Skilled Multifamily-ers: What Makes a Good 1st Time MF Partner?

Question

Greetings all - I have two SF units that I have been managing for a few years, and as I look for my third acquisition, I'm considering whether a 4 to 12 unit MF property is actually a better next step than SF unit #3. I've been reading up and listening to MF podcasts, and watching YouTube finance videos to learn about recourse/non-recourse loans, etc.

My working understanding is that for certain financing for 5 or more unit buildings, the banks will be looking for the investors to have a collective Net Worth bigger than the loan, for the primary dealmaker to have appropriate Net Worth and liquidity, and for there to be someone with MF experience involved. (please correct me if I'm getting this wrong)

Before I start approaching potential investment partners, I want to get my balance sheet, reserves for current properties, etc, all in order so that when I approach someone with MF experience, they say "oh yeah, your position looks good" and that gives them confidence to be a potential partner. (As an example, I presently have 3 months of rent equivalent cash reserves for both units, and I will reach 6 months of rent equivalent reserves in Spring 2021.)

Would any experienced MF investors here be willing to chime in on what an ideal, or at least a good, well-organized first time MF investor should look like in terms of a balance sheet, performance of a current RE portfolio, etc?  Thanks in advance for any tips!

Arn Cenedella · Answer

@Patrick M.

Sounds like you have made a good start on your real estate investing career and are ready to rock and roll in 2021.

Your thought process about financing is generally correct.

I might make a distinction between commercial bank loans and agency loans - agency loans are generally $1M or more and may have a more stringent experience requirement than commercial bank loans.

In terms of your balance sheet, what you net worth is - is what your net worth is - so there is not much you can do to change it in the short term. At the present moment in time, you have a certain net worth - no way to really change that in short term.

I guess my other advice is dependent on how big your first deal is. If you first MF deal is say under 16 units, you might try to go it alone. Above that, I think you would do best to bring in a more experienced partner.

I’m just down the road from you in #yeahthatgreenville.

Good luck in 2021!

Patrick M. · Answer

Wow! Great responses all around.

@Arn Cenedella Thank you for making the point about where to transition from going it alone. I think in an ideal world, that would be my preference, so I've looked more at 4-8 units than 12-16. I got to visit #yeahthatGreenville one year ago today for business, and it seems like a great place to invest. Is there a significant small MF component to the housing stock there?

@Jonathan R McLaughlin I did not know they would consider the building being purchased in the Net Worth calcs. Interesting! My current lender of choice is a portfolio credit union. I've built a relationship with a senior lending officer at the nearby branch and she knows and understands what we're trying to accomplish. I recently brought a balance sheet to them to get a HELOC on one of our rentals. While their terms are not super-creative, they are low-fee and low-rate. So I think if I found a four-unit I would simply work with them doing a 20% down 80% LTV loan. Those 1.2 and 1.4 DSCR numbers are super helpful, and I appreciate you listing what to include, which all makes sense. Love the risk assessment idea, too. Thank you! My family grew up along the red line (Dorchester,Quincy,etc) in Boston. Would love to hear where you invest in greater Boston if you're willing to share.

@Danny Randazzo excellent suggestion. I joined the local REIA to do this kind of networking a few weeks before COVID hit, which has definitely slowed networking progress. Hoping to get more connected with others locally in the coming year. I've been messaging some locals on BP in the meantime. My lawyer, who has 13 units, may be a resource in this regard, too.

@Evan Polaski My first year of landlording taught me that I don't like and should not do repairs. I enjoy deal analysis, building financial models, and structuring how to deploy money and debt for improving ROI. I'll have to think more about what you said in regards to working with investors. Not sure if I'd be more excited to have a partner or more worried that I might lose their money. Hopefully most of the former with a healthy respect for the latter.

@Justin G. thanks for the encouragement and would love to hear more about your deal structure (who does what, how much capital each partner puts in, who gets returns in which order, etc) if you reach a point where sharing feels appropriate to you.

