Can a Small-Mid Sized Apartment Complex Really be my FIRST Deal?

Question

I've listened to most of the Podcasts, read hours and hours on BP, several books, etc. I am not broke and do have a little money saved up (about $16K total not including my 401K).

So far, my favorite strategy is buy and hold smaller (preferably 10 to 75 unit) apartment complexes for cash flow. Obviously, my little $16K is not going to go far in this arena no matter the market. I would rather keep that savings for covering whatever newbie-tax I will surely owe very soon. I understand that to get hard money or even commercial bank money for this big of a deal would require me to prove my expertise in this first. I haven't done a deal yet although I do own my home. It has about $30K in gross equity putting me at about 77% LTV on my FHA. I cannot sell for another 3 years due to using THDA. Since I make far more income now, I would have to pay back the down payment they gave me if I sell in less than 7 years. Also, we are in the middle of a project that is not yet up to code so an inspector is not yet my friend.

Here's the question: How do I get from here (no experience and little cash) to owning my first apartment complex that cash flows?

1. Partner for the down payment on a commercial loan.

2. Partner for the down payment on hard money.

3. Start with a small multi flip using hard money (or a combination of my money and hard money) and then trade up to bigger multis (1031 or carry over the note) until I reach the kind of cash that the bank or lender would consider as enough skin in the game to lend me the rest.

4. Other? What am I not seeing as an option? For those who have apartments in this size, how did you get the first one?

Derek Carroll · Answer

Kelly Rastatter  all of these are good options. You can also have the seller Hold back a second mortgage to come to closing with a lesser amount. Figure that you'll still need approximately 10% of purchase price.

If I were you I'd probably find someone who actively owns small apartments in your area and talk to them about it. Maybe you can wholesale a deal to them. A flip is also a great option with little money because if you have a good enough deal then it will be easier to attract partners or private money lenders.

Manny Gonzalez · Answer

I would call a couple of commercial loan officers in your area and find out. In my area they would only loan 75% of purchase price even though they all said we were getting a good deal and the current operating value could have had a higher purchase price. The banks wanted us to have a lot of skin in the game since this was our first rental property.

Kelly Rastatter · Answer

Thanks for the info everyone! I am reading The ABCs of Real Estate Investing by Ken McElroy right now and so far, it is great. I have read info suggesting using hard/private money for rentals but that doesn't sound like the numbers would work long-term unless they are doing value-add and then refi with a commercial loan. Would the bank require me to provide 25% of the cash-in at that point or 25% of the current operating value?

Mark Nolan · Answer

@Joe Ritzik

Yes a solo 401k is a great retirement vehicle for investing real estate.

Regarding finding an investor mentor, consider sending messages to members which is my favorite part of the website.

Manny Gonzalez · Answer

Hi Kelly R,

To answer your first question YES it is possible to get an apartment complex on your first deal. My wife and I got a 7 unit for our first buy and hold. We weren’t complete novices to real estate we partnered on 6 flips (not all of them winners) before we decided to get our 7 unit apartment.

We went with a 7 unit in Southern California $350K that received $4,120 in rent each month. We went the traditional commercial loan, which was 25% down of purchase price. That equals $87,5000 but with closing costs, appraisals, etc. it really cost us around $92,000 to close.

Yes it is possible but it is not cheap.  If you get a partner to put up the down payment make sure your math works so you don’t have to pay out of pocket each month. We hired a property management company from day one, which has been a huge help.  The cash flow is not amazing but since we save all the income from this property we haven’t had to put in another penny out of pocket. The property pays for itself.

Suggestions.

-Re-listen to all the BP podcasts that deal with apartments.

-Get The ABCs of Real Estate Investing by Ken McElroy

-Ask for all the properties expenses. (we didn’t know that the owners had to pay for water before we made our offer which is $500 a month)

-Call different Real Estate agents and ask for recommendations for loan officers/banks and property mangers.

-Call different loan officers/banks to get quotes on rates/fees and ask for recommendations for property mangers.

-Research and interview multiple property managers in the area and ask for references.

-Look under Files (on BP) and download property manger questions. Our current property management company has saved us thousands in repairs and are worth what we pay them each month.

-Everything we needed to know before we got our first apartment complex was on Bigger Pockets and in The ABCs of Real Estate Investing by Ken McElroy. We are still learning more on BP.

Good Luck.

Jen Shrock · Answer

I am getting ready to put my primary residence and a vacation property on the market.  These two particular properties I would like to sell to fund a start in real estate investing and pay off all personal debt.  I have an 8 unit that has caught my eye of 1/1 units. I really like the area they are in and would be ok with my primary residence being in one of the units.  Once one of my other properties sell, I would have enough for a 20 - 25% down payment at the current price, although I think that can go lower.  The property needs a lot of work which I could spread out some and finish a bit at a time while working my day job.  While due dilligence would still need done to ensure the quality of the deal (it is in short sale status), I am a newbie and my concern is that even if it did turn out to be a great deal, that I would not be able to get financing for it.  So, I have that concern and just the concern of evalating the deal as a newbie and getting the numbers right (my brain thinks like an engineer, not an accountant).  I have been thinking of what I could offer of value to someone in trade for mentorship.

Joe Ritzik · Answer

I'm in the same boat although I have a bit more ($68K) to start out with in a newly established solo 401K.  I'll have quite a bit more when two properties I currently have on the market sell.  The one thing I do not have is the experience so I'm very interested in finding a mentor who currently owns larger apartment complexes to partner with and show me the ropes.  Idle cash is not a good thing.  I need cash flow!  Help!!!

Ramon Jenkins · Answer

Myself I'm considering option #1 in my community.

Keep in mind

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

a.)   You most likely will receive existing tenant’s security deposits.

b.)   Possible seller 2nd

c.)   Credits toward deferred maintenance

d.)   If you close around 1st through 5th of the month you might receive

a full months rental income credit for closing.  :)

e.)  Seller might provide concessions for closing credit.