How hard to directly jump into median size apartment complex?

Question

Read books and posts and talked with different investors and players.

Just would like to know how hard to get finance or good deals for the investors with zero experience?Say,6~8 units complex?

Would like to bypass  the SFRs track and directly into multifamily spaces,but really need instructions or help to analyze the situation.

Thank you

Marc C. · Answer

You can start with multifamily; I did. There are many advantages over SFRs. But you need to spend the time to get educated: Read the books, watch the videos, etc. So much good stuff out there.

Financing 5-20 unit properties can be challenging, so the other posters' advice about contacting a lender first is applicable. Skip the big banks: This will be a LOCAL lender; a portfolio bank headquartered in your state. You want to talk to the commercial banker who will drive by the property. (Want a referral? Ask your local apartment broker (not residential Realtor).

I would be prepared to accept 75% LTV at around 5% interest for 5 years, and a minimum DCR of 1.25.

If your credit score is 700+, the property has 3 years of good and well-documented operating history, and you have a job, I think you'll get a loan on anything under 12 units, even if managed yourself. (But always budget for a 3rd party property manager as you never know when you'll need one...and you need to pay yourself for managing it anyway.)

As for dealing with the bank: The more prepared you are, the better it will go. Prepare a nice package: Photos of the property, your financial projections, and a 2-page business plan covering what you plan to do with the property. Include 3 years of your tax returns for you (and the property, if you have a specific one in mind). They'll also want 6 mos. of your bank statements (plus a year's worth for the property), as well as documents supporting your current assets and liabilities. If you're under contract, include copies of the leases. Include a copy of your credit report, and copies of your credit scores from all three reporting agencies. If you're going to title it in an LLC, set up the LLC now; include copies of the organization documents, your operating agreement, and resolution authorizing the company to open a bank account and purchase a property. Get your EIN and state tax ID numbers now. Make a quick logo and some business cards. SHOW HOW PROFESSIONAL YOU ARE and you will get around the "previous experience" requirement.

Good luck.

Jeff Greenberg · Answer

My advice is always learn from others that have been there.  Find someone that is doing what you want to do and find a way to be of service to them.  I know many MF investors including myself, that started out as a passive investor.  You can learn a lot if you find the right deal sponsor that will share info with you.

Matt Lefebvre · Answer

Hi @Vincent Chen!  The biggest difference you'll find in looking at these size multifamilies/single-families, is the financing component.  Anything 5+ units is financed commercially which has different criteria from a residential multifamily.  Lenders will analyze these deals based on the actual income/expense numbers rather than being partially based on comparable properties.  Usually two, three, or four families are at least partially valued based on other recent sales in the area.  5+ units are strictly based on cash flow.

There's nothing stopping you from jumping right into 6-8 unit buildings... in fact, I believe that the numbers tend to be more favorable for larger properties than smaller ones.  If you have 8 units under one roof, or 8 units under 8 roofs and you need to replace a roof, the 8-unit is going to cost a little bit more than a single-family, but its going to be a lot less than replacing 8 separate roofs.

I'd recommend as a first step, talking to a local commercial lender that can talk to you more about the financing side of things and how they break down the numbers for potential investments.  The advice you'll get (from a competent lender) will be invaluable.

Todd Magin · Answer

Before I get too far, I'm a newbie still in search of his first deal, but I've analyzed about 30 deals already (less than a month) ... so take what I have to say with a grain of salt. :)

You can find good small multifamily deals (2-4 units), but the competition is tougher (more small investors looking for these properties).  The big advantage to these properties is the better financing rates you can get, which can make the numbers work.

I've found that the 6-8 unit range is much harder to find where the numbers work because you need to pay the higher commercial rates but you don't get the economies of scale with a larger building. Therefore, I've found that 10-50 unit buildings are my sweet spot.  They are large enough to get some economies of scale, but not too large where institutional investors are interested in them so there is less  competition.

That being said, my first property may very well be a "dual quad", a property listed as an 8 unit building, but is actually two adjacent quads.  They are taxed separately, so I should be able to buy them as two quads (with favorable financing).  The beauty of this deal is the below market rents due to poor management (owned and managed by a church) ... and because the way it was listed, there was less competition.

Are you planning to self-manage or hire a property management company? Parroting back others advice ... If you self-manage, it's better to make small mistakes than big ones when you're just starting out.  Some have also advised it's better to self-mange your first deal than jump directly into using a PM, because you need to learn how to manage a property before you can "manage" a PM.

Ultimately, the decision is yours as you know best your situation.

Good Luck!!

Stephanie P. · Answer

@Vincent Chen

Cash is going to be king in your situation.  Be prepared to put 25% down and the property must cash flow at least 1.2 to even be considered although there are no income verification products out there that don't require a DCR calculation or seasoning of funds if you want to bring in a silent partner.  All loans that I've seen are full recourse loans with personal guarantees.

Just as an aside, if you see deferred maintenance when making your inspection (like a really old boiler or the roof is not in the shape you'd like it to be) ask the bank you're financing with to lend you the money for the repairs.  If they don't, move along and find another.  There are plenty of nice properties in your market.

Good luck,

Stephanie

Marc C. · Answer

Even if you're small-time, you should be putting your properties into LLCs to reduce your liability. Any commercial lender will understand and won't care. If they do, go to another lender who understands the way the world works.

Matt B. · Answer

I am also interested in the OP's question.  Lots of good responses here.  I hadn't really thought about making myself look legit with business cards, resume, etc for a commercial loan officer.  I'm planning on making the leap to multi-unit properties in the next year or so, so these are great tips.

@Hayden Harper are most of the buyers of 5-15 units you work with buying under LLCs or are they small time landlords taking it to the next step under their own name?  Do commercial brokers prefer one over the other?  Advantages?

Hayden Harper · Answer

@Vincent Chen

I'm working as a commercial real estate broker right now.  Lenders will definitely take a look at your resume and management experience, but that really depends on the lender.  5 - 6 units are consider a starter property in most lenders eyes.  Using a property management company would help your case from a lending standpoint.  Shoot me a DM if you have more questions.

How hard to directly jump into median size apartment complex?

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