1M in funds but no experience

[Sean P.]

In approx 18 months I intend to invest in multifamily as an active investor. I will have access to ~1M in cash for down payment and closing costs (I would also have reserves, separate from this capital). However, as I learn more about commercial loans, I’m discovering that lenders will require experience with similar types of investments, as well as net worth and liquidity requirements. Short of spending several years building experience with smaller deals, what would the folks on this board recommend?

Investors: should I partner with someone, harnessing their experience (and net worth/liquidity)? I’m not interested in being a passive investor and relying on someone else for the sweat equity. If I supplied the cash and sweat equity, how likely is it for an experienced investor sign on for a fee rather than a share of equity?

Mortgage brokers: are there commercial lending options that can work without experience? I'm generally familiar with DSCR loans – do they require experience? Interest only options would be ideal.

Is there a better strategy that I’m not thinking of? Would love to hear recommendations from people on this board.

• Credit ~800
• Presuming 25% down, but open to whatever numbers work out best
• Non-owner occupied
• Long distance (no specific geography selected yet)
• Professional management
• Leaning towards MHP initially, but open to apartments if the numbers work
• Priority is maximizing cash flow, especially in the first 1-3 years

[Randall Alan]

Quote from @Sean P.:

In approx 18 months I intend to invest in multifamily as an active investor. I will have access to ~1M in cash for down payment and closing costs (I would also have reserves, separate from this capital). However, as I learn more about commercial loans, I’m discovering that lenders will require experience with similar types of investments, as well as net worth and liquidity requirements. Short of spending several years building experience with smaller deals, what would the folks on this board recommend?

Investors: should I partner with someone, harnessing their experience (and net worth/liquidity)? I’m not interested in being a passive investor and relying on someone else for the sweat equity. If I supplied the cash and sweat equity, how likely is it for an experienced investor sign on for a fee rather than a share of equity?

Mortgage brokers: are there commercial lending options that can work without experience? I'm generally familiar with DSCR loans – do they require experience? Interest only options would be ideal.

Is there a better strategy that I’m not thinking of? Would love to hear recommendations from people on this board.

• Credit ~800
• Presuming 25% down, but open to whatever numbers work out best
• Non-owner occupied
• Long distance (no specific geography selected yet)
• Professional management
• Leaning towards MHP initially, but open to apartments if the numbers work
• Priority is maximizing cash flow, especially in the first 1-3 years

@Sean P.

Hi Sean,

I’ve been exactly where you are about to be.  My wife and I were working full time corporate jobs where she made 6 figures, and me a bit less.  

We wanted to find our path to replacing that income and not sitting in a corporate cube 8-10 hours a day.  Option 1 was the 4% rule where you could withdraw 4% of say $1 million - but that is only $40,000/year - which was not going to replace $200k in income.  That’s when we looked to real estate. 

We started buying single and multi-family properties for the cash flow.  We began doing this in 2018 buying 12 properties our first year, 10 the next year, and 9 the next year.   By having the money up front it will be very easy to buy properties.  We financed all our properties to maximize how many properties we could afford.  

There are limits to how many Fannie Mae (personal) loans you can have, which is 10 per person… so if you are married my first suggestion is to buy your properties in one person’s name to maximize  how many loans you can have.  

When we reached our limit there we actually did a consolidation loan with a commercial DSCR loan where we paid off 5 Fannie Mae loans with a portfolio lender which opened up 5 more Fannie Mae slots for us. This is about to bite us though as commercial loans only lock for 5 years - so our 4% commercial loan will reset in the next year and probably increase to the 6% range if we don't pay it off before then. So that's a lesson learned through experience.

While I’m sure MH Parks have there place - the homes themselves are viewed more as depreciating assets by lenders - more like cars, and less like real estate.  So I don’t think you will see the same level of appreciation with mobile homes as you would with brick and mortar real estate - so i would recommend buying traditional real estate. 

There is no need to partner with anyone unless you are lacking something.   partnerships get messy.  You want to go one way - they want to go a different way - then what do you do?

To maximize cash flow - manage the properties yourself.  It’s easier than you think.  Property management can cost upwards of 1/3 of your profit on a financed property.  So PM will definitely take you in the opposite direction of cash flow. 

Utilize a property management platform that automates tasks for you.  We use Rentec Direct - but there are many out there.  They collect your rent, apply late fees,  deposit your monies into your bank account, market your properties, track expenses, screen your tenants, etc for just a few dollars a month per door.  It’s my favorite landlord tool - bar none for how much it makes my life easier!  

The challenge in today’s environment is that properties are far more expensive than  2018-2021, and mortgages are way more expensive as well.  So finding the cash flow you desire will be far more difficult.  So while real estate can be a great vehicle - realize it’s cyclic - and you are in the high side of cycle.  I would always recommend comparing your expected returns on a deal against other non-real estate options and do what makes the most sense.  So if you find you aren’t seeing the cash flow you desire - real estate may not be the best vehicle at the current time until interest rates come back down.  So go into your investment opportunity with open eyes to what delivers the best returns.  

Hope some of it helps!

Randy