The Multifamily Investing Masterclass: How to Get Started in 2024

Ashley:
This is Real Estate Rookie, episode 346. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
Welcome to The Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, we have the one and only Andrew Cushman. If you guys are at all familiar with the BiggerPockets ecosystem, he’s had, I don’t know, 50 episodes on The Real Estate Podcast, but it’s his first time here on the Rookie Show. Andrew is an expert in the multifamily space. So we bring him on, and you’re going to hear his journey of getting started as a new multifamily investor, what a real estate syndication is, and why he made the transition from flipping houses to real estate syndication. You’re going to learn about how to build your buy box, your multifamily. We’re going to talk about is now a good time to even get started in multifamily, and you’ll be surprised, I think, by what Andrew’s answer is.

Ashley:
We recently had AJ Osborne on episode 340, and he talks about why now is a great time to get into self storage. So I’m very curious as to what Andrew has to say to us as to why now is a great time to get into multifamily.

Tony:
Now, before we keep going, I just want to give a quick shout-out to someone in the rookie audience by the username of Kdemsky79, and Kdemsky left a five-star review on Apple Podcasts and said, “I love this podcast because it gives me the inspiration to pursue my real estate investing dreams. There’s a good spread of expert guests,” like today’s episode, “and rookies telling their story.” So if you are a part of the rookie audience and you have not yet left us an honest rating and review, please do because the more reviews we get, the more folks we can inspire, and inspiring folks helps them take action and hopefully get their first deal which is what we’re all about here at The Rookie Podcast.

Ashley:
Andrew, welcome to the show. Let’s jump right into it. Andrew, I want to know, is right now a great time for a rookie investor to get into multifamily?

Andrew:
Contrary to what the news headlines would have you believe, yes, it is. One big thing to keep in mind is if you’re looking to get into this all this negative crazy stuff that you’re hearing about interest rates going up, and people can’t make the mortgage payments, and syndicators are collapsing, all this stuff is happening, and it’s true, but it only affects deals that were bought in the past. If you are new, if you’re looking to get into new deals, all this actually benefits you because prices have come down 20% to 30%, and it’s a myth that interest rates make apartments not work. What happens is when interest rates go up, the cost of debt goes up, and therefore, the price has to come down in order to be able to have the property generate enough income to pay for the debt. So if you’re going into a new deal, all that means is you just buy it at the right price, you go get a loan, doesn’t matter if it’s 6%, 7%, 8% as long as you bought the property for the right price, and if it cashflows and works today, you’re good to go.
So all of the turmoil that you’re hearing, if you’re looking to get into the business, this is the chance you’ve been waiting for for the last 10 years because the refrain for the last 10 years is, “Oh, it’s so hard to get a deal. It’s too hard. There’s so much competition. Everyone is overbidding,” and that was all true. That is all going away, and now is definitely the time to get in because, again, competition is way down, pricing is down 20% to 30%, seller motivation is up. Right? It used to be you had to put hard money which means before you even do any due diligence, you can’t get your deposit back, so there’s a huge risk there. That is going away.
Also, keep in mind it is impossible to perfectly time the market. We will only know when the bottom is when we’re looking back going, “Oh dang, that was it. I wish I bought more.” So if you take advantage of the disruption now and pick up the right properties that you can hold long-term, nobody has ever regretted buying a nice multifamily property 20 years ago. You cannot find that person. So if you be that person who starts buying now, then you’re setting yourself up for success down the road. Again, now is the chance you’ve been waiting for for the last decade.

Tony:
Andrew, you said that some of the properties that aren’t performing well or that are struggling, those properties that were purchased in the past, what were some of those mistakes that you think those buyers made that set them up to struggle given this current economic climate, and what can we learn from that as new investors?

Andrew:
I’d say there’s two main mistakes that buyers of all kinds made from mom-and-pop to syndicators to big institutions. One of them is that people got a little too aggressive with their assumptions, and this addresses a broader topic of when you’re looking at deals of making assumptions that have a high probability of coming true. So a given example is I saw deals get sent to me where the person or the group buying it was assuming 7% rent growth for the next five years. That’s unlikely to happen, or property taxes only going up 2% a year for the next five years. Again, not likely to happen, especially if you’re in places like Texas where it’s like it’s a whole game to see how high they can jack up your property taxes. So the number one mistake that has led to current distress was overly optimistic, overly aggressive assumptions in underwriting.
The second big one, and this is one where it’s a mix of some people were being irresponsible, some people just got caught off guard, and also, just the fact that nobody saw a 500 basis point interest rate increase coming. So what happened is something like 70% or 80% of commercial real estate including apartments in 2021 and 2022 was purchased with floating rate loans. Most single-family houses, you buy a mortgage, you buy the property, you get a mortgage, the rate is fixed for 30 years, you’re good to go. In the commercial world, the debt works quite different, and it’s often due in 3 years, 5 years, 7 years, or 10 years. There’s some exceptions, but much shorter timeline, and a lot of the mass… majority of the properties in the last couple of years were bought with loans that were due in two, three or five years. So, again, that means they’re due this year or next year, in 2025. On top of that, the interest rate moves as the market moves.
So someone bought an apartment complex, they might have been paying a 3% interest rate, and today, they’re paying 8%, which means they can’t make the mortgage payment anymore, which means the lenders might foreclose, or the values come down 30%, and they can’t refinance into another loan. So, now, they have this huge balloon payment that’s due in three months. They can’t refinance, the property is not worth enough to sell, they can’t make the mortgage payment, and all of a sudden, you’ve got sellers that have to sell and have motivation. That is something we have not seen in a decade, and that’s part of what’s leading to both the distress and the opportunity.

