some basic questions that maybe some of you could answer for me:

  1. 1. I am currently 19 years old, and in college studying Business. If I really make sure my credit looks good, would it be realistic for me to think that I can buy my first property by the time I graduate(3-4 years)?
  2. 2. Will I be able to get a large enough loan for a property in Los Angeles, average prices ranging from $1.5 - $3.5 million for a 10 unit property?
  3. 3. I want to find a loan where the collateral is the building. I dont want the bank to come after me if things don't work out as planned. How can I go about this?
  4. 4. Would it be possible for me to get investors to help me put a sizeable "down payment" on the loan that I take? Where do I look to find investors for this type of "business"?

If you have anything else to tell me then by all means go ahead! I am an information sponge at this point. I have a strong drive and I am willing to do what it takes to get where I want to be. Thank you!

#3 jumped out at me so I must tell you that there is NO WAY to stop the bank from coming after you if things don't work out. It doesn't matter how seasoned an investor. If you agreed to have something financed and go into default they deserve to recoup their monies. Wouldn't you want to recoup your money if you loaned it out (particularly $1million +) and someone promised to repay it then didn't?

You really have to study the business of real estate investing a lot more to get a understanding of how things work. Its much easier for newbies to enter investing in residential rather than commercial properties. Read REI books, BP blogs, listen to podcasts here and attend a few REIA groups.

Kudos,

Mary

@Tyler Fernandez  

welcome to the site.

The building will be the collateral & will need to show from past performance that it will earn enough income to pay the loan. Banks usually want to see $1.20 coming in for every $1 lent.

The lender will require you to personally guarantee the loan. 

@Tyler Fernandez , first of all let me commend you in being unafraid of eating the elephant. Keep in mind that an elephant is best eaten one bite at a time. That being said, it's inspiring that you're ready to take action despite the big numbers involved in a tricky market like Los Angeles. And...you are wise enough at the tender age of 19 to ask for advise before jumping in with both feet.

If you are getting into apartments with 5 or more units, then your credit is not you biggest concern. The bank will look at it your credit surely, but commercial lending is primarily based on the asset. You'll be able to get a large enough loan provided the deal makes good enough sense, but it won't be easy. Commercial loans are more difficult to get than residential. Then will likely ofter no more than 65% LTV, which means 35% down (ouch!)

If you negotiate a nonrecourse loan and things go sideways, the bank will NOT come after you. The key is NON-RECOURSE. This is something to be worked out with care. 

It sounds like you would welcome some help in this area. It would be a fantastic idea for you to partner with one or more experienced investors who can help you find the funding and structure the deal. There are several people I know in the Los Angeles area that might be able to help you. Send me a private message so I can get their contact information to you.

Merry Christmas!

Tyler, I don't want to be a naysayer here, but I think handling a 10 unit multifamily is most likely biting off more than you can chew given your lack of experience in real estate. If you MUST go this route, I would 100% agree with @Tom Mole  that you should do this with an experienced partner. Be prepared to put a large amount down to get things to cashflow. Multis in CA and especially LA are expensive right now.

I would encourage you to consider starting off with small SFH or maybe a small multi (2-4 units) in order to get some experience with not only management of the property but the actual costs associated. Pitfalls will abound but your mistakes will be smaller and more manageable.

Hi Tyler

I commend you for getting serious about this area at such a young age. If you follow through and don't do anything terribly stupid, you will end up wealthy, because you have time on your side.

I started in my late 20s, have gone pretty quickly, and still envy you!

With respect to your questions:

1. Your ability to do a deal before you graduate is dependent upon being able to spot a good deal and being able to raise the equity to make it happen. If you can do this, no one will care about your age.

2. Depending on the deal, you ought to be able to borrow 70-75% of the cost of buying a 5+ unit building. The constraint will be the debt service coverage ratio (google this)... the worse the deals are (and they're pretty bad right now), the less NOI relative to the price (eg the lower the cap rate), the less NOI there is available to service debt. Banks want to see something like $1.20 in NOI for every $1 of annual debt service (NOT amount borrowed!)... this is what will constrain the amount you can borrow.

