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

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

Minneapolis, MN · Member since 2017 · 40 posts · 9 votes

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!

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Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9y

@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.

See this reply in the discussion

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  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y

    @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.

  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Jonathan Twombly WOW...this may take a little more time than I thought! Thank you SO much for that insight! Just curious, what kind of money do you actually net off of each unit after factoring repairs etc? I've read a few people clear maybe $70-$80 off each unit but I thought it would be something like a couple hundred at least Would you suggest I hold off until I could afford something like a 50-100 unit property before I got in the commercial real estate game?
  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    One thing is that really bad tenants tend to "infect" other tenants. in other words, if you have a tenant that causes all sorts of trouble/drama/damage/police reports/noise, etc. they will usually spread this problem as there are some tenants that tend to behave in whatever way the general atmosphere of the building is. So you really can't tolerate the really bad tenants even if they pay their rent.

    I would also standardize everything as quickly as possible, from paint to flooring, to save costs. And when evaluating a property, look at what the previous owner capitalized. I have often seen sellers capitalize stuff that should be an operating expense to hide expenses and make the NOI look better. There's a lot more than that of course, but those are some of thoughts that came to my head first.

  • Rental Property Investor · Northville, MI · Member since 2013 · 263 posts · 183 votes
    9y

    Here is a link to an in-depth post I wrote with my reflections on the second year of ownership of an 18-unit property, which I bought with no previous multi-family experience:

    https://www.biggerpockets.com/forums/432/topics/26...

    The article has a link to the even more detailed reflections on the first year of ownership of the property. 

    I would definitely recommend starting on the relatively small scale you are looking at now.  It's a great way to get experience without risking the money of others, and to build your resume for bigger deals.  It will confirm that MF is indeed something you like to do and want to do before you commit multi-millions to a deal.

  • DFW, TX · Member since 2016 · 58 posts · 68 votes
    9y

    @Jonathan Twombly brings up all very good points and lessons first time MF investors don't realize and learn after trial by fire!

     @Terrill Clark when you say "actually net" are you referring to rent increases? In that case, it will wildly depend on your comps in the area and how much you put in for rehab and interior upgrades. There isn't a one answer fit all unfortunately for that question.

    Seems like you're a hard worker and willing to put in the time. Is there a reason why you want to go it alone? My suggestion is that you first become a passive investor in a MF syndication.

    What this will allow you to do is get access to the inner workings of how to structure a deal and give you a direct line to a sponsor. This will however typically require you to have 50k (typical minimum investment) and be an accredited investor / sophisticated investor depend on the sponsor's investor requirements.

    Something else to consider is unless you plan on self managing, going straight into 60+ unit apartments allow you to be able to carry the expense of a 3rd party management company. Typically anything less won't work as the margins aren't there for them.

  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Andrew Syrios I don't think I would have thought of that, but that makes total sense! Thanks for that!
  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y

    @Terrill Clark  We don't really think of per-unit profits.  We're more focused on return on invested capital and absolute dollars paid out, since we have to meet a preferred return to our investors before we can participate in the deal.

    I say that you should start where you are.  You will get where you want to go much faster by simply getting started.  But make sure you exercise discipline at all times, because the most important thing in making money is not losing money.

  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Ken P. AWESOME! This is what I was hoping for! Thank you
  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Abel Sng when I say "net" I'm referring to the money ACTUALLY made each month from each unit. Sort of like "payday" I didn't really give much thought on going in alone vs trying to find a partner, I just felt that having the capital would help me out. I've read so much about reserves etc that I just wanted to be prepared, even if I didn't use all of my life's savings haha I'm very ambitious and I just want to succeed. I'm trying to be the one in my family that will show the younger kids that we don't have to always work for someone My goal is to make $6,000-$8,000 monthly through real estate. I'm currently working 72hrs weekly and only making 4K monthly. I NEVER want to have to work this hard when I'm older when there are people doing much less & made it possible through real estate
  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Jonathan Twombly I guess my concern with there money made per unit is based on my desire to make money in general. I work very hard and I don't want to HAVE to work this hard when I have a family of my own Once I get at least $3,000 monthly coming in that could take care of bills, I know I'd be much more focused on the investment return. I appreciate your input though! I need to just get started. Would you suggest I start small or wait for a larger opportunity to take care of my short term $3000 month goal?
  • DFW, TX · Member since 2016 · 58 posts · 68 votes
    9y

    @Terrill Clark I'm 30 myself with two kids so I can feel for you brother! If you are currently working 72hrs a week making 4k a month (not sure if this is gross or net) you should consider finding yourself a "bridge job" where you can cut down your hours so you can focus on RE if that's truly where you want to go.

