What Newbie Investors Should Be Prepared to Do to Land That First Multifamily Deal

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It’s been frustrating to find good multifamily deals lately. Despite best efforts, the first (or next) deal remains elusive.

Are apartment buildings really the ticket to passive income and early retirement? Or maybe it’s you: Others can do it (maybe), but can you? Do you have what it takes?

And so you begin to question your strategy–and even yourself.

In my previous article, “5 Tips From Expert Real Estate Investors For Handling a Lack of Good Deals,” I polled three experienced real estate entrepreneurs how to handle the waiting game. All three had good advice, from pursuing multiple strategies to patience and persistence to simply trying different things.

I’m not sure if abandoning the multifamily strategy is the right lesson to be learned here. I’m more of the mindset that commercial real estate has worked for generations to produce massive wealth, and that rather than abandoning the strategy, I need to consider and try different approaches to make it work.

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Lowering Fees to Make the Deal Work

One thing I’d like to propose is to compromise your compensation as the syndicator. Don’t compromise how you underwrite the deal, but consider lowering your fees and/or equity to make the deal work. If you’re raising money to do deals (as you should), then you should pay yourself at least an acquisition fee at closing and possibly other fees while you own the asset and when you dispose of it.

While those fees are fair and reasonable, they do put pressure on the returns for your investors, forcing you to acquire assets at a lower price than investors using their own capital (for example).

What can we do to become more competitive?

One thing we can do is to decrease or even forego our fees; maybe take less equity than we normally look for.

“What?!?” you say, “That is outrageous. What, am I to work for free?”

Well, maybe. Or at least for less.

You would only consider doing that to get into your first deal.

Once you’ve done your first deal, the game changes. You now have track record. Deal flow. A network of investors. Your ability to raise money and get deals more competitively increases dramatically.

Is the Sacrifice Worth It?

I remember speaking with another syndicator several years ago. He got himself into a good-sized deal that he syndicated. When asked about how he structured the deal, he was sufficiently vague, citing confidentiality, etc., but reading between the lines, the deal was decidedly in favor of the investors, and the syndicator’s compensation was questionable at best. I’m sure I politely voiced my disagreement with the arrangement.

But while it appears that this syndicator was clearly taken advantage of by his well-heeled investors, he now controls well over 300 units.

Was it worth the sacrifice to get into the first deal?

Maybe. Possibly.

I’m just saying: In an environment right now where there’s a lot of cash chasing deals, you ask yourself the question, do I sit this out for the next 7-10 years, or is there something else I can do to become more competitive and get in the game?

And one of the things we should consider is paying ourselves less to get into our first syndicated deal to get into the game.

 

What do you think? What are YOU prepared to do to get into your first deal?

Let’s talk in the comments section below!

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

4 Comments

  1. Tom Mole

    Great blog post and a point well taken! It hit me where I live. Frankly, a year ago I would have done any deal for free just to do the deal.

    At first I thought I was a bit overwrought, but the brilliance of the concept soaked through. We all pay something to get into the game. Most folks pay and yet never get into the game.

    Taking a strategic bath on the first deal and perhaps even a bit of spanking on the next deal could just be the barrier to entry for most folks. Those willing to do this go on to succeed, those that don’t fail to launch.

  2. Brendan Morin

    Great post, Michael. It’s easy for experienced investors to spout off their incredibly stringent, time-tested requirements for any deal, or to say they’ll walk if it’s less than perfect. While I’m sure that’s a great strategy when you’re experienced and sufficiently entrenched in your real estate networks, the fact of the matter is that without the same network resources, newbies just aren’t going to see the volume or quality of deals that these experienced investors will. As such, passing on every less-than-perfect deal might leave the newbie investor out of the game for a very long time, if not indefinitely, waiting for those perfect numbers.

    Instead, I’m a believer in not being afraid to jump on the first deal if the returns are good enough to justify the risk. For my first small multifamily deal, I purchased a home for a fair market price at a 7% cap rate knowing that I was in the right place in my life to invest – there’s no shortage of investors on here that would proudly pass up such a deal. That property has since performed excellently, and through a bit of elbow grease and good fortune I have been able to convert it to perform as a 10% cap.

    I like to think of this as investing in experience and networks. As a newbie, it’s perfectly valid to trade on on-paper returns (within reason) for the opportunity to get your name in the game and some dirt under your nails. Even if my above-mentioned property continued to perform as a 7% cap, I’d be making an acceptable return to justify the exponential increase in experience and resources it has provided me. To paraphrase The Joker, “Spend $200k on a 4-year degree and nobody bats an eye; accept less than $200/door on your multifamily deal and everybody loses their minds.”

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