3. For 5+ unit deals, the bank looks primarily to the asset for repayment, not the borrower. So you should focus on this size. And you can pay a bit more on your loan (generally less than 0.25% extra interest rate) for "non-recourse", which means the bank won't come after you if you default (unless you have done something incredibly stupid / fraudulent).

4. You absolutely can get investors to fund the downpayment (equity). Your ability to do this will depend on the quality of the deal you identify... if it's good enough, you'll be able to raise the cash. Keep in mind that whichever bank provides the loan will require that any investor putting in 20% or more of the equity be identified (this bothers some investors).

Thank you so much everyone for all the responses! I'm so grateful. One more question though: When it comes time to pull the trigger on a location, should I look for newly renovated/empty locations and look for tenants at market price, or should I look for places that already have tenants that are reliable but are rent controlled?

That's a pretty impossible question for anyone but you to answer.

The great news is that you have one UNBELIEVABLE advantage over most RE investors in the world -- time. You're young, and compound interest makes us all rich if we use it right. 

I suggest you use the time between now and graduation to decide if real estate is really interesting to you, or just a means to an end. Being a landlord can suck. So can buying, selling, financing, negotiating, partnering, hunting for deals, tenants, and doing rehab/turnover work.

There's a huge amount of education needed between (a) a rich guy told me MF is a real money-maker (in LOS ANGELES, where very few people can qualify to buy anything), and (z) I own a property worth 7 figures at the age of 22. It's totally possible, but it will take a lot of work. I'd start by reading the BP beginners guide, and if you're still interested after that I'd probably pick up @Brandon Turner's book on investing with no money down. It deals extensively with creative financing, which, if you want to buy a million dollar property with no cash and no credit history, you're definitely gonna need.

Sorry, but you will have a very hard time using the typical wholesaling/creative financing routine for multifam here in LA. Any broker with half a brain will require proof of funds showing at least enough liquid assets to cover your downpayment. So, right away, either you need to have the money yourself (which you don't) or you need an investor who believes in you enough to help you prove funds (this is possible).

With respect to the rent control vs. newly renovated question: It depends. In a perfect world, you'd pay a fair price for a rent controlled asset such that you would have a guaranteed return (because the rents would only go up and you have no vacancy). In the real world, those assets trade at 13-15x, so the return on them initially is terrible. 

Bottom line: What you will buy will depend on where we are in the market cycle and what sort of deals are available.

@Tyler Fernandez  LA is a tough market for MF, but don't be discouraged.  The best thing for you at this time is to get yourself educated so that you know a good deal when you find one.  Good luck is when preparation meets opportunity.  Prepare yourself and keep putting yourself in situations to learn, network and grow.  When you find something that you feel is a deal, this site is a great place to get an unbiased opinion.  This could save you a lot of greif in the future.

Tyler,

Focus on finding and buying a cheap single family home. If you can get that done, get another. Keep building the empire and someday you will find that the sky's the limit. 

But banks will not talk to you until you have a history in the business. And even then, banks can be hard to work with.

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To add another question to this thread:

Let's say you buy a small multifamily (2-4 units) first, season it for 2 years, and then apply for a loan towards a 5+ unit property. Will the bank view that as a successful track record, even if it was in your personal name? How else could you get a history in the business, if this is your first commercial deal?

@Aliz Rao I am sure that would work, but even if you jumped directly to a 5 unit I don't think that the bank would weight your lack of experience to heavily. SFH experience will be considered on small MF purchases. If you submit professionally looking document you will gain much respect from the bank. Brandon talks about that all the time.

@Arlan Potter I disagree with you. I was a passive investor in an large deal, and that went far when I purchased my first ever (not counting my personal residence) 20 unit deal.

The other way to get history is to partner in a deal with someone with experience. You gain credibility by association.

https://www.biggerpockets.com/forums/223/topics/226846-my-multi-million-dollar-first-deal-at-20-years-old

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