Things You Wish You Would've Known With Your First Apartment

[Terrill Clark]

Hey Biggerpockets Family!

I've been away for a while just learning what I can while working a **** ton so I can save up for my first property. My plan has shifted from wanting to flip homes when I first started on this journey and I now want to own apartment complexes. 

My goal is to own a 12-15 unit complex. I've been looking just to get an idea and see that they typically start around 1.5million for 10 or more units (I live in Minnesota)

Starting out, I'm aiming for 5-8 units. I'm thinking I'll need around $90,000 for a 20% downpayment and maybe $50,000 for renovations (just aiming high)

I don't have any experience managing properties and people I've shared this goal with (many whom never attempted anything like this) all suggest I start with something like a duplex but I believe that a duplex and apartment complex would be different experiences

I'm just looking for some success stories as well as things you've learned on our journey that would've helped you succeed when you purchased your first complex

I'm 26 & I feel like I'm sacrificing all of my time working so I can make this happen. ANY helpful input would be GREATLY appreciated!

[Jonathan Twombly]

@Terrill Clark

Here are some things that I wish I had known when I started out.

The first property I bought was 102 units, in South Carolina.  I had the equity lined up, the debt, everything.  I thought I was good to go.

First, I did not realize that, with commercial loans, the lender will not lend to you unless you have a personal net worth equal to or greater than the size of the loan, with 10% in cash.  I had to get my partner to sign on the debt with me.  Even though he more than had the balance sheet, he was extremely reluctant to sign on it, since he was not a real estate guy and really overestimated the risk of signing on a non-recourse loan.  So you should know about this going in, and if you don't have the net worth to do the deal yourself, make sure that you have partners who have the net worth and are not afraid to sign on the dotted line.

Second, you need to raise a lot more equity than just the down payment.  In addition to the closing costs, there may be tens of thousands of additional funds needed for escrows, funding your operating accounts, etc.  The lender may come at you with demands for immediate repairs, which you need to escrow up front - and then pay for, before you get this money back.  So you need to have the money for the escrow AND the money for the repairs set aside up front.  (Crazy, right?)  The point here is that you really need to get ahead of this as early as you can, so you need to have ongoing discussions with your lender about costs and escrows, so you can be sure to raise enough money up front.

Third, you will need a reserve fund for capital items.  You cannot finance capital items out of cash flow.  It will kill the property's liquidity.  You need to raise a capital fund up front so that you have the funds set aside to pay for capital items.  It's almost line your own internal line of credit.  You will be paying the lender escrows every month for capital items, but you will not get this money back until you have paid the vendor, so you need a source of cash to pay the vendors while you are waiting to get your escrows back from the lender, which can take 60 days, and is usually subject to some kind of minimum, because the bank does not want to deal with requests for $500 her and $1,000 there.

If you don't provide the property with enough funds to be liquid, you will NOT make money.

Of course, if you are doing this on your own, and you don't need to pay investors, you can finance these items out of pocket as the need arises.  But you need to be prepared.