Tony:
Yeah, Andrew, too, and super incredible points, and I couldn’t agree more. Just on that first point about being overly optimistic, and Ash, I want to get your thoughts on this too, but I think for a lot of new investors, it is tricky to walk that line of how aggressive or optimistic should I be when I’m analyzing a deal because when the market is hot like how it was in 2021, 2022, if you were too conservative with your numbers, you would miss out on every single deal. If you weren’t conservative enough, you could end up in a situation where you buy a deal that doesn’t necessarily pencil out. So, Ash, I want to ask you first. As you were looking at properties 2021, 2022, how were you striking that balance of not being too conservative that you were missing out on everything, but also not being too lax where you would potentially buy a bad deal?

Ashley:
Yeah. I’m definitely very conservative when I run my numbers. I definitely don’t say like, “Oh, maybe I can get cheaper dumpster service for the apartment complex,” or anything like that. I am very good at being diligent about sticking to my numbers and also over-inflating my expenses a little bit. So what I did to pivot through this change in the market is I found where I could add additional revenue to properties. So one of the things was like, “Okay. We’re buying land. Can we sell any of the timber that’s associated with it? What other multiple income streams can we generate? Can we charge people to park their RVs in this huge parking lot?” Things like that.
So that was where I had to learn I have to think outside of the box is somebody is looking at this property, and they’re saying, “Okay. I can rent this house out for that amount. I can rent the barn out for this amount. What other ways can I generate revenue off of this property where I can now create the income that will make this deal work for me?” or maybe another investor coming in and saying, “I can’t pay this price because it doesn’t make sense,” or, “I can’t use this type of lending where I could.” So that’s where I had to pivot and change is to finding different ways to generate revenue off of properties.

Andrew:
Yeah. Ash, I really like some of those creative things that you mentioned, and that’s… In multifamily, the money is really made in operations, and some of the things you just mentioned, those are perfect examples of what makes someone a really good operator versus just an okay operator. In the last 10 years, you could get away with being an okay operator. Now, you’re going to have to do the things that you were just talking about.
Tony, you nailed what has been the dilemma for the last five, six years is you wanted to be conservative and realistic so that you hit your numbers, you bought a good deal, you were able to pay your investors, all of those things. But if you overdid it, you just never get a deal. If you find the easy, concise answer to that, please let me know because we’ve analyzing literally thousands of deals. I’m not quite sure the answer, but this is what I boil it down to. A phrase that one of my old original mentors told me is he said, “It is better to regret the deal you didn’t do than to regret the deal you did do.” So when it’s tough to decide, that’s what I lean on.

Ashley:
That is great, Andrew, and I think that’s great advice to any new investor looking forward as to what they’re looking at to buy right now and as to if… “Okay. can I fudge the numbers a little bit?” “No, you can’t to make this deal work.”

Andrew:
No. You’ll probably regret it later.

Ashley:
Yes. Okay. Well, Andrew, this is all great information and just a starting point of what we’re going to talk about in today’s episode going forward, but first, let’s take a short break. So we just heard from Andrew about how past problems that buyers are having are now surfacing in multifamily. Let’s get into some consideration is if you want to start multifamily investing, what you should be doing today. So, Andrew, let’s start from the beginning. Do you have an example of a deal that you could go through with us where maybe everything did not work out okay and you had some lessons learned?

Andrew:
Yeah. I mean, since we’re on The Rookie Podcast, I’ll start with the first one. I wasn’t a rookie to real estate. I’d been flipping for four years, but I was a rookie to multifamily, and my first… and I did have a mentor and a coach that I had hired. We’re actually still friends and business partners to this day. So I wasn’t just going and completely winging it. However, people said, “Well, how did you get that first deal?” Well, it was really a combination of enthusiasm and being a little too naive.
Our first deal… Now, this is back in 2011 when you could literally just go on LoopNet and pull up a huge list of properties and say, “I want to go look at these 10.” I’ll come out in three weeks, and they’ll still be there. Not the case for the last 10 years, but that’s what it was then, and that’s how I found the deal. Literally, just looked on the map at a market that I thought would be good, didn’t have all the good screening procedures that we have in place now, started talking to a broker that had a ton of listings in that market. He saw a sucker coming from a mile away and said, “I’m going to talk to this guy,” and I ended up buying a mostly vacant, like 75% vacant, 92-unit 1960s and 1970s construction property out in Macon, Georgia on the complete opposite side of the country from me, and that was our first deal.
I had to raise a total of $1.2 million to get that done. It was not financeable. It had to be all cash. I completely underestimated how hard it would be to raise that money in that environment, and we are getting back to that environment today where everyone is scared of real estate like they were in 2011. I had to extend the contract period twice by adding more money to the deposit, non-refundable, just days before I had to close, got just enough money raised to close, and then took six months after closing to have to finish raising it. Fortunately, our documents allowed us to do that. That is probably the biggest reason why I started turning… my hair really started turning gray about that time because it was major stress.

Tony:
Andrew, at least you got some hair. You could join the Shady Head Club with me.

