Is a multi-family property good for a beginning investor?

Question

I am looking to carve my niche in multi-family properties, such as a apartment complex,  since trying to cover everything would be spreading myself to thin. Given my situation of that I would be using OPM to finance a deal ripe for the picking, would it be a good idea to look into a multi-family property? Tell me if I should change any of the following, in terms of thinking. I would try to find a apartment complex where the average rent is lower, so around the $500-$800 mark, so if certain aspects of the market in that area go belly up, perspective tenants can still manage to occupy my units.

Brian Burke · Answer

If this is your first investment, small is good.  Small probably won't wipe you out.  Well, it might, but it shouldn't.  When I first started if I'd have lost $5K on a deal it probably would have been my last deal.  And you're right, as a new investor it would be tough to attract much capital so going in with the assumption of raising $100K max is more realistic than thinking you can raise millions.

But $100K doesn't do much in the multifamily space.  In some markets it wouldn't even get you an SFR, in other markets you could probably get 5-10 units with a $100K down payment.  1-4 units would get your feet wet and teach you the lessons you'll benefit from later...but getting your education on the back of someone else's money might not be a very fair deal to the investor.  Your best bet is friends and family, they are more likely to invest in YOU as a person, not your track record.  The downside is that if the deal goes bad you not only lose money you destroy a relationship.  This all should be part of the discussion with the friend/family before going into business together.

Derik S. · Answer

Thanks for the input Brian,

Question, what would these deals look like that are less likely to wipe me out? Starting out, I am probably not going to be able to get an investor is shed anymore at the most than $100,000, right? So, I want to start out cheap-ER, without necessarily buying junk that would require more of an investment to make it attractive to prospective tenants,

Brian Burke · Answer

Done correctly, multifamily is a good asset class. That said, there are a lot of added risk factors for an inexperienced investor. I've seen a lot of folks go belly up from multifamily because they didn't know what they didn't know.

If you are planning to use OPM you have to take an honest inventory of your experience because this is a serious responsibility.  Plus you have to attract capital, which is easier said than done.  Money isn't attracted to deals, it is attracted to track record.  If you don't have a track record your roadmap to success would begin with smaller properties such as SFR, duplex, 4-plex, etc and then you can scale up as your investor base broadens.

Buying lower-end is OK but don't let that lure you into a false sense of security. During an economic downturn even the lower wage earners can lose their jobs.  In 2009 many apartment complexes all across the pricing spectrum lost occupancy and suffered from skips, uncollectable debt, and leasing concessions and in some cases negative rent growth.  Many investors lost their properties to foreclosure, completely wiping out their OPM.  Inexperienced investors got hit the worst because in many cases they were undercapitalized and overleveraged.

Do yourself and your investors a favor and earn your stripes on deals that are less likely to wipe you out if things go wrong.  Or...partner with someone with lots of experience so you can get OJT before being responsible for OPM.