Am I ready for Multi-fam and Apartment Investing

[Helen Chau]

Greeting everyone!

I would like to leverage this group's expertise to help assess my readiness for multi-fam and apartment investing.

I have been a SFR landlord for 4 years. The properties have been providing decent cash flow and appreciation over the last 4 years. I have taken most of my money out (down payment) through refi and the properties still cash flow positively. I am thinking of selling the properties, taking the cash out and putting it into a bigger project.

I am doing my research now. So far I know I have to have 20% down, 10% in reserve, plus inspection / appraisal / closing cost etc. I should do a 1031 exchange when selling my SFRs and put that towards the multi-fam property. I have a CPA and attorney in my power team to help me when I am ready for a deal.

My questions are:

1. what else do I need to be sure that "I am ready"?

2. what do I need to be ready for when I am going to talk to a commercial lender, knowing that they will look at deals very differently than residential? e.g. will my 4 years of landlord experience and full time RE investor status be good enough? This will be an initial conversation because most likely I won't present a deal (I don't have yet). Rather, I will try to find out what type of property I can do given the amount of down and reserve I have, rate, cost and qualification of borrow(s).

3. any other resources I can tap into to help me get ready? I have been reading posts on this forum and found them helpful.

4. what size of multi-fam project should I look into as my first deal? And what type of lender should I talk to?

Appreciate any thoughts and tips on this!

Cheers,

Helen

[Joel Owens]

Thanks Pete for the vote of confidence.

Hi Helen,

I have many clients from California. I transact all over the United States. Typically most of my California clients are buying in other states because of the yield that is available there with multifamily.

What kind of loan terms you get Is based on the asset itself. I have no clue without knowing what kind of liquid cash you have on hand now versus the equity trapped in your properties you want to sell for 1031 purposes.

You mentioned that you are a full time investor. Do you work a job with an annual salary and what is the amount?? If you don't work a job then do you have a partner that works a regular job with annual income?? These are not required but helpful. You can overcome this if you have substantial net worth and liquidity.

From the economies of scale purpose size does matter to land a full time property manager and a full time repair person. The other part is that if you are dealing with small balance loans under 1 mill it will be a local bank giving a 5 year term and maybe a 20 year amort.

You get longer term loans by moving into larger loans of about 3 million and up. The best part is those tend to be non-recourse against you, the rate is fixed, and the length of loan term is 10 years or longer which helps protect against interest rate shock with a five year loan.

Chase bank was mentioned but I have called them before here locally for another client and they like only a select few markets and really large loans. For instance here in GA they do only SBA loans and no commercial here. I have many sources that are specifically apartment lenders that do the whole U.S.

The 20% down loans usually on the first have a higher interest rate. Better is to get a 75% ltv at a lower fixed rate and then get a seller to hold a 10 to 15% second note at just as good or better terms then the first mortgage. You can then blend the rate down to maximize returns. It's great that you have a tax accountant and an attorney but one of the most important aspects in my opinion is a commercial broker who knows this asset class and is also an investor. There are many stated cap rates out there but the underwritten actual cap rate is quite different than what is shown. Your 1031 proceeds the total debt needs to equal the new property or higher or you will have taxable boot.

In California due to rent control, high income tax, overly compressed cap rates there is not much yield there. I know some clients that had recent appraisal on a small building they own with 12 units for a 3 cap. They are selling and plowing the money into other markets for more promise.

If you just want a long term tax write off with limited to no cash flow and equity build up then Cali might work. There might be some multi cash flow areas there but probably not in nice areas you want to own in.