It was the summer of 2012, I was in the midst of preparing for my first triathlon which would be a half Ironman in the Pocono Mountains. Half Ironman races consist of a one-mile swim, 50-mile bike ride, and a 13-mile run. Since I did not want the half Ironman to be my very first triathlon, I decided to participate in a sprint triathlon that summer. This was a much shorter race; however, it would be good practice for me transitioning from swimming to biking to running.
Even though it was a short distance, I was incredibly nervous the days leading up to the race and the morning of. Just the thought of swimming in a lake freaked me out! As with any fear or nervousness, I moved through it and completed my first triathlon. Then, I went on to finish the half Ironman that fall. It was an intense race, but after eight hours, I completed it.
I was reminded of this experience as I prepared for today’s post. Preparing for your first anything can be absolutely nerve-wracking. It is all new, and you don’t know what to expect. Yes, you can talk to people who have been there and done that, but until YOU go through the experience, it is not real and tangible.
The most important deal you will ever do in this business of real estate investing is your FIRST deal. You can read all the books and blog posts, attend networking events, and take courses, but nothing is like going through the experience yourself — from beginning to end.
Lately, I have been talking to a number of new investors who are looking to get their first deal underway. I thought it would be helpful to share a step-by-step process as you prepare to purchase your first deal.
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The Achievable 8-Step Process to Land Your Very First Multifamily Deal
1. Begin with the end in mind.
The first step is to ALWAYS begin with the end in mind. As you embark on this journey of real estate investing, get super clear on your purpose — your “why” statement. I explain your “why” statement as this: This statement will inspire you and pick you up when you get knocked down and have thoughts of giving up.
You will get knocked down. It is not enough to say you “want to make money or passive income.” There are a TON of ways to make money and passive income besides real estate investing. You need to have a big enough, a deep enough “why” statement that leads you through the tough, frustrating, “I want to give up” movements.
In addition to your “why” statement, you should also gain clarity on your actual multifamily goal. What are you looking to achieve as a result of purchasing this multifamily? Some want a certain amount of positive cash flow, some want a certain ROI — i.e. cash on cash return, internal rate of return, cap rate — some want appreciation, and the list goes on and on. Everyone’s goals are different. What are yours? As always, you want to be as specific as possible.
2. Educate yourself.
Before we bought our first rental property, which was a duplex in Philadelphia, we spent an entire year educating ourselves. This included reading books, attending courses and seminars through our local REI group, and speaking (and learning from) as many people in the business as possible. Clearly, there are a ton of resources here on BP to educate you.
In addition to all the amazing articles and podcasts, get out there and make it real. I don’t know about you, but until I actually DO something, I don’t really learn it. You can talk about it, but it is in the doing of something that it actually becomes real and sticks. My suggestion is to find a few successful multifamily investors that are local to you. Get to know them, learn how YOU can help them with their business, and in return, you will learn their business. You will learn how they find properties, evaluate properties, and make offers. Hands down, the “real life” approach is the best education you will receive.
3. Get your financing ready.
Everyone says, “Find the deal and the money will follow.” I don’t 100 percent agree with this statement. If you are new to this business, it is very smart of you to get your financing in order BEFORE you look at properties.
I am sure you are aware that the market out there is competitive (not just locally but nationally). You have to move very, very quickly in this business to secure deals. The other reason you want to get clear on your financing before you look for properties is because you need to know your budget to help focus your search.
As you’re preparing for your first purchase, consider the following:
- What is the purchase price range that you are comfortable with?
- How much do you have for a down payment?
- How much do you have for unexpected operating expenses?
- What lenders/banks can you work with?
- When you interview lenders/banks, discuss with them their criteria for multifamily purchases. Some consider a four-plex “commercial real estate” and duplex and triplex “residential real estate.” This will impact the type of financing you can qualify for, so get clear with this BEFORE you begin looking at opportunities.
- If you don’t have an appropriate amount for #2 and #3, then you need to prepare yourself with alternative financing (hard money, private money, etc.).
4. Determine your market.
Once you determine how much property you can afford (or are comfortable affording, I should say), you can better determine which market to focus on. There are people who do well in this business by investing in all types of markets. The key is to get clear on which type of market meets your goals. The best way to think about this is classify markets into A, B, C, or D-class neighborhoods.
