All Forum Posts by: Anton Mattli

Congratulations!

@Justin C. I am not familiar with the 2-4 units segment but my hunch is that you should treat your underwriting the same way as you would for single family homes. Starting out on the multifamily side, I suggest that you have a look at C or lower B class properties (workforce housing). It all depends how much of your own funds you have available and whether you would be willing to partner up with others. That will determine what type of properties and size you really can consider.

Welcome, Justin! Single family and multifamily are very different animals. Before you jump in, I suggest that you join a couple of local networking groups that strictly focus on multifamily to get a sense of what is happening in the multifamily market. You will learn a lot and will make connections with people that will be valuable resources.

As already stated, in major markets, your competition is strong. In Dallas/Fort Worth, we see strong competition from $1 mio. properties all the way up to Class A assets but you will face particularly stiff competition in the $1-20 mio. range where you find a lot of individuals and syndicators that are aggressively participating. As a result, most building owners will sell through a selling broker to get maximum exposure and in turn maximize proceeds. It is crucial that you create relationships with the selling brokers so that you are not an unknown quantity once you decide to submit a LOI. And before you submit a LOI, make sure that your ducks are in order, i.e. you and/or your investor group has sufficient net worth and liquidity to get the financing. Otherwise, it is unlikely that your LOI will ever get moved up to the short list for best and final offers.

Trying to find off-market deals through a buyer broker will be very difficult in most major markets; if someone is willing to sell you a building without going through the market exposure a selling broker can provide, you have to wonder why they want to sell off-market.

I have been arranging commercial real estate loans for 25+ years and we just closed a 223(f) FHA loan so I am well aware of them. FHA offers less strict net worth requirements but they are in most cases not suitable for the acquisition of an existing property in the current market environment since it takes months (typically 6+) to close them due to extensive due diligence requirements. If an owner is willing to agree on a 6+ months financing contingency in today's market, I would wonder why. Also, as an aside, besides the massive paperwork for FHA loans, the upfront costs are very substantial, too.

Fannie and Freddie have net worth requirements that may be waived for very strong and experienced sponsors in some cases but not for new entrants to the game. 

CMBS loans may be slightly more flexible but I challenge you to close a CMBS loan at sub 5% and 75%+ LTV with minimal net worth requirement for a newcomer to multifamily. CMBS are not for the faint hearted during the current volatile market environment where buyers of these mortgages regularly change their mind in the last minute, i.e. there is a high risk of a retrade during the application process.

If you want to put together your own deal (with or without outside investors), get ready to spend a lot of time researching markets and properties or you might make very costly mistakes. The actual process to buy a multifamily property is not complicated - finding and evaluating properties and submitting a winning bid without overpaying is the challenging part.

@Account Closed, Thanks for your comments. Having been involved in commercial real estate through several boom and bust cycles, I am likely more cautious than most and still feel that a beginner is better served in learning by investing alongside with experienced investors but if @Jerry Shen feels comfortable to go all in by himself, more power to him.

I am curious, what non-recourse financing for 75%+ LTV and sub 5% interest rate do you have access to that does not require a combined net worth of all signatories to be equal (or at least very close) to the loan amount?

@Account Closed, @Andrew Syrios : I completely agree that an experienced multifamily investor with plenty of capital may be better off going direct rather than investing passively in syndicated deals but that requires a lot of capital as well as time for market research and property-level due diligence. We obviously do not know the complete financial situation of @Jerry Shen but unless he has plenty of equity invested in other assets and thus is well diversified, I would strongly advise against placing all eggs in one basket (i.e. investing the full $2 mio. in a single property). 

Also, if @Jerry Shen wanted to go on his own, his overall net worth would have to be the size of the loan amount and if not, he would have to find other investors investing into his deal, effectively turning him into a syndicator. Outside of the circle of family and friends, it is highly unlikely that someone will invest with a sponsor without any track record, though.

I agree with other opinions that you should get your feet wet in multifamily investing by participating in several syndicated deals with highly experienced sponsors. Be careful whom you pick, though: Over the last five years, virtually every sponsor has looked like a hero thanks to strong rent growth...

Generating $250k with $2 mio. equity translates to 12.5% cash-on-cash return before income taxes. That is a tall order for any stabilized asset. In markets with strong employment growth like Dallas Fort Worth, class C and lower B properties get you close but any sponsor projecting 12.5%+ in today's market will have to find mismanaged properties and you have to trust that sponsor that they can rehab and/or stabilize the property. Also, in those cases requiring rehab and/or stabilization, your first year's cash-on-cash return will likely be very small. Overall, I would set my cash-on-cash expectations lower (let's say 10% for class C and lower B, 7-9% for upper B to lower A, below 7% for new class A) and be positively surprised if a sponsor can pull off a higher return for you.

@Mabel L., CA is notorious for low cash returns and going out of state is a viable option but requires a lot of personal commitment or trusting experienced sponsors with proven track records. Do an in-depth due diligence on prospective sponsors or intermediaries before writing a check.