5 First time investors seeking advises on multifamily properties

Investor · Gardena, CA · Member since 2017 · 445 posts · 398 votes

7y

Unless you get sellers to carry, most lenders want 30% down for multi-units and investment properties. I think a more ideal down payment for a rental properties is 40%. I also think that borrowing against investment properties is very dangerous. I would not be your partner because should you have too much debt against several properties and the poop hits the fan your real estate empire will fall like a stack of dominoes. Now, if you were to buy properties that appreciate, I have no qualm about selling that property and upgrading to a property with more units and a better ROI.

Out-of state rentals are okay when you have a good management company, but it is fairly difficult to get a management company that is really good and there are hundreds of reasons they are not good. Management companies can have too many clients and they spread their work load too thin. Management companies want to show a good bottom line every year and they do this by doing shoddy repairs and deferring maintenance. Read up on the internet about the pros and cons.

Purchasing out of state makes the grass look greener in Texas, Arizona, Memphis, Kansas and other states because properties are less expensive, but there is a reason properties are cheaper. You have to realize that there are real estate investors in every state with hundreds of millions of dollars and then ask why local investors are not buying the properties and the seller have to advertise nationwide. Are you smarter than those local investors, or is their something wrong with the neighborhood. Are vacancies increasing. Is the neighborhood a war zone?

As for an LLC and investing with people you know, when an amateur sets up the partnership the chance are it will be a very quick disaster. Even though you are dealing with people you know there are many many laws you have to abide by when you are investing someone else's money. People get paranoid and they want out of the partnership for many reasons. The only thing the best contracts in the world can do is become a good Exhibit during your lengthy and expensive trial.

I am not a negative person. Just being realistic and warning someone who does not already have the experience. It is difficult to earn and bank a lot of cash. One bad decision can wipe out in a few minutes what takes a lifetime to earn.

Go to real estate clubs and hob nob with professional investors and get advice and opinions. Attorneys will advise you and do the paperwork for money, but they will not hold your hand to prevent a disaster.

It is doable, but you have to work very hard to educate yourself to avoid the potholes.

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Account Closed

Investor · Gardena, CA · Member since 2017 · 445 posts · 398 votes

7y

I am 100% PRO multiple units. You can make more money than you imagine when you understand the power of the numbers. Here are three scenarios showing how you earn an instant $36,000 just by raising the rent for 1 apartment only $200 per month. You earn an additional profit of $2400 every year and at the same time you earned an instant $33,000 by increasing the value of the building.

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Nick Foster

Real Estate Broker · Carlsbad, CA · Member since 2017 · 70 posts · 63 votes

7y

@Michael Ndjondo makadi, is there anyway you can start your RE journey solo? Having four partners sounds like a nightmare. Especially four partners who are new to RE investing. As stated above, partners will want to exit in due time. They will get nervous, go through a divorce, lose their job/income, etc.

If you absolutely have to have four partners, which you will definitely want your own attorney to review any partnership agreement you will be signing, you should consider buying a property in a market where at least one of the partners resides. I don’t see the point in going into a new market blind if five investors reside in three markets.

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Greg Dickerson

Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes

7y

Originally posted by @Michael Ndjondo makadi:

Thanks in advance for your time.

Myself and other 4 friends have been talking about forming a limited partnership to jumpstart our RE investement journey together.

We have a good chunk of cash to start building our portfolio. we are focusing mainly on multifamily properties because we want to grow relatively faster and acquire more properties to grow our portfolio within the next 10 years. All team members are full time employees, while 3 live is San Diego, two live in two different states (Connecticut and Kansas). A legal agreement will bind the partnership and defines all rules and duties.

The plan is to buy our first multifamily property this year in either Wichita KS, Dallas TX or Austin TX. Those are the three cities we are currently looking at because of various connections in them. Any other market option will be appreciated.

I want to get some perspectives and advises from those who have experience investing in either out of state multifamily properties under a LLC umbrella or just RE investment overall experience:

1. what are some of the possible pitfalls of investing as a team under a LLC? would this cause any issues for borrowing money from banks?

2. How much leverage would you advise us to take on? Our current goal is 80%.

3. Will it be safer to start small with single unit house (s) to gain more experience? We will be using property management companies to manage our properties.

4. What strategy could help us grow from 0 to 200 units for example within the first 10 years assuming we can start with a 8-16 unit complex.

5. Is increasing the cash flow the only way to increase a multifamily property value? We are thinking about refinancing at some point, pull out some of the equity and reinvest it in San Diego also.

