How to scale up to a building

Question

I am very experienced as an operator of mid sized apartment buildings, but my desire to invest in real estate is a new breakthrough for me. Due to my experiences in building management, multifamily building(s?) ownership is my end goal. For those of you that worked  your way upward to owning a residential building, could you please share how you achieved it ? Do you have any advice for a newbie that wants to learn from your mistakes etc ? What was the strategy that grew your portfolio ? Now that you know what you know, how would you do it differently ?

Bryan Hancock · Answer

My key recommendations would be:

1.  Find someone to partner with for your first few deals.  If you bring operating experience you can leverage that to attract a co-GP and the capital that comes with it.  You can also learn how to structure deals, get a track record for banks, etc.

2.  Start smaller than you think you should.  I realize you have experience operating, but pro formas are notoriously optimistic and you can blow yourself out in a BK by starting small and working your way up.  Rome wasn't built in a day.  This will also allow you to attract smaller amounts of capital and slowly grow and leverage these relationships into larger deals

The Urban Land Institute has some great starting books and Joel Block's material on capital formation is great.  I would also recommend Ray Alcorn's book for an overall commercial real estate perspective.  John T. Reed also has a really classic tax avoidance book too that is a good read.  Aside from that the best education will come by partnering with someone who can teach you the investing side of the business while you leverage your operating experience.

AJ Shepard · Answer

@Billy Archer

Congrats on making the step from the dark side!  Just kidding, PM is essential service for investing and if you ask a lot of investors, a good operator of PM can make or break the deal.

It always starts with the first one.  If you are thinking going alone at first, I would suggest start with a 4plex.  This will get you started on a track record and get you experience with lending, purchase contracts and probably some stuff you know a little bit about or have heard of from your clients.

If you are thinking bigger than that, I’d definitely find someone that has taken on investors as a partner.  Dealing with investors adds a layer of complication to the deal.  As a PM, I’m sure your communication skills are great, and you probably have some clients that may already want to invest with you, so you are definitely a leg up.  The other reason for a partner is that when you get to commercial lending, even if you have experience operating they may not lend to you because of no investing experience or not enough capital in the bank.  Make sure that partner can also sponsor a deal.  Start making relationships with commercial lenders and commercial brokers now if you haven’t already and have them vet your new partner.

Best of luck and don’t be afraid to take the leap, you’ve got a good solid ground you’re coming from.  From one PM to another!

Ryan Howell · Answer

Billy, you have experience that will definitely be an asset as you start investing.  I would advise you read the E-Myth, as I suspect working in apartments as an operator vs as an investor are different and it will help you from the mindset perspective.

I would also read some of the BP books and the podcast to start learning the different strategies out there.  Determine your goals.  Why do you want to invest? Is it because you want some passive income now or long term wealth building?  That may help you align with a strategy.  You don't have to try and buy a large building.  You could start with a single family or duplex/triplex in your area.  Also, consider house-hacking a small multifamily as a way to get started.

Colby Fryar · Answer

@Billy Archer I would definitely recommend teaming up with an experienced investor or syndicator for a larger property.  You are already a great asset as a property manager. If you have capital as well, that is really icing on the cake. You might want to consider a coaching program or an education program for syndicators because you really need to get educated on the other side of the business.  I am in a coaching program currently and it has been well worth the money so far.

Colby

Eric Johnson · Answer

@Billy Archer if you want to leverage your operating experience, you now must learn the other side of the coin (the investing side).

Important questions:

1. Are you looking to take down a deal on your own or with another general partner, with an even equity split? OR

2. Are you looking to scale through other peoples money (outside investors)?

The answer to those questions (or decision between those options rather) will bring some clarity of how to get there.

Billy Archer · Answer

Thank you for the responses!

@Charles Seaman I am most interested in doing it on my own.  That said, I am not opposed to partnering with a mentor and/or someone with experience to show me the ropes from the investor side.  Based on that, what would you suggest?

@Eric Johnson Similarly to what I wrote to Charles, mostly on my own or partnership.  I am not necessarily opposed to using OPM, but I'd rather feel confident in my own business plan/scale before seeking money of others.

@Ryan Howell I am definitely going to look out for that book.  I'd love to hear from more property managers that took the backward plunge from property manager to investor, rather than the other way around. I'm currently reading Greene's out of state investing book.  My beginning goal for now is to max out my conventional loans on small multi-families to build cashflow and equity-cashflow to eventually replace my income, equity to grow the portfolio. I'm working on a downpayment and I may have a partner in a longtime friend that has flipped successfully. However, I can't help but feel that if I were able to get my way into a midsized apartment building, I'd thrive.

Craig Bellot · Answer

Hi Billy,

Great learning about the ins and outs of investing and managing property being in your background will definitely be helpful. It's amazing to get up close to the action of closing and making deals.

I love that real estate is so multi faceted. The economics, financial, social and mechanical and legal make it fascinating to me.

The first steps I would recommend as a new investor is to get a handle on analyzing the income, expenses and ROI of the properties you are looking at.You can use the Bigger Pockets calculators to start. Use Zillow and rentometer.com to get data and analyze a few from your home to see what type if returns there are.If these meet your investment criteria then start looking in person. Let me know if you have any questions and good luck on your new endeavor!

-Craig Bellot

Billy Archer · Answer

@Todd Dexheimer Unfortunately I live in a unique market which generally insulates me from the type of investors you refer to. I deal with owner occupied Cooperative and Condo buildings that generally don’t allow investors. They are mostly people’s primary residences which as you know is a completely different mindset of owner. Those that do invest in Coops are called a sponsor , and in my experiences they’re usually multi millionaires that literally converted their rental buildings to Coops in the 1980s en masse to find profitability. I’ve spoken with one of them, but he’s just so far from my plan that it was hard to find common ground. The only place we found common ground was to buy a fixer upper in a cheaper market to build equity when I start out. I feel that if I were a property manager of rental buildings I’d have more interactions with the owners you refer to. But I’m primarily dealing with homeowners that have no interest in investing because it’s their home, not their job.

Billy Archer · Answer

@AJ Shepard I don’t belong to the NARPM or any real estate associations. I do think that if you’re willing to have a coffee when you’re in Connecticut I’d love to sit down with you and learn about your journey. You probably have great advice that can strengthen my business plan since you are well on your journey already and I’m just getting started. I’m sure you have some simple formulas that can bridge the gap between a PM mindset and an owner mindset.

Todd Dexheimer · Answer

As a PM you are around owners all the time. You could talk with you favorite owners about your desire to partner with them on their next deal. Think about what you want to achieve and understand how that will affect your current business both positively and negatively.

I would suggest learning about investing from the owner stand point. There are a lot of good books, conferences and podcasts out there that will help you along the way.

How to scale up to a building

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