Getting Started in Multi-Family Investing

[John R.]

Hi Everyone,

I'd like to get a discussion going about how to get started in multi-family investing. I'm 25 years old, engineer, and I have a good job. I make good money but the company I work for does not offer retirement and I can't stand the thought of someone else handling my money and my future. I don't like the stock market, just don't have the time to follow it day in and day out, but I do invest small amounts in it. I'm a hands on type person. I work with financial data for my job so I understand money. Things like return on investment, IRR, NPV, capital expense are part of my every day vocabulary. I evaluate real estate for fun on the weekends. I lead a very exciting life. I feel I'm ready to buy my first property, besides the nervousness I have about starting my own business, that's where I need help. Should I start an corporation (LLC)? Can I even get a title of a property into an LLC today? How do I protect myself if the property fails? How do I protect different properties from faults with another? Should every property be a separate LLC? If I'm short on capital, where do I find investors? How do I attract investors if need be? Should I start really small (2-5 units) or go for a larger property? I want to make a livable income off this someday so I want to start big. I'm not scared of evaluating $1,000,000 + properties but I obviously don't have that kind of cash to get something like that bought. I've haven't talked to any lenders yet or picked out a property to make an offer on, although I have several prospects. Any advise helps and I look forward to reading your responses.

Thanks, John

[Max Drizin]

Hi John, and welcome to BiggerPockets.

Before I talk about your LLC issues, I'll preface this that I'm not a lawyer, I shouldn't be trusted for your legal advice, and there are people that rightfully charge $200 an hour for this information.

I personally do an LLC for every property I'm part of, as it does limit the inside liability of the property. That is, when a tenant gets litigation-happy if they hurt themselves on the property or something, it's not me personally liable, it's the LLC.

Of course, the outside protection isn't there. If I screw up, I'll probably get taken everything taken at that point. That's a different issue.

If the property fails, you have to remember that you are personally guaranteeing the loan on the property, LLC or not. If you take out a mortgage, no bank will do it without a personal guarantee, since the LLC doesn't have credit, income, etc.

That being said, you should do your best to make sure the property doesn't fail. The possibilities of property failure should be natural disasters, which is where insurance steps in.

As far as investors goes, it depends on what you consider an investor. A bank can be an investor, since they are giving you money when you are short on capital. For smaller projects, local banks usually allow you to establish that personal relationship that gets you the loan you need.

There's things like private equity firms when you get into bigger deals, and they have their benefits and drawbacks. You can also look into seller financing for a deal, but that limits your bargaining with price and also limits the properties you can get.

Otherwise, investors are usually relatives and friends. Maybe you'll meet people out of that circle, create relationships like that, and so on, but it doesn't happen for your first few properties.

You shouldn't necessarily start big, simply because it's a quick way to realize that you don't know how to manage, deal with tenants, work with contractors, do the work yourself, and so on. Start with the smaller properties first, and the big ones fall into place later.

Make sure that you research your areas. Chances are that you won't hold on to the property you buy this year for the rest of your life. Learn about trends in the area, what streets, blocks, and neighborhoods are on their way up and on their way down, and make your decisions accordingly.

I would find a good agent in your area who specializes in investment properties and really knows what he's doing.