6. Will it make more sense to have at least one of us along the way becoming full time?

7. Any other advise will be greatly appreciated.

Michael- I have been involved in many partnerships on deals. First thing is one of you has to take the lead. Keep in mind It is very difficult to get 5 people on the same page with a venture like this. Just the logistics of communication and decision making alone are a struggle. I would make sure to get an attorney to draft the agreement as to contemplate all the scenarios and have a system in place for timely response to issues and decisions. You will also need to have a clear understanding of what happens if one of you are not pulling your weight. Maybe they switch to passive if they are not performing etc.

Significant capital is a relative term. Depending on what that is and the number of partners you should go as big as you can out of the gate. following are answers to your specific questions.

1. No issues borrowing just general issues that come up whenever a number of people enter into a partnership venture together. Its like a marriage and everyone has to have a clearly defined role with accountability mechanisms in place s well as a stop gap in the event the do not perform.

2. I like to see 70%-75% in general as a minimum which will be required on the larger deals anyway.

3. Do not waste your time on single family rentals. Very difficult to scale and will not be worth the efforts of 5 people.

4. I qualify this as I do tot know your background, knowledge or experience but I would say If you have the capital and ability to raise more start with 100 units + or - and up and go as big as you can out of the gate.

5. Generally speaking increasing the NOI is the main way to increase value and the quickest. However if the property is a wreck making improvements to properties will add to the value as well by reducing the CAP rate someone is willing to pay for newer updated product vs older. The Lower the CAP the higher price.

6. This all depends on your plan. The more time you can dedicate the faster you can scale.

7. Without knowing your background and how much capital you have its difficult to give specific advice. The main thing is to get educated on the space, immerse yourselves and become experts at all aspects of the business. Focus is 100% of the game.

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Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

7y

First off, congrats on wanting to get started!

When setting up this partnership, make sure that everyone is able to add value and the it actually makes sense to have 5 owners in the deals. Also, set up a clear buyout agreement for each other down the road. 5 owners to me seems busy and possibly messy.

To answer your questions:

1. Pitfall with investing as a team, is that all of you likely will need to show financial docs and sign on the loan. If you're getting money from a bank, it will be all recourse loans. Make sure they don't tie each of you to the full loan amount, but instead tie your share.

2. 80% would be max, but difficult to achieve. I would say you're looking at 70-75% of purchase with the renovation amount coming out of pocket. On a deep value add, you may be able to get a bridge loan that will include the renovation in the loan

3. Much smarter in my opinion to start with larger multifamily than SF.

4. Buy value add, renovate, raise rents, cut expenses, refinance or sell and then repeat

5. Raise rent, cut expenses or capture other income (loss of rents, concessions, RUBs, laundry, etc)

6. With 5 of you, I think you can more than handle it if you delegate properly

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Michael Ndjondo makadi

OP

Investor · San Diego, CA · Member since 2017 · 107 posts · 35 votes

7y

@Account Closed, thanks for your contribution and strategy.

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Kim Lisa TaylorPro Member

Attorney · Saint Augustine, FL · Member since 2016 · 242 posts · 234 votes

7y

My advice is to get some multi-family real estate and training and learn about syndication. This can keep you from making rookie mistakes that cost 100s of thousands of dollars to fix. There are many multi-family real estate trainers out there. Some of them include REMentor, Jake and Gino, and Rod Khlief (full disclosure, I do training for them), but there are others as well.

1 Reply

John Corey

London · Member since 2019 · 722 posts · 386 votes

7y

You may be creating a nightmare even if the property aspects go entirely as planned and no one acts up.

Pooling funds with 5 people is very much heading into SEC and state regulations. Be very careful. The more you are in charge, the more the legal hammer can fall on your head.

Speak to a lawyer who handles syndications and SEC regulations. While it might feel like a big cost, failing to stay on the right side of the law will bite you later. This is likely to kick off when one of the investors gets married or some other life event triggers a desire to get out of the deal. Once they realize they can get the SEC to do the dirty work, your nightmare will begin. Ignorance of the law is not a valid defense. Jail time can be an outcome. The SEC is not to be messed with.

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Greg Scully

Rental Property Investor · Johnson City TN · Member since 2016 · 386 posts · 271 votes

7y

@Michael Ndjondo makadi You've already gotten a lot of good feedback , so I'll just comment on #8 - the scaling strategy.

It can be as simple as starting with 8 units and doubling that amount every year.

8+16+32+64+128=248

In five transactions over 5 years you can reach 200+units. That's a very achievable goal.

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5 First time investors seeking advises on multifamily properties

5 First time investors seeking advises on multifamily properties

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