Properties in D-class neighborhoods will be the cheapest but the most risky. Properties in A-class neighborhoods will be most expensive — appreciation is there, but cash flow might suffer. Over the years, my husband and I have acquired a rental portfolio in both B and C-class neighborhoods/markets. This has worked for our business strategy and focus. This might not work for everyone.
You also need to consider the ongoing debate — do you want to invest close to home or invest remotely? Most of our portfolio is within 30 minutes of our home (and I might add that our team manages, so we are very hands on). We are closing on a large multifamily next week that is two hours away. As we grow, we might begin to expand our circle. However, I am glad we have focused close to home for many years. It helped us learn the business hands on.
Determine your comfort level — what type of neighborhoods are you comfortable investing in? Study all the markets within 90 minutes of your home that could be good neighborhoods that meet your criteria to invest in. Determine the size of multifamily that works for your goals and that is in demand in your respective markets.
5. Determine the type of deals you want.
Multifamily properties themselves are also classified as A, B, C, D, which refers to condition, age of building, and amenities. I am not going to get into too much detail on the definitions of each category, but a general rule of thumb is that “A” classification is newly built and in pristine condition, while “D” classification is older properties in dilapidated condition.
As a new investor, I would suggest that the D-type of property might be too big of a risk. I would also say that the A-type of property is too expensive and may not meet your cash flow goals. For new investors, B and C types are probably where you want to start.
6. Find deals through multiple sources.
There are a TON of articles on BP to help you with this particular step. However, one bit of advice I can say is use every avenue you can to find deals. The days are gone when people could simply find properties on the MLS or at the auction. You have to have MULTIPLE strategies to find good deals these days.
Currently, we use wholesalers, REO real estate agents, regular real estate agents, commercial brokers, the MLS on a daily basis, and continuous networking. The key here is that you have to hustle, network, and meet as many people as you can who can help you find deals. I don’t care what anyone says — there are deals to be found in this market. You just need to hustle a bit more for them.
7. Evaluate deals and make offers.
Once you begin to find deals, evaluating them is the next step. You want to have some type of calculator or software in place that can help you evaluate your deals. BP has a ton of great calculators for PRO members.
We purchased a software many years ago called Cash Flow Analyzer. It provides income, expenses, cash flow projections, operating data, etc. We have been very happy with it over the years and continue to use it to this day to help us evaluate rental deals.
Regardless, you want to use something that helps you become consistent with running numbers. We have probably evaluated over 1,000 properties in 10 years we have been investing in real estate. To this day, we still run the numbers and evaluate deals through our software.
Just the other week, we were excited about two multifamily deals, and after running them through our software, we decided to pass on them. Just be aware — new investors always underestimate expenses, especially maintenance expenses and management fees. When you begin to run numbers on your deals, get feedback from investors who have looked at more deals than you. This will improve your learning curve.
8. Do your due diligence.
Most new investors think once the offer is accepted, the hard part is done and they are going to sail smoothly to closing. Well, it does not always work that way. We are working hard on getting to two different closings on multifamily purchases that have taken longer than they should have. We have discovered environmental issues with both of these properties, so that has added another issue to deal with.
Regardless, challenges and curveballs ALWAYS come up on your way to closing. The due diligence period is there to help you gather a ton of information from the seller on the building. Don’t rush through due diligence. Do your homework, and make sure you know what you are getting yourself into!
I hope you found this 8-step process to be helpful and that it inspires you to take action and move forward towards your multifamily aspirations. Remember, Rome was not built in a day. Take steps each day to move towards your goals. This is a cliché, but it is the truth. Success takes a ton of faith and hustle, a bunch of tiny steps, and a commitment to NEVER ever giving up.
Are there any steps I am missing? What steps would you add?
Let’s chat in the comments section below!
(We hope you enjoyed the article! Before you move on to the next one – make sure to join this weeks Free Webinar (10/5) “Using Duplexes, Triplexes, & Fourplexes to Find Financial Freedom” hosted by best-selling author Brandon Turner. Click Here to check it out!)