Again- great information here and thanks to you all!

Jonathan R McLaughlin · Answer

@Patrick M. don't worry too much about the net worth requirement if you are going commercial or portfolio loans, remember the projected value of the building is included in their assessment, you have the SFs for both net worth and experience as well. Should be a manageable leap without partners if you have downpayment.

If the has a DCR of above 1.2 accounting for vacancy, repairs/capex reserve and prop management (even if you don't use it since the bank calculates paying for it if they take it over) someone will be interested if you have decent credit. If above 1.4 I think you will have an easy time of it. Rates are generally 4s-low 5s and some combination of 20-25% down and 20-25 year amortizations, many market variations.  Make sure your numbers work with those assumptions and run it by them.

Put on paper a risk assessment of your current properties: debt, estimated market worth, tenant reliability, economy of the neighborhoods and have it ready.

Arn Cenedella · Answer

@Justin G.

Once Covid is over, let’s meet up face to face!

Happy Years Eve!

My gut says we are both going to have a super 2021!

PS Looking forward to you twice a week online meetups, I will try to attend as often as I can. I expect to be able to learn quite a bit from your team!

Justin Goodin · Answer

@Patrick M. Yes, when you sign on a commercial loan, the guarantor will be required to have a net worth and liquidity amount equal to or greater than the loan amount. Banks will also want some experienced Sponsors on the deal. Experience helps and having good credit history helps too.

If you are lacking one or more of these things, then work to find partners to fill these gaps. I am doing it right now for a deal!

Arn Cenedella · Answer

@Patrick M.

Sadly, there are not a lot of small multifamily properties in Greenville.

All of the newer construction is 150 to 200 units plus in size.

One can find a fair number of duplexes and triplexes but 5 to 20 is more difficult.

I wish I could tell you different.

Jill Iwanski · Answer

My wife and I have moved into the multi-family sector in 2020. Prior to 2020 we had a quad and duplex. We started our investing career in 2016 with the purchase of a quad. Then in 2017 we purchased the duplex. In 2020 we purchased a 28 unit for $1.5 mil and a 24 unit for $1.35. We did not have a net worth even close to the loan amounts or liquidity. We spent a great deal of time putting together a presentation that we presented to the loan committee and bank board of directors. We were able to show positive cash flow while building reserves for each property. We have a mix of self managed and on-site property managers. We work with a local bank that carries the mortgages on our primary house, the quad and the duplex. The investment property mortgages are commercial loans at 4.1%. We have good to excellent credit score and slightly above average W-2 jobs. I think anything can be done if you learn to ask the right questions to the right people. We work closely with our banker and he is in the loop every step of the way. The bank is basically your partner and we treat our bank just as that, a partner.

Evan Polaski · Answer

@Patrick M. your net worth and liquidity are primarily the focus of larger loans, typically $1mm plus loan balance.  Generally, under the $1mm threshold you are going to borrowing from local lenders on a balance sheet loan, each of which will have their own financing requirements, but often are not quite as tied to the NW and liquidity covenants.  You will also most likely be signing a personal guarantee (i.e. recourse loan) versus the larger loans that get you into non-recourse territory.

Regarding looking for a partner, it really depends on what you are expecting from this partner.  Will they be an active or passive partner?  If active, what level of activity will they have?  Generally, I would look at myself first and determine what it is you are good at and/or LIKE to do, and find someone that complements those natural skills and desires.  If you love putting deals together, but can't stand actually operating a property (meaning asset or property management), then find someone that is great at and enjoys management and financials, but has no desire to hunt down deals and deal with investors.

Danny Randazzo · Answer

@Patrick M. You should discuss with your local network because most times any new partner will be someone local that you’ve known for at least a couple years and ideally longer. There are great podcast episodes on BP and from other hosts where guests go into detail about how they found and partnered with others

Justin Goodin · Answer

@Arn Cenedella Great advice! Thanks for sharing that.

Skilled Multifamily-ers: What Makes a Good 1st Time MF Partner?

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