Andrew:
But see, you got a strong presence on the lower side of your head. I have even more gray there, so I’m just like, “Not going to work.” Some of the mistakes that we made, number one… Well, actually, I’m going to start with some of the things we did right. You said, “Well, why did you do that on the other side of the country?” Well, for one, my philosophy is live where you love to live and invest where the returns are the best. I live in southern California. You could not pay me enough to be a landlord here and have to deal with the garbage the legislature makes you go through, so we said, “All right. We want to be in the Southeast United States where the economics are good, the demographics are good, it’s business-friendly, it’s landlord-friendly, all of these things.”
Why did we go straight to 92 units, which I don’t recommend most people actually do, is because, well, we said, “Well, we want a property that’s big enough to hire and support its own full-time staff that works for us because I’m going to have to asset manage this thing from the other side of the country.” I’m not going to be flying out to fix a water heater because, number one, I don’t know how to do it anyway, and then two… So I want people who were there all day, they live there, that’s their job to run it. So that’s why we went big, and we’re really glad we did that.
Some of the mistakes were dramatically underestimated the cost of the renovations in addition to… Those old neglected properties are like a rotten onion. You peel off a layer, and the layer underneath is even worse. We had multiple episodes of vandalism where people would rip out the copper pipes, not even turn off the water. They must have gotten soaked. Yeah. If I was going to vandalize, I’d at least make sure I’m not getting wet so if the cops see me on the street, it’s not obvious if it was me. So not only did they rip out the copper, they flood the unit, so there goes $50,000.
It was a rough neighborhood. When we walked into the head of the police, the police chief, and we said, “Hey, here’s what we want to do. We want to partner with you guys to clean this up,” he looked at us and said, “Good luck.” That’s not the response I was going for. Now, we did get it cleaned up. We did get the crime reduced. When we bought it, it was collecting $8,000 a month on 92 units. We quintupled that basically five times over, and we did sell it for a good profit. However, lots of mistakes, lots of lessons learned. Don’t go buy a giant, neglected, highly distressed property in a bad area for your first deal.

Tony:
So, Andrew, just one thing I want to question before we get into the nitty-gritty of this detail or of this deal is you said you were flipping for four years prior to that. What was the motivation for transitioning from flipping to multifamily?

Andrew:
It is multifaceted. One flipping is a great way to get started in real estate, to generate chunks of money and build up some cash. But unless you’re one of these people who is going to build a seven-figure flipping business and have other people run it, it’s just another intense job, and you’re only as good as your last flip. You sell a house, you put some money in the bank, you got nothing left to show for it. I mean, again, it’s good. It’s a good business. It can be great money. But if you’re looking for something residual, it doesn’t typically provide that.
The second is we… My wife and I are business partners. When I say we, I’m typically referring to her and I. We had great 2009, 2010, 2011, great years because everyone, again, was scared of real estate. Prices were coming down. We had almost no competition. But then, everyone else started to figure out the opportunity, and no one had equity anymore, and so we said, “All right. Flipping is great, but it’s just another intense job. What would produce more residual, more long-lasting wealth?” We said, “Okay. We just had a huge recession which probably means we’re going to have a long expansion coming after that. Expansion means job creation, household formation, and everybody either got foreclosed on and can’t buy a house for the next seven years, or they know somebody who gets foreclosed on and they’re scared to buy a house for the next seven years. So that means, put all those things together, there’s probably going to be a whole lot of rental demand. So let’s go learn how to do apartments.” So that is how and why we transitioned to apartments in 2011.

Ashley:
You talked about that you raised money for this deal. So did you do a syndication? Was this private money you took on? Can you explain the funding of this deal?

Andrew:
Yeah. So the funding was… We did a syndication which, like you mentioned, is basically you put a deal together, you put a pro forma and a package together and say, “Hey, we’re buying this apartment complex. Here’s the business plan. Here’s what we think the returns are going to be. We need $1 million dollars to do this. Everyone can invest $25,000, or $100,000, or whatever you have.” So that’s how we funded it. As I mentioned, we ran short because I underestimated how hard it was to raise $1.2 million back then.
My very first check was my mom, and then the checks after that were the people who were giving us the money to flip the houses. We had some private lenders that funded those, and then the final $200,000, we didn’t want to retrade or go back to the seller and try to change the pricing, so what we did, we said, “Hey, look. The honest truth is this property has got a lot more work to be done than we anticipated, which is 100% true. We’re not going to ask you for a price reduction. However, we want you to help us out by carrying a note and loaning us the remaining balance of the funds.” I think we ended up settling on $200,000 or $300,000. That’s actually how we finished it off is we got the seller to carry some for us, and then we paid him off when we stabilized it and refinanced it a couple of years down the road.

Tony:
Andrew, one of the things you said which stood out to me was that you took these relationships that you have with your private moneylenders in your flipping business, and they were some of your early investors in this deal. In the Real Estate Partnerships book, Ash and I talk about the benefit of starting smaller with your investors, and then testing the waters there to move up to something bigger. So, in a flip, I mean, what? You’re probably holding money maybe six months to a year when you’ve got a flip that you’re working on. Maybe even shorter timeframe than that. So if for whatever reason that partnership doesn’t work out, it’s a six-month partnership, right? But since you’ve built that relationship with people, now it’s easier to go into a more expensive asset where the time horizon was, whatever, three to five years to get that thing stabilized.

Andrew:
That’s another good point. If someone is listening to this saying, “Okay. This is all great, but I don’t have any track record. I want to buy a 10-unit, but I have no track record multifamily,” start with the people who know your track record in whatever you are currently doing. Whether you’ve been flipping for five years and you have private investors, or you’ve been doing notes or maybe even working as a pharmacist for the last 10 years, and all your coworkers know you as someone who’s honest, and trustworthy, and hardworking, that is… Lean on any kind of track record you have in your network there.
Every single one of us in multifamily or anything started at zero at some point with no track record, and so don’t let that be a hurdle. Figure out what else do you have that counts as track record and say, “Yeah. Maybe I’ve never…” Again, this only applies if you’re raising money. If you have your own cash, this goes away. But if you’re looking to bring in other people, leverage the other characteristics and strengths you have, the other things that you’ve done to say, “Yeah, this is something new, but here’s why I should be successful at it because of all this other things that I’ve done.”

