Bigger Deals, Better Profits: 10 Steps to Your First Large Multifamily w/ Brian Murray and Brandon Turner

Brandon:
This is the BiggerPockets Podcast, show 497.

Brian:
Take this risk, go through all this effort and look at the small amount of money that it’s going to generate for me every month and that was a little bit discouraging. Then I noticed that hey, instead of looking at a duplex, if I look at a three unit or a six unit, but how much better that looks. I’m going to go through the same process, but, wow, now, it’s actually something that could make a difference for me.

Speaker 3:
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Brandon:
What’s going on everyone? It’s Brandon Turner, host of the BiggerPockets Podcast, here with my co host, Mr. metaphor of multifamily, David Greene. What’s up, man? How you doing?

David:
Nice alliteration. I’m doing really good, actually. Things are going pretty well.

Brandon:
Brian Murray, you’re here as well right now. You’re here for part two today. What’s up, man?

Brian:
Hey, how are you guys doing? I’m really excited to kick back in here?

Brandon:
Well, for those who don’t know, if you didn’t listen to the last episode, the last episode of this podcast, which was episode 496, we spent over an hour just going through small multifamily properties. Kind of a step by step guide to buying small multifamily and we talked about what the difference between small and large. It’s not unit number, and a whole lot more and we really dove deep into that. Then we ended that with me reading chapter one of the new Multifamily Millionaire book.

Brandon:
So today, we’re talking about large multifamily and that could be a five unit. Technically, it’s the way you approach it as we talked about in the last episode. It could be a 20 unit, could be a 50 unit, but the idea of how do you scale into like a team-based approach to big deals. That can really create some generational wealth. So that’s what today’s episode is all about and Brian, you’re going to be leading the charge on this because you lead the charge on writing Volume II.

Brandon:
I lead more of the writing on Volume I, you lead more of the right in Volume II, but we kind of did it together, tag teamed it which is fun. So I’m excited about this. Should be good time. Before we get to that though, we got to hit today’s quick tip.

Brandon:
Today’s quick tip is the exact same quick tip as I gave on the other show. Pick up a copy of Volume I and Volume II of The Multifamily Millionaire. When you get it at biggerpockets.com/multifamilybook, M-U-L-T-I family book, and when you buy them together, you get like 10% off, and you get a bunch of cool bonuses which are worth more than just the cost of the book. If you buy it before the end of August, before the end of August 2021, we’re also tossing in the four week masterclass that I hosted on multifamily where I spent almost seven hours going through the book in detail, a bunch of the chapters.

Brandon:
It was me, a whiteboard, a slide deck and I just dove into it. So all that and more if you buy it before the end of August. Again biggerpockets.com/multifamily book. Now it’s time to get into the weeds of large multifamily. Brian Murray, what’s up, man? Welcome back and thanks for joining us.

Brian:
Absolutely. Excited to be here again.

Brandon:
I know you are. Anytime we hang out, we’re excited, right?

Brian:
That’s right, especially when we’re talking about multifamily.

Brandon:
We’re kind of like multifamily nerds, aren’t we? It’s a good thing to nerd out about. Somebody once said, by the way, it was Warren Buffett once said, I’m going to butcher the quote, but he basically said, “I could have been really excited and interested in janitorial work. I just happened to be really interested in something that makes a lot of money.”

Brandon:
I found that such a profound statement. Again, I know I butchered it, but the idea being like, I could have been really good at underwater basket weaving and interested in it. I’m just so glad I got interested in multifamily, that my fire is in multifamily and I know Brian, you probably feel the same way.

Brian:
It gets me charged up.

Brandon:
Well, let’s do this thing. David. Any thoughts from you before we jump into the step by step of large deals?

David:
Well, the first thing I want to ask Brian here is why should I be interested, what is the appeal of multifamily investing?

Brian:
Wow. So there’s a lot of reasons why I get so excited about multifamily. In the last episode I made a reference to the fact that it’s forgiving. So I want to touch on that again because I didn’t really expand on that. I think there’s a lot of reasons it’s forgiving but one is that, with large multifamily, your income is spread across so many different tenants.

Brian:
So if you make a mistake with a tenant, with a single unit, if you’ve got 100 units, you’re talking about a 1% drop in your income, even if you mess up with three tenants. With other asset classes, say commercial or retail, oftentimes if you mess up with a tenant, you might be cashflow negative and really dig yourself a hole.

Brian:
So the consequences of that mistake are magnified for other asset classes. Multifamily, I also love the people. I love that aspect of it. A lot of people think it’s easier to work with commercial tenants, retail tenants. I’ve met awesome people who are retail and commercial tenants but I’ve met some of the most difficult tenants I’ve ever dealt with are professionals who maybe, frankly, sometimes come across as super arrogant and demanding but with multifamily, we get so many down to earth, good people.