    Bridge job:  A bridge job is a temporary job that gives you space to catch your breath, regain your energy, and provide some low-pressure income, while also giving you more time and energy to work toward finding your dream job/passion.

    I did the exact same thing last year. Was working crazy hours in public accounting and now closing on a 284 unit prop with my partners! Sometimes you need to take a step back to move forward.

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y

    @Terrill Clark  As I said, start where you are.  If you wait for some event in the future, like having enough money to do bigger deals, you may never get started.  And if you want to raise money from investors to do bigger deals, you will have a better time of it if you already have deals under your belt.  Get a deal done with your own money, manage it right and make money.  Then do a slightly bigger one.  And a slightly bigger one.  And when you need other people's money to do the next slightly bigger deal, now you have a track record to run on.  Also, as you do bigger deals the banks will become more concerned about your experience.  So building experience will definitely help you on all fronts.

  • Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes
    9y

    Thanks for sharing your goals and positive energy.

    If I had to pinpoint one quick thing (rather than making a laundry list for you), I would probably advise a new buy and hold rental investor that......

    1) If you self manage, you will find some tenants have personal management issues; your goal will be to get them paying rent on time and following the rules (that is it).

    One thing I have seen in 13 years as a landlord working with tenants and few fun years on BP interacting with investors/landlords on BP is that we have a divergence and even a potential conflict brewing that a newbie can fall prey to.

    That is, the folks on BP are some of the most self motivated, financial savvy, and smart folks in the country but their tenants not so much, especially in working class or lower income strata (think mid level, "C" or below). 

    The tenants are often great people but they often live paycheck to paycheck (like about half the country) and they may lack other skills that can manifest themselves in all sorts of ways (be it communication, ability to handle the clutter on the porch, or afford to fix the car leaking some oil on your driveway).

    In fact, I see about 3/4 of the conflicts for landlords on BP relate to items like late payments, tidiness, a broke this or that, pets (or family members) run amok, getting along with other tenants/neighbors, not following rules, noise, smells, problems with move outs, or even issues with applicant pool (like credit or job history).

    When you step back, you have to realize if they (all your tenants) had excellent financial, interpersonal, communication, and organizational skills--they may not be renting from you (but own their own place or even their own rentals!!). They may be on BP!

    So, to sum it up, you often have the folks with the best management skills housing those with suspect personal management skills or at least with areas that could use in improvement. Realize that fact  you are half way home. It is what it is... Then you can put any negative emotions aside and develop systems, strategies, and skills to manage your property and people (screening, handy skills, good scripts for common issues etc)...

    Of course, some great tenants are just in an area a short time, choose to rent for other reasons, etc. But for many it is the only option. In fact, the former (in my case) often move on to buy while the latter often lack the credit or ability to save a down payment (and can be very long term tenants).

    At the end of the day, these folks (the renters) can either make you rich or crazy in my view, depending on your approach. 

    Some landlords go nuts and their blood pressure spikes when they get a call about something broken, see a messy unit or a tenant is a day late on rent. I don't think these folks will last for the long haul. Heart attack candidates actually...

    Others hold off on the screaming, hit the pause button and take a deep breath. They find out more about the situation and try to respond in a way that keeps the tenancy (and their sanity) intact. 

    They know they screened as well as they could for their market, and issues happen from time to time, so they get to work doing a minor repair, using a calm script as a reminder, and effective communication to get the tenancy on track. 

    They do that year after year (decade after decade even) and meanwhile all the rents collected (which have gone up nicely btw) have paid down their mortgage; then they even notice a similar multiplex down the street sold for an eye popping price... Appreciation.....

    All your great person management skills paid off (and you avoided any stress related illness!) all the while housing folks who needed a place to live.. Sounds like a unsung super hero story to me!

    Best of luck!

  • Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    9y
    My uncle owns about 1200 units in Minneapolis, you looking in that market? I think he's looking to unload a few. Would be happy to connect the two of you. Maybe you could get with less money out of pocket if he has anything worth selling on terms.
  • Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Hey Hush.  I'd recommend immersing yourself in podcasts, books, and deal analysis for a few months and you will come back a lot more comfortable (and with more specific questions).  Buying 5-8 units without investors is not like syndicating 100+ unit communities.  Your team (lenders, management companies, brokers, inspectors, etc) will also help you.....you can do this.  Just get some education under your belt and keep posting.  Good luck.

  • Investor · Melville, NY · Member since 2017 · 29 posts · 9 votes
    9y
    Hush Dinero For my first deal, I didn't line up a back up property management. Without a good PM - one will continue to struggle to succeed. I further didn't realize in some markets there are only few PM companies to choose from & your choices can be limited. Depending on the market, it can tough or sometimes expensive to find a PM for small deals. Bottom line: Make sure you've more than one PM lined up before making offers.
  • Investor · Columbus , OH · Member since 2010 · 311 posts · 51 votes
    9y

    @Ken P. Thanks for the article 

    @Michael Boyer - Awesome summary! I absolutely agreed; to develop a system to manage people and your property. It takes a lot of practice & discipline. 

    @Terrill Clark - There's a very good podcast by @Andrew Cushman , am not sure of the number but I've watched it a couple of times on YouTube and I will recommend it to anyone planing to get into MF.

    Good luck 

  • Investor · San Francisco, CA · Member since 2015 · 306 posts · 211 votes
    9y
    Originally posted by @Jonathan Twombly:

    @Terrill Clark  As I said, start where you are.  If you wait for some event in the future, like having enough money to do bigger deals, you may never get started.  And if you want to raise money from investors to do bigger deals, you will have a better time of it if you already have deals under your belt.  Get a deal done with your own money, manage it right and make money.  Then do a slightly bigger one.  And a slightly bigger one.  And when you need other people's money to do the next slightly bigger deal, now you have a track record to run on.  Also, as you do bigger deals the banks will become more concerned about your experience.  So building experience will definitely help you on all fronts.

    Love the tip-- As far as the folks you chatted with, what was the one thing you think sold them more than anything else?
    I've heard a number of pitches, formal and informal but wondering what you found to be the most useful for your partners.

    Thanks in advance :)

  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    9y
    Great thread! I have gotten a ton of value out of Andrew Cushman (checkout his interview on Kevin Bupp's podcast) and Micheal Blank. Not too many folks are focused on my commercial so I bought Michael Blank's syndicated deal analyzer and joined his mastermind group. My first deal was a duplex and a fouplex (same seller, down the street from each other) I'm doing full renovations on all the units. I'm learning a ton but I will only buy commercial from now on. I'd just start in commercial, something small like what you're talking about. I'm trying to close on a 6-20 unit value add by the end of the year.
  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y
    Originally posted by @Alice K.:
    Originally posted by @Jonathan Twombly:

    @Terrill Clark  As I said, start where you are.  If you wait for some event in the future, like having enough money to do bigger deals, you may never get started.  And if you want to raise money from investors to do bigger deals, you will have a better time of it if you already have deals under your belt.  Get a deal done with your own money, manage it right and make money.  Then do a slightly bigger one.  And a slightly bigger one.  And when you need other people's money to do the next slightly bigger deal, now you have a track record to run on.  Also, as you do bigger deals the banks will become more concerned about your experience.  So building experience will definitely help you on all fronts.

    Love the tip-- As far as the folks you chatted with, what was the one thing you think sold them more than anything else?
    I've heard a number of pitches, formal and informal but wondering what you found to be the most useful for your partners.

    Thanks in advance :)

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    9y

    Alice, I am not sure what your question is.

  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Abel Sng congrats on the new property! I'll keep your advice in mind. The bridge job doesn't sound like a bad idea especially since people are suggesting I just get started anyway
  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Jonathan Twombly that makes sense...I'm going to read up on this more, listen to more podcasts to become more knowledgeable and take a leap
  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Michael Boyer WHOA haha thanks for that insight! All of that just made me more excited to get started. I don't think I thought that deep when it comes to what I should expect but I think the experience will be great
  • Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    @William C. Could you PM me? Maybe your uncle could be the guy to get me started. Thanks to everyone's posts, I see I need to become more knowledgeable first though
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