Tony:
Even if you have your own cash, think about all the big companies, even they’ve got cash. They’re still going out there and raising capital from other people because it allows you to do even bigger deals. Right? I’d love to, Andrew, break down the numbers on that first syndication because I think for a lot of investors, when they hear you got 92 units, that’s… “What is that? $1.2 million raise?” The pie gets split up quite a few ways when you do a syndication. Especially the first go around, the syndicators are typically a little bit more generous to the limited partners to make sure that they can get a good return. So if you can, first, break down the structure for us, Andrew, on what that deal looked like, and if you’re open, what was the actual profits that you generated from that deal?

Andrew:
Yeah. So when we closed on it, technically, I was supposed to get a $50,000 acquisition fee. I don’t think I actually took that until a year or two later. The split of profits from operations and sale was, back then, 70% to investors, 30% to sponsor. Today, it’s much more common for that to be 80% to investors and 20% to sponsor. When we sold it, we… What did we sell it? We bought it for $699,000 or something right around there, and we ended up selling it for $1.92 about five years later. I don’t remember what the internal rate of return and all that stuff was. I mean, it was good, but I truly do not remember what that was.
So, again, it was a lot of mistakes and lessons learned, but that was the buy, the sell, the splits. Like I said, we did refinance about two years in, and we refinanced, we paid off the seller, and then we returned… I don’t remember. Again, I don’t remember the percentage, but we returned the majority of the original capital to investors. So if someone had put in $100,000 at the beginning, when we refinanced a couple of years later, they might’ve gotten $70,000 back or something like that. But then, they still retained their ownership percentage. They don’t get diluted.
That’s still pretty much the structure that we use today where maybe we got a Fannie Mae bank loan or Fannie Mae’s government agency kind of, but it’s a primary mortgage, and then we syndicate the equity. We put in some ourselves. Profits are generally split 80-20, and we typically operate for about five years. Then, if there’s a refinance in the middle, then we’ll typically use that to give some of the original capital back so that there’s less risk. Right? If you put in $100,000 and you get $40,000 or $50,000 back, but your ownership percentage stays the same, now your risk level is down because absolute worst case scenario, you can only lose what’s still invested. So does that… Hopefully. I do want to differentiate because how things were done and structured 12 years ago is a little different than now, but that’s how it was done.

Ashley:
Andrew, I can’t even get past the 92 units for $699,000.

Andrew:
Yeah. Isn’t that crazy? Less than $10,000 a unit. I spend more in renovations these days on a unit than I paid to buy those things.

Ashley:
Yeah. Crazy. So what would your recommendation be? So that’s how you got your start in multifamily, funding and putting together a deal that way. What would be your recommendation today as a rookie investor as to how they can fund a smaller multifamily deal?

Andrew:
Recommendations in terms of the overall process, or just how to get started, or just how to fund it?

Ashley:
How do you think they should start? Say they have no money.

Andrew:
No money. Okay.

Ashley:
How should they go and fund a deal? Should they be looking for bankable products because it’s great to get a bank loan right now, or should they be doing a syndication, or try and get seller financing? Whatever advice you have as to this is a great way to try to find a way to fund buying your first multifamily.

Andrew:
So the good news is when it comes to multifamily commercial property, so five units and bigger, the debt is not necessarily based on your credit score and your personal cashflow. It’s based on the cashflow that the property produces. Yes, they’re going to look at your credit score. So if they pull your credit, and you’re a 321, they’re going to say, “Eh, maybe we don’t want to fully trust this person,” but you don’t have to have stellar credit. It’s not like getting a mortgage today where if you’re below 750, they don’t want to give you a mortgage anymore. You don’t have to have perfect credit. So that is the good news.
Also, the good news is the money for the down payment, for the renovations, for the transit, all of that does not have to come from you. Now, these days, we invest in every deal we do, but for a lot of the deals, we didn’t because we didn’t have the cash. So if you’re getting started and you’re saying, “Hey…” Let’s say you live in Dallas, and you find a great 10-unit that’s a couple of miles from home, you’re like, “Oh man, I really want to acquire this property, but I don’t have the money.” The ways to overcome that are, number one, you can do joint ventures, which means just you and a couple of people who have the money become equal partners in an LLC, and then you purchase the money, and you all have decision-making capabilities. This is what keeps it from being a syndication. You don’t have to worry about SEC rules as long as you are all… Again, it’s a JV. You all have management responsibilities, so you are putting in basically the sweat equity, you’re finding the deal, maybe you’re going to run the deal, and then you bring these people in, they provide the cash. That’s one way to do it, joint venture.
Another is to, again, syndicate. This is where you are finding the deal. You’re going to operate the deal. You put together a pro forma, and you say, “Okay. I need…” Let’s see, 10 units in Dallas. Maybe you’re going to go raise a million dollars. I mean, $1.5 million, and say you’re going to go out to people that you already know and have a relationship with and say, “Hey, here’s what I’m doing. Here’s an opportunity for you to earn some passive income and some wealth creation. Do you want to invest in this opportunity?” You’re not asking for money. You’re providing a service and an opportunity, and it’s important to make sure you frame it that way.

Ashley:
That is so key right there, that phrase you just said.