Brian:
I know I personally feel really good about providing good quality housing for them. Oftentimes in my company, we’ll refer to them and Brandon at Open Door Capital, it’s like, we call them homes. That’s what they are. They’re people’s homes, and the larger you get, you got to have that motivation and inspiration and providing great homes for people. Something you could really feel good about.

Brandon:
Hey, Brian, I have a question for you. Why did you not start with the smaller deals like I did? I started with a lot of duplexes and triplexes and the small world. You jumped right into the bigger stuff. Why is that?

Brian:
It really had to do with, I was doing the financial analysis, and I was learning how to underwrite at the time, and I was underwriting all these smaller properties, and looking at the numbers, I was like, wow, I have to take this risk, go through all this effort and look at that small amount of money that’s going to generate for me every month, and that was a little bit discouraging.

Brian:
Then I noticed that, hey, instead of looking at duplex, if I look at a three unit or a six unit, look how much better that looks. I’m going to go through the same process, but, wow, now, it’s actually something that could make a difference for me. Then as I got even bigger, I remember I came across one property that a broker came back to me and was explaining to me, “Hey, there’s an opportunity. You could potentially get into this larger property, because the seller owns this outright and is willing to do owner financing.”

Brian:
I was already talking about. I figured that out, and I realized that the bigger you go with the properties, the more common it is to have creative financing opportunities. That got me really juiced up, because then I realized that, hey, I thought that the savings that I had wouldn’t go very far. That I couldn’t be looking at big properties and what I realized is, it was in many ways, just the opposite.

Brian:
Because the bigger you get, there’s all these … What seemed to me at the time to be these crazy ways to finance it and structure it so that you could get into them with less money and then it’s still looking at that underwriting. I get to that bottom line and I’m getting really excited because I say, hey, these big properties could throw off a lot of cash and really make a difference in my life.

Brian:
So that’ the process I went through, even before I bought that first property. They evolved as I analyzed more and more deals and it just so happened that one of those larger deals landed. It helped me reframe what I thought I could do, and I think it’s in the very first chapter in Volume II … We’ll talk maybe later about the myths, but there are a lot of myths that people have and don’t need to go into those right now.

Brian:
I think the bottom line is like I’m really passionate about explaining to people why they don’t … All those reasons they think they can’t get into multifamily, you really can. There’s so many ways to go about it and I love that.

David:
Let’s say that I’m sold on that, and I want to start in multifamily. What skill sets do I need to know I’m ready to start at that asset class?

Brian:
So I definitely don’t think anybody should just dive right in without doing any homework or laying some groundwork. If you’re already investing in small multifamily, I think you’re more prepared than you think you are. What is 100 unit apartment complex? It’s the same as … If you have owned a single condo, how challenging was that for you to manage it? Most people could wrap their heads around that, and if you can wrap your head around how to manage a single unit, why couldn’t you manage? 100?

Brian:
It’s just volume. It’s not different process necessarily. It’s just volume. So I want people to know that it is an option. It’s real, you can do it and that’s what The Multifamily Millionaire Volume II is all about. It’s not saying that large multifamily is for everyone. It’s saying that it’s an option and it’s making sure that you understand that it’s an option you can choose if it’s right to you, because there is a way to do it. Most of those reasons why you think you can’t, there’s actually ways around them.

Brandon:
That’s cool, man. One of the things I love about the larger multifamily, it’s one of those things as well. There’s a lot of things I love, but I love the fact that it is a business and it feels more like a business. It’s the same game, what we talked about in the last episode. It’s the same game as small multi. You’re still dealing with tenants, like you said one unit versus 100. It’s not much different, but the approach to large multifamily is so much more similar approach to if you own a chiropractor business, or you own a McDonald’s or you own a Starbucks.

Brandon:
It’s a business. You have goals, you have people, it’s got personnel, you’ve got personalities in there, but the same business principles as almost any business apply to the larger multifamily. The reason I like that is because it’s designed to be a business that you don’t have to be 100% a part of every single piece.

Brandon:
In fact, I would say it’s easier to own and manage 100 unit property than it is a duplex. That sounds crazy, but if you build the right systems, which is all what Volume II is all about, is how to do that. It is less work to manage and to own and to buy 100 unit than it is a duplex. Maybe not to buy. Buying a duplex can be pretty easy, but everything else. It’s kind of crazy.

Brian:
Absolutely. While I encourage everyone, and I’m saying, hey, you can do it, that doesn’t mean you do it alone. So then I think you’re alluding to that too, and I think an important characteristic for someone who’s even thinking about jumping right into large multifamily is you have to have some humility. You can’t be unrealistic at the same time. I don’t want people to be afraid of it, but at the same time, if you walk in thinking, you’ve got a cape on and wear in your underwear on the outside of your pants, you’re going to fail.

