Start with 300 Units?

Question

I've been a residential investor for 15 years and 2 years ago, I committed to moving over to multi-family. However, I'm struggling to find my place. So far, I've identified 4 ways to finance apartments:

1. Buy the building yourself or in a JV

2. Syndicate

3. Owner carry/owner finance

4. Some combination of the 3 options above

I like #1 above, but then my partner and I have enough net worth and down payment to only afford about 50-60 units. I want to do 200-300 right away. But again, the 2 problems are net worth and down payment.

Syndication can get the funds raised but again, how do you get enough collective net worth to cover the loan amount? I'm probably missing something in my understanding of commercial loans?

Owner carry sounds amazing but will definitely be harder to find, especially on these bigger deals where there is possible interest from institutional investors (depending on condition of property of corse). I want a value-add so might not be competing with many institutional guys but there are enough people buying now that will definitely be some competition.

So for those of you who got into apartments and took down 200+ unit deals for your first one, how did you do it? Even if you're syndicating, those who are signing the bank note have to have a net worth to cover the value of the loan, right? Is it really that easy to find partners for your first deal who have a collective net worth of 20+ million? Are there other options on how to get around the requirement to have enough net worth to cover the loan amount (I understand you can be just slightly under the total value of the loan if you're a high income earner)?

Evan Polaski · Answer

@Russell Gronsky there are several ways you can do this.  If you don't have a rich family member or close friend, you will want a Key Principle.  There are groups that offer this, for ownership, in the right deals.

Secondly, talk with the property management company you want to use.  You can offer up ownership in the deal to the owner of the management company to sign the loan, and maybe put some capital into the deal as well.  One issue with this play is you generally can't fire this management company if things go south, since you gave them ownership in the property.

Greg Dickerson · Answer

There are two issue to overcome when starting out with larger deals especially right now. Experience and Net Worth.  Experience is a huge factor in underwriting these days. A couple of ways to get started are you can Co-GP with a sponsor who has the net worth and experience to qualify or you start smaller and work your way up. The Co-GP can work two ways, you either have the deal and fill in the rest or you bring the capital and other resources to the deal and partner with a sponsor.

Erik W. · Answer

Before we dig into all that, I would like to know why 300 is your magic number and not 500, 800, or 1000?

I'll throw in one bit of info you may already know.  When you look for non-recourse financing typically net funds distributed must be $1.3 million or higher.  There may be some that go with less, but that's a general idea for where the price point begins.  The reason it is non-recourse is the lenders know the object they are financing can carry itself if/when there is a default.  In other words, the project must be profitable to operate independent of you and your partners or the syndication, so that if you are removed from the equation via a default then the lender won't really lose anything: the only thing that changes is who is writing them checks and/or they can sell the performing asset to another partnership/syndicate.  Bottom line, the project must therefore support a full time management and maintenance personnel.  My guess is that's why you're looking at 300 unit as that should be enough to be self-sustaining in most cases, but it's not 100% clear if that is true or not.

That kind of project (300+ units) would run around $15+ million in my market.  It is going to be challenging to find enough people with that much money and net worth who will turn funds over to someone who had never done an apartment deal before.  But that's why it pays so well.  It takes a person of rare talent, experience, industry knowledge, hustle, etc to put a deal like that together.  Keep in mind, though, at those price points you will be competing against insurance companies and hedge funds that have $100s of millions if not billions to spend, and they're totally happy with 5% steady returns all day long.  Expect to get outbid frequently.

Best wishes...let us know how it goes!

Ben Guttman · Answer

@Russell Gronsky would be glad to make some connections for you if I could.

Enrique Huerta · Answer

Yes, there are plenty of institutional buyers chasing value-add deals. As the market cycle has run on, the institutions have gone further out on the risk spectrum and started to buy core-plus and value-add...right now most institutional investors are on pause (per various sources) so may be a good time to get into the value-add space.

Russell Gronsky · Answer

@Enrique Huerta makes sense. Uncertainty is all around so they are cautious, as they should be. But this does present an opportunity for someone else to get into the space.

Russell Gronsky · Answer

@Evan Polaski that is slick, offering ownership to the management company. Never thought of that. I definitely see some cons to this approach, as you mentioned, but is absolutely a worthwhile option and something to explore!!

Russell Gronsky · Answer

@Greg Dickerson thanks! It was the video on your YouTube with Grant Carson’s that got me thinking about this.

Russell Gronsky · Answer

@Erik Whiting, you’re right on the money about wanting 300+ units to start because there is enough there to support a full-time staff. There are other benefits to doing big deals and frankly, I’d do a 1,000 unit deal if they would let me. Even 5,000 units, the more units, the better.

And like I said in my original post, I know there are institutional players in this space but they are also looking for stabilized assets. Yes, they are happy with a 4-5 CAP asset that is stabilized. Are they buying value-adds? I honestly don’t know the answer to that question but I suspect the appetite isn’t as strong for value-adds from institutional money?

Start with 300 Units?

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