Andrew:
Yeah. Yeah. I mean, not only do you need to internalize that, but you need to project that when you’re talking to investors. It’s a 100% true, but it’s just ingrained in our nature like, “Oh, I don’t want to ask for money.” Well, you’re not. You’re literally providing a service and an opportunity, especially if you’re doing it the right way. So syndication is one, partners is one. You could get private debt. If you do that for a large… Let’s use some smaller numbers here. Let’s just say you need a total of $500,000, and you’ve got $100,000. Maybe you can get some private debt for $400,000 as long as you’ve disclosed that to the lender. Some will allow it, some won’t. Then, the one thing to keep in mind is unlike single-family, multifamily has much higher transaction costs. You have much larger deposits. You have very expensive attorneys involved going through loan documents and purchasing sale contracts. The appraisals are more expensive. I mean, there’s a whole host of other things involved that can add up to be $50,000, $100,000, $200,000 depending on the size of the transaction.
Now, if you don’t have that cash, that is where you definitely will need to find a partner. So going back to that very first deal in 2011 where we were raising $1.2 million, and again, it was all syndicated, I had to front $125,000 just to get it to closing. Now, that is a cost of the deal, and that is… As the sponsor, if you’re syndicating, that is refundable to you out of the raise because, again, it’s a cost of the deal, but you have to have that money upfront just to get to closing, to make the deposit, to pay the attorneys, all of those things. So if you don’t have that, then your first step is to find somebody who does and who wants to do this with you. Again, if you’re going to go buy a 5 or a 10-unit in your backyard, that amount is going to be smaller. It scales up.

Ashley:
What would you say would approximately be the dollar amount where it’s worth it to do a syndication?

Andrew:
That is a really good question. So your first one in terms of dollars is not going to be worth it, but you have to look at it differently in that if you are looking to syndicate apartments or really, any other asset, and build a large portfolio, and build a business out of it, making money yourself on your first deal or two is goal number four. Goal number one is to learn. You can learn a lot through podcasts, and coaches, and mentors, and books, but there’s a certain point at which you just got to do it and learning through guided experience. So, number one, you’re looking for experience. Number two, you’re looking to build that track record so that you can say, “Hey, I have actually done these type of deals before,” because you can get started without a track record, but it does get easier the bigger track record you have.
Then, the more you can go to the lenders and say, “I have experience. I have other loans. I’m in this market,” those things build on each other. So when you’re doing your first deal and if you’re looking to get into syndication, your goals are track record, adding investors to your list, building relationships with brokers, all of those things. Then, profiting from it, that’s hopefully a nice benefit of doing all those things. You got to really look longer-term, and realize and understand that the first few years typically of building a syndication business is not all that lucrative. It only gets… Well, I shouldn’t say only. It typically gets lucrative years down the road when you’ve built it the right way.

Tony:
So, Andrew, one of the things you said earlier that really stood out to me was that you live where you love to live, but you invest where it makes the most sense. You lived in Southern California, very expensive market, decided to invest in Georgia, a much more affordable place to invest, but how did you decide on what your buy box was as you moved into that market, and for rookie investors to today, what would your recommendation be for that first commercial deal on how to build that buy box?

Andrew:
My buy box back then was basically anything that someone would sell to me.

Ashley:
Is that your advice for rookie investors today?

Andrew:
That is my advice to absolutely not do, and candidly, that is one of the reasons that most investors start off in lower end properties is because they seem affordable, the seller is willing to give and sell it to you because no one else wants to buy it. What I like to say is those properties are cheaper and more available for a good reason. The grass is greener over the septic tank. Just don’t step there. Stay away. So our buy box now or someone who’s getting started, number one, just decide a number of things. Are you a cashflow investor, or are you looking for appreciation or a little bit of both? I would recommend, especially in the beginning and especially if you can’t take a big financial hit if something goes wrong, make sure you’ve got at least some good cashflow to sustain the property. So you can decide if you’re a cashflow or appreciation. Are you going to self-manage or use third-party?
Just in general terms, you want to look for properties that are in areas where… Now, this could be a city on the other side of the country, or this could be just picking the right neighborhood in your backyard, but the key things to success, getting started in multifamily, is buy in an area where you have population growth, job growth. Those two are the biggest. Beyond that, you want good median incomes or high median incomes. When we say high median income, that means high relative to the rent you are charging. $60,000 median income is pretty good in secondary markets in Georgia. That is the poverty level in Southern California, so you have to… Basically, what you’re looking for is can the average or median person easily afford the rent that you’re going to charge? You want to buy in areas with low crime, and especially in the beginning, I highly recommend buying properties that are not in flood zones.

Tony:
Yeah. I had a very bad experience with a single-family home in a flood zone. Yeah, worst deal I think I’ve done so far, but anyway, I want to talk a little bit because you said population growth, job growth, but low crime. As a new investor, where should I go to get this information? What are some tried and true data sources to identify, “Hey, what’s the median household income? Is the population getting bigger or smaller, et cetera?”

