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

Multi-Family and Apartment Investing
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Things You Wish You Would've Known With Your First Apartment

Terrill Clark
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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Jonathan Twombly
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.

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  • Terrill Clark
    OP
    Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Mike Dymski thanks for the encouragement! I figured whether it was 5 units or 105 units, it was all the same. I figured the only difference would be the amount of work/people I deal with...that alone tells me I need to get more educated on the topic
    0Reply
  • Terrill Clark
    OP
    Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    Lee Ripma thanks for the advice! Are you planning on keeping the duplex & 4plex in addition to the 20 units you're going to get? Anything in particular that is swaying you away from the smaller 2-4units and going toward the 6-20 range?
    0Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    9y

    Lots of great feedback in this thread, especially from @Jonathan Twombly

    I'll add by saying, you're probably going to need 25% down, as most lenders require this. With your first deal, they may also require a business plan and professional management. When dealing with property management, you really need to stay on top of everything if you have a smaller property. There are some alternatives to traditional property management, but note that lenders may force you to start with an established company.  

    @Michael Blank and @Joe Fairless both have great content on the subject if you check out their sites.

    2Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    9y

    Hi Hush,

    Our bank requires 25% down on a commercial (non-recourse) 25year 5 year ARM. They calculate operating expenses at 50% of revenue. The deal must have a minimum debt service coverage ratio of 1.25. Plus they required us to document a fair amount of liquid personal assets to cover vacancies and other expenses for a worse case senario and to show a history of relevant business experience. You can probably get started much faster using w-2 income to obtain traditional residential financing (or even fha financing) on a 1-4 unit for a "house hack"

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Don't let pro forma cash flow lead you to investing on the really rough side of town. Quality and consistency of cash flow is at least as important as the quantity, and that comes from quality tenants, who want to and can afford to live in quality property, in quality neighborhoods ... it is ok if the property needs a bit of work to fix into quality, so long as the purchase price is discounted accordingly, but you can't rehab the neighborhood it is in ... cash flow does you no good on paper if you can't collect it in reality ... and even if you can collect, if you have to chase tenants all over the place to get it, it is just not worth the effort in most cases. Spend a bit extra to start with a good, solid, B-class neighborhood to invest in ... Do not confuse price with value. Go for the boring, plain vanilla, singles and doubles when you start rather than swinging for the fences trying to hit a grand slam. 

    3Reply
  • Terrill Clark
    OP
    Minneapolis, MN · Member since 2017 · 40 posts · 9 votes
    9y
    I really appreciate all of the info everyone...this is why I'm glad BP exists!
    0Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    9y

    @Terrill Clark

    I didn't read through this whole thread but wanted to add some commentary of my own.  I own a 22 unit apartment, and here is what I wish I had known:

    1) make sure you definitely have a big reserve of funds after closing.

    2) The initial tenants will probably not be up to standard and will need evictions or trash the place.

    3) The turns cost A LOT more money than I had expected (I'm talking turns / rehabbing units) This ties into #1.

    4) Unless it's a remodeled and fully "turnkey" apartment building - it will take a while for it to start really cash flowing well.

    5) Numbers on paper go out the window when you are focused on stabilization over the first couple years.

    6) It is worth it in the long run and you will learn a lot!

    Good luck!
    Lance

    0Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    9y
    Originally posted by @David Faulkner:

    Don't let pro forma cash flow lead you to investing on the really rough side of town. Quality and consistency of cash flow is at least as important as the quantity, and that comes from quality tenants, who want to and can afford to live in quality property, in quality neighborhoods ... it is ok if the property needs a bit of work to fix into quality, so long as the purchase price is discounted accordingly, but you can't rehab the neighborhood it is in ... cash flow does you no good on paper if you can't collect it in reality ... and even if you can collect, if you have to chase tenants all over the place to get it, it is just not worth the effort in most cases. Spend a bit extra to start with a good, solid, B-class neighborhood to invest in ... Do not confuse price with value. Go for the boring, plain vanilla, singles and doubles when you start rather than swinging for the fences trying to hit a grand slam. 

     I definitely agree with this! I had multiple deals under my belt including up to a 4plex (in a rough-ish part of town) before I bought my 22 unit.  I already learned the lesson of paper cash flow in a rough area and the value of starting small and working your way up.

    0Reply
  • Steve Bracero
    Real Estate Agent · Westboro, MA · Member since 2016 · 1k+ posts · 471 votes
    9y

    Very informative thread! Helpful to hear all insights of owning/managing larger apartment buildings 

    0Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Terrill Clark this thread seems to have taken a few turns that maybe what you weren't intending originally. Sounds like you are young and willing to do what's necessary to get ahead using real estate. 

    So, back to the basics, your best first move will always be to 'house hack'. You want a 4 unit and you should live there. You will get the best financing that way and build your wealth the fastest. You will also learn to understand property management.

    Plan to live there a year and then figure out your next move. Get a low down-payment loan even if you have the cash. Save that for the next phase.

    If you can, find something distressed and fix it up yourself or with some affordable partners.

    If Minneapolis is super hot now, which I'm sure it is, drive around and find these kind of properties, knock on the door and ask who they pay their rent to. Talk t those people until you find the right property.

    After you do this 4 times and you're a millionaire on paper come back and talk to us about more advanced strategies like syndication and commercial properties :)

    0Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Terrill Clark I am a "bottom line" kind of guy and based on the information you have provided, you should also consider buying Subject To transactions & selling to Tenant Buyers. It builds the cash so you can buy an apartment building.

    It is single family homes, granted, but for the $90k you mention of 20% down plus the $50k for renovations in your original post - you would be able to buy 6 properties and for instance, I cash flow mine on average for about $500 per month each. That would be $3,000 per month in your example, plus the $10k to $25k each you would get per property from the down payments paid by the Tenant Buyers to you. 

    There is no property management since you've resold each property and the Tenant Buyer takes cares of all maintenance and repairs.

    I mention this because in one of your posts you want to teach your family members how to be self sufficient, which I am a strong believer in, and few if any of them will take the time to and energy to buy apartments. You can teach them however, to buy a house here and there using Subject To and make some good coin in the process. There is plenty of information at BP on the subject and it would actually get you into the game a lot sooner than trying to save up $150,000 to buy your first multi.

    0Reply
  • Fabio Salas
    Investor · Champaign-Urbana, IL · Member since 2014 · 84 posts · 49 votes
    9y

    @Greg Rollins some great points to keep in mind about investing in apartment buildings.

    1Reply
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