5 First time investors seeking advises on multifamily properties

[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.

[Greg Dickerson]

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.