Andrew:
Yeah. I’ve got a couple of good sources for you. Number one, we did a… I guess it’s the OG BiggerPockets Podcast, episode 571. We went through the whole screening process that we use and how to do that, how to identify the neighborhoods that I just talked about. So go check that out, and then there was a follow-up episode shortly after that where we dove into some underwriting stuff. So check those two out. However, if you are open to investing, just, again, live where you want to live, invest where the returns are good, go to the Harvard Joint Center for Housing Studies. They have an awesome map on that website of every county in the United States, and it’s color-coded which makes it super simple for guys like me who just like it easy and visual. Basically, you want to invest in the counties that are dark blue because that is where you have the greatest population growth and greatest migration. So if you’re like, “Ugh, Andrew, I have no idea where I want to start. It’s a big country,” go get that map and start with the blue counties.
Some other really good places to get data is we subscribe to Esri, E-S-R-I. I think it’s only $100 or hundred-something a year. It’s not terribly expensive, but they have a tremendous amount of the demographic data that I’m talking about. Again, population, income, all that kind of stuff. That is what we use for every deal we’re looking at to this day. If you just google “FEMA flood maps,” F-E-M-A, that’s the government website that shows you the maps of what’s in a flood zone and what is not. You also want to go to the Bureau of Labor and Statistics, bls.gov. That is a wealth of information for job growth, population growth, income. Basically, all the government statistics, and then there’s another one. It’s called Rich Blocks, Poor Blocks. It’s exactly what it sounds. Just those four words all jammed together dot-com. It will show you median income for different neighborhoods.
That’s a key point is you’ll see a lot of broker pro formas and offering them rents where it’s like, “Three mile radius. Median income, $90,000.” Right? Well, if you’ve ever been to a city like LA or Dallas, sometimes if you just cross the street, it can be a completely different world, and so you do not want to just take a big average area and say, “Oh, the median income is good.” You really want to drill down to the neighborhood that your property is in. In terms of crime, there’s about a billion different websites out there like Crime Mapper and a whole bunch. Just google crime statistics in whatever city you’re in, and you’ll probably find about 16 different resources for that.

Ashley:
That was great, Andrew. There was a couple there that I hadn’t heard of, and I always love to watch Tony vigorously google things and look things up, but there’s two that I would add is brightinvestor.com, that’s a newer software, and then also NeighborhoodScout too is one that I have used. Yeah.

Andrew:
NeighborhoodScout is good. Also, let’s say you’ve already identified some markets. Let’s say you’re like, “Okay. I’m trying to decide between Boise, and Dallas, and Atlanta.” Go to the big brokerage sites like… Berkadia is really good, but Berkadia, Marcus and Millichap, Cushman and Wakefield, CBRE, all of these, and sign up to be on, basically, their distribution list. Those guys put out reports sometimes monthly, at least quarterly of all these different markets. They are brokers, so they’re a little optimistic at times, but they do typically provide all the sources for the material they’re referencing, and so they’ll list out all the announcements of new jobs, and new plants being built, and all that kind of stuff. So that’s another really good free resource is to go get yourself added to the list of the various brokerages that have offices in whatever markets you want to invest in.

Ashley:
That’s a great tip right there. That was a really great informational deep dive into different resources where you can find different stats and data to actually verify the market that you’re in. Anyone can go on the BiggerPockets Forums. They can go on Instagram, anywhere, and they can see, “You know what? Andrew, he’s really successful in Houston, Texas right now. You know what? I want to do what he’s doing. I’m going to go to Houston because he’s doing it.” Yes, maybe some investor is successful in a market, but that doesn’t mean that their strategy, or their why, or what their reason is for investing, or their end goal is going to align with yours. So just because somebody is investing in one market or location, it doesn’t mean that it is a good fit for what you want to do, so make sure that you are always going and you are verifying, verifying, verifying.
So we could have Andrew right now just tell us, “Okay. Right now, what’s the best market to invest in?” and Dave Meyer does this all the time where he’ll pick a random market, and he will just go through on BiggerPockets and say, “This is the good of this market, this is the bad of this market, this is who should invest there, and whatnot.” But that doesn’t mean that it’s going to be a perfect match for what you’re doing. So you always want to go, and you want to pull this information on your own. Getting a market tip, hot tip from somebody is a great starting point, but make sure you’re not just taking somebody’s word for it, and you’re actually going and verifying that data from a lot of these resources.

Tony:
Let’s talk a little bit, Andrew, about building out your team. So say that you’ve chosen your market, you’ve got an idea of what your buy box is, but as you actually go through the steps of purchasing, setting up, managing, et cetera, I’m assuming you’re not doing all this stuff yourself. Right? So who are the team members that you need to build out? How does it differ from traditional single-family investing, and then what steps are you taking to find those people?

Andrew:
So, first off, go get David Greene’s book Long-Distance Real Estate Investing even if you’re doing it in your backyard, and that will make sense in a moment. The big difference is when you’re going from single-family to multifamily, there’s some additional team members that you need that you may not necessarily need in single-family. So, a team in multifamily. That will often involve property managers. Do you self-manage? Do you use third-party? That’s a personal business decision that depends a lot on what your goals are. My recommendation would be if you are just getting started and don’t have any property management experience at all, either partner with somebody who does or hire a third-party, but pretend they’re not there. What I mean by that is you have to have the right third-party company to let you do this, but approach it as they’re co-managing with you, and you’re there to help them and to make, whoever is working on your property, their job as easy as possible so that you can see the systems that they have, so that you can see how they address problems as they come up, and learn on the job.
Again, what I don’t recommend doing is just… Unless you enjoy it, and you live right close by, and you want to be heavily involved, don’t go by 10 units and try to manage it by yourself with no mentors and no experience. Also, don’t buy your 10-unit and hand it off to a third property manager and say, “Hey, send me the report in a month,” because that won’t work out either. So do something in the middle. So you’re going to want to have property management as… Again, whether that’s going to be you hire an assistant to help you do it or you get somebody third-party.
You’re also going to need contractors. I guess that’s probably similar to single-family. However, if you’re buying 10 units, you’re going to need someone who probably has a little more bandwidth than the contractor that can handle one or two houses at a time. So make sure your contractor has the size and the ability to handle bigger jobs. You’re going to need attorneys. Again, if you’re syndicating, that’s a whole separate attorney. You have, basically, a syndication attorney.

Tony:
They’re not cheap.

