How should I start investing in commercial multi-families?

Question

I sold my personal residence in California last year, and I'm looking for the best way to invest the money. I have two other residential investment properties, and I'm thinking about investing in commercial multi-family (5+ unit) properties out of state at this point. I'm not sure what's the best approach for me though.

I currently have about ~1.1 million of net worth, with about $750k of liquid assets. The way I see it I have the following options.

• Purchase a small apartment complex (5-10 units). I should have enough cash, and I can maybe get some private loans if necessary. This way I won't have to worry about commercial loans, and I can get a few years of commercial property experience when I buy my next property. 
• Purchase a 15-20 unit property, around 1 to 1.5 million. I've talked to a few DUS lenders, and they said that if the property is good enough, I should be able to get a Fannie Mae commercial loan, given my financial situation, even if I never had a loan before. Even if I put down a 25% down payment, I would still have 30-40% liquidity in terms of my total net worth, which should be pretty strong.
• Find a local high net worth (or at least around the same as me) local partner, familiar with the area who also has some experience with small apartment complexes and commercial loan. We would split the initial capital 50-50%, and split the equity structure 40-60% (with me being 40%, since I don't have that much experience). Is this a fair structure? This way we can aim for a 40-50 unit property around 2-3 million purchase price.

Let me know what you guys think. Which approach makes the most sense for somebody in my financial situation?

Thanks,

Ray

Jeff Kehl · Answer

@Ray Li all of those options sound fairly risky to me because your betting most of your net worth on a single investment. Why not invest passively in 3-4 deals or even more if you do some smaller balance crowdfunding things and then keep the rest in something safe like short-term bonds until you see how the first few deals work out?

If you're really wanting to dive into a deal where you're actively involved, why not just do 1 smaller property using leverage?

Ellie Perlman · Answer

@ Ray Li -  I agree with @ Steve Berton. Spreading your money across multiple investment is a GREAT way to learn about multifamily investing. You can start with a minimum investment (every syndicator has a different amount, some will set it to as low as $25K and some will start at $100K. Take time to know them, as Steeve recommended, and make sure you invest with someone you are comfortable with.

Good luck!

Ray Li · Answer

@Peter Moser I talked to a few of the local banks, and most of them wouldn't lend to out of state investors. That's why I'm trying to see if I can qualify for a Fannie Mae loan.

@Michael Swan Thanks for the advice. I've actually read Multifamily Millions a while back, but I will definitely re-read it again sometime soon. If I invest in a syndication as a passive investor, would I be able to participate or join in on the purchase and due diligence process? That's why I prefer to buy as an active partner, that way I can l actually go through the process with somebody experienced.

Thanks,

Ray

Michael Swan · Answer

Hi @Ray Li,

I would get my feet wet by investing in a deal with a proven Commercial Multifamily lead that would allow you to learn everything from LOI, PSA, financial and physical due diligence (walking through every unit with property inspector and lead) every aspect from start to repositioning, to communicating with PM, lender, vendors etc... That way as a newbie you don't get taken to the cleaners.  Right away, go out and get Multifamily Millions by David Lindahl and pay close attention to pages 47-130 in the hard cover book.  I am living that everyday on my 8 apartment complexes right now.  If you do this right it is amazing repositioning a value play.  If you do this wrong, you can lose your bottom.  I know.  My first 2 apartment complexes I did on my own went bad really fast and I sold those two and learned my lesson the hard way.  That was painful!! But I won't make roomie mistakes like that again.  Too many land mines if you go it alone.

Swanny

Ian Ippolito · Answer

@Ray Li,  with $750K, you have a fourth option. You could diversify that into a few (or even many) multi-family syndication/crowdfunding deals.

You would have to give up direct control, and feel comfortable vetting the sponsors to handle the investment for you.  If that’s not possible, then this wouldn’t be a good option.

But if it would, then it would give you several advantages. First, you would not be locked into the high-risk situation of being a newbie investor putting the majority of your net worth into a single property in a single area of the country.  With syndications/crowdfunding, even if one area of the country went down the tubes, or one of the choices turned out to be a dog, it wouldn’t kill your whole portfolio.

You would also be getting professional, experienced management, versus trying to learn yourself on the fly. ( The downside is that you do have to pay for the management. But if you take a little time, you can find deals where it doesn’t cost that much).

And, you would not have to spend the time managing it yourself.  If you are a do it yourself type, this might be a disadvantage. But if you are not, or you simply don’t want to learn how to do it, or don’t have the time, then this might be preferable.

Account Closed · Answer

There is no real right answer here. I think it is a good thing you are putting some hard thought into how you might scale.

Personally, I think going bigger is better if you have the team in place to get things done. In other words, if you can find an equity partner with experience in multifamily acquisitions I would go down that path.

Fradel Schaechter · Answer

@Ray Li- As others have mentioned you, a syndicator would be likely to help you learn/ educate you about the details of a deal you invest in.

Hope you find an investment you are comfortable with and that brings you great returns!

Steeve Breton · Answer

@Michael Swan & @Mike Krieg excellent advice.

@Ray Li  Diversifying across 2 or 3 sponsors would be good from a diversification perspective but as an investor I've always learned what good (and bad) looks like with every deal.  As Michael mentioned, they should be willing to share their underwriting and answer detailed questions.  Given you're financial position I'm guessing you'll have no problem finding someone who's willing to work closely with you.  You can get started by interviewing a few of the Pros on this and other similar threads.  Check out their websites, ask them about prior deals, etc.

Michael Swan · Answer

Hi @Ray Li,

If they don't allow you to learn every aspect along the way, then find someone else to invest with.

Swanny

Mike Krieg · Answer

You might consider taking a small portion and diversifying among some different asset classes via syndications. For example, there are very professional and proven sponsors with great deals in multifamily, self storage, and mobile home parks (high end nice parks, not the crappy stuff). These deals require being accredited, and also a relationship with someone on the GP side of the deal. They're also private deals. This allows you to learn about these different asset classes, invest and build up your experience. Reading the Investment Summaries and listening to the sponsors explain their business plans alone offer an incredible education about the businesses, strategies, and opportunities. The commercial game is very different than the residential game. You can get hurt in many ways if you're not careful. This is why I'd suggest following the pros for your first few deals. Once you have some experience and have built up your NW a little more you can go after some larger projects on your own and/or with a partner.

How should I start investing in commercial multi-families?

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