How to Buy Your First Multifamily Property

For investors who are making the leap from single-family homes to multifamily properties, they already understand the downside of being a single-family property landlord. When a tenant moves out, you’re cash flow goes to zero. So does your income. In a multifamily property, one tenant has an impact on operating income, but not to the extent a single-family tenant does, since the loss of one vacant unit is spread over multiple doors. 

In addition, as the landlord of single-family homes, you’re the one tenants call when the toilets backup, the HVAC stops working and every other electrical, plumbing and structural problems occur. That takes an inordinate amount of time, and unless it’s your full-time job, you simply can’t juggle those demands along with another job.

Challenges of First Time Multifamily Buyers

Buying your first multifamily property can be exciting, however, there are some challenges that you’ll need to address. The first challenge is a lack of experience. It often takes years to acquire the knowledge and expertise needed to find, assess and purchase the property. Many new multifamily investors simply don’t have that experience, and are surprised to find how much their experience in buying and owning single family homes have very little to do with multifamily. Another major challenge is not having enough cash to buy multifamily.

Money is another major obstacle to owning your first. multifamily. Without a successful track record in buying and selling properties, many sellers and lenders shy away from first-time buyers.

Investors who are looking to passively own real estate look for a syndicator with both experience and a successful track record acquiring properties. Without experience, it will be very hard to raise capital. There are some things you can do while you’re gaining the experience you need, but it’s critical to have it.

Another key challenge is finding the properties. It takes time to build relationships with brokers and lenders who have an inside track to key property listings that may be coming up or aren’t yet “officially” listed. Working on networking and building those relationships with brokers and lenders is key to gaining access to property listings at the earliest possible time.

Use What You’ve Got: Your Market Knowledge

If you have invested in single-family homes, you have a leg up on competitors who haven’t taken that step. The reason is simple: you know the area. You have knowledge of tenants, competition, rental comparatives, property values and other market factors. You’ve also built relationships with contractors and service personnel to resolve problems with the single-family homes, which can be beneficial when you acquire a multifamily property.

Partnering with Experienced Investors: Your Key to Success

So how do you overcome all of the challenges when putting together your first multifamily purchase? For passive investors, the answer is to partner with a more experienced investor or syndicator. If you’re looking to be an active investor, partner with someone who has experience in multifamily deals. 

Each person has to bring something of value to the table. The person you’re partnering with is bringing multifamily real estate experience, so now you have to decide what you can offer in return that provides value to them.

You could be the person who finds the deal, vets it and proposes it to others. An alternative would be to find the capital and manage the investor relations. It’s entirely up to you based on your interests, your experience and what you’re willing to give in terms of your time commitment. Finding the right partner is not easy, but if you work hard and find what the experienced investor needs, you will be able to create a meaningful relationship.

Experience Trumps Effort

Partnering with someone who has multifamily experience is a very smart and strategic move. While multifamily investing isn’t rocket science, it is complex and requires knowledge and expertise that you are “borrowing” with your partnership. 

Another option is to hire a mentor. Working with a mentor will teach you all of the key details that you’ll need to know when buying your first multifamily property. An experienced mentor will help guide you through the entire process, and there’s nothing wrong with having someone with a lot of experience helping you navigate the purchase from start to finish.

Multifamily properties come with added responsibilities, liabilities and additional capital reserves. It also requires expert due diligence in reviewing the deal, which is where your partner comes in. Without previous experience in vetting multifamily properties, buying a multifamily property can be overwhelming. That’s where your mentor comes in to help.

Your experienced mentor can help guide you through the many steps required to perform the due diligence. That includes everything from screening the deal, marketing properties and how the deal should be structured for investors. They can also help with the financials and cash flow of the deal. There is also a large volume of paperwork that requires review, including current income and expense statements, existing service contracts in place, and any repair reports that are pending.

Finding A Qualified Mentor

You won’t find a mentor worthy of your time in the phone book. Nor should you respond to anyone who offers, “free mentoring.” You need to talk to syndicators, brokers, business associates and other respected people in the real estate community. You’ll also need to get references from clients they’ve worked with in the past. Having a successful track record is a good indication you’re working with the right mentor.

Going it on Your Own

If you don’t want to hire a mentor, you’re going to have to do a lot of reading about multifamily property investments. You’ll need to learn about syndication, analyzing deals and working with investors. Once you start learning, you’ll find that many deals often turn out to not be as good as they first appear. In addition to reading, listen to podcasts of successful real estate syndicators to find one that has the qualities you’re looking for. Go to meetups, seminars and events to listen to speakers who share the same goals that you have. By doing your own due diligence on mentors, you’ll find one that works for you.

Just remember that with the knowledge you gain, the more independent you will become, which is the key to successfully purchasing multifamily properties.

Here’s More You Need to Know

There are a lot of intricacies involved in purchasing multifamily properties. For example, if you’re planning on purchasing a multifamily property with more than 5 units, you’ll need liquidity, which equals 9-12 months of debt payments. You’ll also need a net worth that’s equal to the total loan amount.

If you invest with a syndicator, remember that some only accept accredited investors. An accredited investor is one who:

• Made at least $200,000 of annual income in the previous two years ($300,000 for married couples) 

• Has a net worth of at least $1,000,000 excluding the value of the primary residence

Syndicators are allowed to accept a certain amount of non-accredited investors in a deal, but they can’t advertise opportunities to non-accredited investors. To gain access to those deals, you’ll need to network with syndicators and others in order to find out about them. There are other ways around the accredited investor requirement, so talk to the syndicator to find out if you qualify.

Another factor to be aware of is the amount of time involved in all the processes of putting a deal together. If you buy a multifamily property without a syndicator, you’re basically becoming an active investor. Until now, you were a passive investor who let the syndicator do everything. Now, you and your new partner are doing all of the work, and work takes time. Make sure you’re willing to commit to this before you consider purchasing multifamily properties.

Avoiding Headaches

If you are going to be an active investor, you’ll need to learn which properties cause the most headaches. The two biggest factors that can cause problems are the neighborhood the property is located in, and the condition of the property itself.

If you’re buying a Class-B or Class-C property, you’ll need to be aware that repairs are needed - especially with Class-C buildings. (Class-A properties generally require little if any repairs or renovations, but they’re also more expensive).

Tour the neighborhood and see if there are a lot of vacant buildings, dilapidated properties and people hanging out during normal work hours. If you see this, you’re looking at trouble, because you’ll be in an area that may prove to be difficult to rent in, and you most certainly won’t be able to raise your property’s rents anytime soon.

You have to buy within your budget, but avoiding Class-C properties on your first venture would be wise advice. You’ll have continuous problems with rent collection, building repairs and other issues that will cause you major headaches. To make your life easier, consider hiring a property manager on your first property (and most others as well!) It’s an expense that takes away potential income, but it’s money well spent in terms of time and hassles.

Summary

Making the move from a single-family home investor to a multifamily one is not an easy move, but in terms of financial rewards it’s something you must consider. Team up with a partner who has experience in multifamily investments, so you can overcome many obstacles first-time investors face. In return, you do a lot of the work to make the deal happen, from finding investors to pitching the deal. Use your best strengths and your own experience to bring value to the partnership and you will both benefit financially.

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