Andrew:
No. Typically, they’re flat fee, and that flat fee can anywhere from $10,000 to $30,000 for syndication, and that gets back to the question like, “Ooh, at what point is syndication worth it?” If you’re just doing 10 units, it might not be worth it for the profit, unless you’re using that as a stepping stone. That’s exactly the perfect example of why because there’s… Boom, 15 grand gone just to get the syndication paperwork done. You’re also going to need an attorney to help negotiate and review loan documents and the purchase and sale agreement.
I know every state is a little different in single-family, but in California, when you buy a single-family, it’s just title and escrow. We don’t involve attorneys, and I know other states, I believe mostly on the East Coast, you got to sit down and have attorneys to handle everything, if I’m correct. In multifamily, whether you’re required to or not, actually, one of the biggest mistakes I see some people make is be their own attorney. Do not do that in the multifamily world. You will end up with some nasty clauses in your loan docs that you’re not going to find out until way down the road, and you are going to wish you had spent the money on the attorney. So you want to have a good attorney.
You want to have good lenders, and I have actually found it most beneficial to have a really good loan broker, somebody who can take the needs of your property and your finances out and match it to the best loan for your business plan and what you’re trying to do. You’re going to need a really good insurance broker for the same reason. Insurance. I’m sure most people listening have probably heard that has become a nightmare lately. I’ve got actually friends who their portfolio, their annual insurance premium last year was $1 million. This year, it’s $2.3 million. So, literally, their expenses went up 130% just on insurance.

Ashley:
Let me guess. Was this in Texas?

Andrew:
No. It was actually spread-

Ashley:
In Florida?

Andrew:
Yeah. Well, partially in Florida and partially several other states, but yeah, you’re actually right. Florida and Texas are the two and California are the three main culprits driving the insurance problem. Again, not to scare anybody, the silver lining on that is the free market works. What’s happening is insurance premiums are so high now that more carriers are coming back into the business because they can make so much money off premiums that most of the experts that I talk to now are saying that prices should level up and possibly even start coming down next year. Right? So you don’t need to underwrite 60% increases every year for the next five years, so don’t… Be careful with it, but don’t let that stop you.
A good insurance broker. I’m just trying to think. I’m sure I’ve missed a couple, but those are the key ones, and then the next question is typically, “Okay. That’s great, Andrew. How do I find all of these people?” Referrals, referrals, referrals. Go on BiggerPockets Forums and say, “Hey, I’m trying to buy 10 units in Dallas. Who else is invested in this area? Can you please connect me with your favorite lender, contractor, syndication attorney, et cetera?”
Also, if you’re buying a property, I’m going to assume you’re probably talking to a broker or agent of some kind. Ask that agent. Say, “Hey, if you were buying this, who would you want to hire to manage it for you?” That’s how I found our property management company that we’ve partnered with for 12 years now. I literally asked the brokers, “Who would you hire to manage this thing?” The same couple names kept coming up over and over again. Do that for lenders. Do that for… “Hey, if you were buying this, what contractors would you use?” Then, when you talk to the lender, say, “Hey, do you have a favorite attorney that you like to work with?” Just do that whole circle of referrals. That is the fastest and most effective way to build a high-performing, high-quality team of the third-party people that you need to do this business.

Ashley:
Another person that is a great resource, and I just recently put this together in the last year, is the code enforcement officer of that town or city. Especially if it’s a smaller town, they have more… There’s only one code enforcement officer, but anytime they go and do inspections of multifamily, so they’re seeing what operators take care of the building, what property management is taking care of it, what tenants are happy, which ones are dissatisfied, and they’ve actually become a wealth of knowledge for me as somebody who’s picking out as to how well is this property management company.

Andrew:
Yeah. I really like that tip. That’s a good one, especially for the under 50-unit properties. The only thing I would add is if I was asking the code inspector, I would say, “Hey, I’m considering buying something,” and I definitely wouldn’t be like, “Hey, I’m buying this property at this address,” because then they’re like, “Oh, cool. Let me go look at it.”

Ashley:
Okay. So before we wrap up here, Andrew, I want to know one last question. Based on today’s current market conditions, is there anything that you are doing to pivot today that maybe you didn’t do last year or the year before?

Andrew:
In some ways, yes. In some ways, no. I mean, we’ve always had very strict criteria of what we do buy and what we don’t buy. We’ve always had pretty conservative leverage. We’ve typically never gone above 75%, but some of the things that we have adjusted are instead of 75% leverage, now we might be 55% or 65%. So if it’s a million-dollar property, you would be looking at getting a $600,000 loan, which is 60% instead of two years ago, maybe you would’ve gone for $800,000. So taking lower leverage.
Also, we are looking at trying to purchase some properties all cash and getting no loan at all, and the reason for that is yes, it is harder to do because you got to raise that equity, and it’s a bigger commitment in a lot of different ways. However, what has changed in the market now is these days, from a seller’s perspective, the most important thing is how certain they can be that you as a buyer will close. If you can eliminate the risk of your loan blowing up, then that increases surety of close, and so that’s going to increase the chance that, number one, you’re getting it at a better deal from that seller. Two, what that does, it means you don’t have any debt service to worry about. Your interest rate is not going to fluctuate. You don’t have to worry about paying the mortgage, and then two, you can patiently wait until the market shifts, and it’s a really good time to refinance, and you do it then. You’re not forced to do anything.
So we’re looking at buying… again, looking at deals all cash. Also, if you’re looking at buying a property today, it was really popular the last few years to look at a two to three-year timeline. Don’t do that. That business model is on the shelf for now. It would be very risky to say that you have to exit two to three years from now because who knows where we’re going to be. Have a longer timeframe. So, typically, for us, we’ve always looked at five years. Now, we’re looking more towards 6, 7, and even 10 years because our best guess is the next two years might be a little turbulent, and then that is going to set up the next big bull market upcycle, and we want to sell well into that upcycle. So that’s a few things as we’re looking at lower debt, sometimes no debt, looking at longer hold times, but the fundamentals have not changed.

Tony:
Andrew, one last question before we let you go here, and it ties into that last point. You said that you’re looking at potentially holding properties for up to 10 years. That’s a decade. When I think about our rookie audience, I wonder if they might have challenges getting an investor to commit to a deal for up to 10 years. So if you were a rookie investor, how would you pitch a potential deal with a 10-year hold given that maybe you don’t have that super strong track record yet?

Andrew:
The investor that funded by far the biggest amount of my flips was a guy in his 70s. When I brought him that very first apartment syndication that was on a five-year timeframe, he looked at and said, “Yeah, Andrew, this looks great,” but he goes, “I’ll probably be dead by then. I’m not invested in that.” So you’re right on. It is definitely tougher to get people to invest for those longer timelines. There’s not a silver bullet to it. What I would say is… or how I would address that if I was getting started is I would build the pro forma and the projection maybe on five years. I do think five years is fine.
One of the beautiful things about real estate is time typically heals all wounds. The longer you can wait, generally speaking, the better it gets. That’s just how the US economy is set up. So what I would do is I would maybe focus on five years, but then set it up so that if for some reason in five years, it is either a bad time to sell or it’s very clear in five years that if you keep holding, you’ll make a whole lot more money, you have the option to do so. Right? That’s actually something that we’ve been very cognizant to do in our deals the last three years is maybe they were set up as five or six-year deals or even four-year, but we always made sure that the potential is there to hold longer if we either need to or want to.
I’ll give a perfect example. We have one in the Florida Panhandle that we bought in 2015. Our pro forma was to sell it in 2020. We still have it, so it’s going on eight years now, but that is because it makes so much money that all of the investors voted… We took a vote because doing something different than what we originally said, voted to keep. It was a unanimous vote, “No, let’s keep this thing,” even though it originally was five years. So that’s how you end up getting a 10-year hold with investors who would otherwise never agree to 10 years is you buy and say, “Look, our plan is five years.” But then, if you buy it right, and operate it right, and do such a good job with it, it’s not going to be hard to convince people to keep it even longer. Again, if your investor is like, “No, I really do want to get out,” there’s different ways to structure that without selling the property or hey, you know what? Sell the property. Put a check in the win column, and then move that money somewhere else.

Ashley:
Not even with syndications, but that example works with private money too. If you are amortizing it over 10 years, maybe you do the loan callable instead of… that it’s actually a balloon payment where they have to give so much notice. We’ve done them where they have to give eight months notice in writing if they’re going to call the loan or else it extends for a certain period of time.

Andrew:
That’s a perfect example actually. So I have a small property that is not syndicated, and we did that very thing. In order to not have to put quite as much cash into it, we got a number of investors to do private notes. It was a two-year term, and then we said, “Hey, at the end of two years, the notes just go month to month.” One of the investors said, “Yeah. I actually need my money now. Can you pay my note off?” All of the other ones, “Yeah, we’ll just let it keep going.” But if we had said, “Hey, can you give us a five-year note?” that would’ve been a lot harder, right? But now that they’re used to getting an ACH deposit in their account every month and there’s nothing better to do with the money, everyone is like, “Yeah, we’ll keep it.” So do a good job, and the problem goes away.

Ashley:
Well, Andrew, thank you so much for this mini masterclass on multifamily. Can you let everyone know where they can reach out to you and find out some more information about you?

Andrew:
Yes. BiggerPockets Forums, of course. Please connect with me on BiggerPockets, and I am not a social media guy. However, I’ve decided to slightly catch up with the rest of the world, and I am on LinkedIn now. So if you comment or respond, that actually is me posting and actually responding. So if you want to engage with different topics with me, then please do that on LinkedIn. Our website, just vpacq.com, short for Vantage Point Acquisitions. There’s a couple of different ways to connect with us there, and I look forward to hopefully talking with you. For those of you who are only listening to this on audio, go check out the YouTube because Ashley and Tony are the most color-coordinated hosts I have ever seen on a podcast. They look professional and perfectly match their backgrounds, both of them. Mine looks like business barf on the wall, and they’re perfectly coordinated, so.

Ashley:
Well, hopefully, they go, and they watch this YouTube one because no other episode will be like that. Andrew, thank you so much for joining us. You can also find out more information about Andrew and get even deeper into his multifamily deals. You can go to episode 571. It is a great starting point on The Real Estate Podcast, but Andrew is a celebrity there, and you will find more episodes and more information on multifamily. If you would like to learn more about myself, or Tony, or today’s guest, Andrew Cushman, please head to the description of this episode in YouTube or your favorite podcast platform to view the show notes.

Tony:
Well, Andrew, that was an awesome episode, man. Really, really appreciated that.

Ashley:
Yeah. Thank you so much.

Andrew:
It was fun talking to you guys, so.

Tony:
It’s always cool when we can break down the meteor, more intimidating rookie topics for folks and make it seem more attainable.

Andrew:
Hopefully. Hopefully, they’ll get some value out of that, so.

Tony:
Yeah. No. It was super good, man.

Ashley:
I’m Ashley, @wealthfromrentals, and he’s Tony, @tonijrobinson, on Instagram, and we will be back with another episode.