Brian:
So having some humility and saying, “Hey, here’s where my skill sets are, here’s where my knowledge set is, what do I need to surround myself with to do this?” That’s the right way to go about it. So those people who have jumped in and they’re jumping right into large multifamily, they’re usually very self aware, they’re humble. They say, “Hey, I want to do this. I know I can bring some value to the table, but I’ve got to partner with somebody who has maybe done this before, or they’ve got something I don’t have.”

Brian:
I think that’s part of why Brandon, you and I gravitated to each other and started Open Door Capital. We both brought different things to the table, and whereas these books formed on the side of a volcano. Open Door Capital started … I think the first time we agreed to partner, we were sitting on surfboards, and we were both planning to go into large multifamily at the same time, separately, and then we recognize that, hey, if we do this together, we could go so much further together than either one of us could on our own. I think there’s a lot for people to learn from that.

Brandon:
I remember one of the very first conversations we ever had about possibly working together and again, brings back the idea of a team-based approach. Multifamily is very team based approach when you get to this larger level, but I think it was you were in the back of Ryan’s van which has like no seats or seatbelts and we were driving on Maui. Do you remember that? It was at the Maui mastermind, and it was either you or me were in the back of Ryan’s van as we were driving around doing something and we didn’t have enough seats. Do you remember that?

Brian:
Yeah. Yeah. Absolutely.

Brandon:
Anyway, we’re going to say that our multifamily partnership started in Ryan’s crappy white van, which is great.

Brian:
Good stuff.

Brandon:
Good stuff. So let’s dive into that. I wanted to go really step by step today. David, you and I title this earlier, but we want this episode to be a step by step, if you want to get into the larger multifamily, this is what you got to do. We did it last episode on the small multifamily side. So this one we want to go to large. Unless David, you have any objection, why don’t we just get into number one. Is that cool with you guys?

David:
No, I think we should dive into this. Brandon, what is the first step that people need to understand when it comes to buying large multifamily property?

Brandon:
The first step is, I’m going to fire that question over to Brian. Brian’s-

David:
Did I say Brandon, not Brian.

Brandon:
I think you did.

David:
I think I said the wrong B word. Sorry.

Brandon:
Brian, what have you got?

Brian:
So no accident. It’s the same first step that we talked about in Volume I. So if anything, at an even higher level, and that’s commitment. So just making the decision to casually, oh, yeah, to want to do multifamily, that’s not enough. You’ve got to have a level of commitment. So while the income down the road if you do this right should be mostly passive, that doesn’t mean there’s not a lot of hard work involved. There absolutely is, especially on the front end. So, again, you have to make that commitment.

Brian:
You have to want it, you have to be ready to put the time in. You have to surround yourself with the right people and that requires commitment, requires hard work, requires sacrifice. It’s not going to fall out of the sky, land in your lap. You’re not going to just the next day wake up and have a 200 unit apartment complex. It is, there is more to it. I’m not saying you can’t do it, but just like in Volume I, just like if you’re buying a duplex, if you’re going to buy 200 units, you got to make up your mind and commit to it.

Brandon:
If I could add a piece here, you talk about this in the preface of the book. You mentioned this kind of story of how you gathered at this mastermind with a bunch of other real estate investors. I think even more than small multi, if you want to get into large multi, I don’t think that’s even optional. I don’t know of any large multifamily syndicator or investor who doesn’t and didn’t regularly surround themselves with others that are also doing the multifamily thing.

Brandon:
I don’t know why that is. I’m sure there are the rare case out there, the Lone ranger who’s by himself doing this thing, but for me, for you and for most people, they somehow got into a group of people who were doing that. Whether they paid for part of that group, whether they went to a mastermind, whether they just had friends in the area that they got together and talked, but have you found the same thing to be true?

Brian:
Absolutely. You share a great story in Volume I that’s very similar. I think you were attending a conference when it happened to you. For me, I had my very first multifamily mastermind, just being surrounded, at that time with about 30 other very large multifamily investors. Those moments can be some of the most pivotal you could possibly have. So whether it’s a mastermind, or even starting at a local meetup, or interacting with people on BiggerPockets, and I actually think even social media can can be beneficial.

Brian:
What you want to do is just get that stream of information and surrounding yourself, even if it’s virtually, with people who are doing exactly what you want to do. It makes it seem more real, it gets you fired up, it helps with your mindset and I think it helps with commitment.

David:
I like that advice, because when it comes to where do I start with committing, it might just be as simple as commit to getting yourself around other people that are doing this and see what organically comes out of that.

Brian:
Put yourself in those situations and good things happen.

Brandon:
It’s way too early to talk much about it, but something we’re hoping to do here in 2022 at BiggerPockets is we’re going to try some more intentional ways at BP to get the larger, like the multifamily guys are the people doing dozens of flips every year. Basically the … I hate saying higher level, but the investors that are the professionals, we’re going to try to find some more frameworks and groups to get those people together more often within the BiggerPockets community.

Brandon:
So I’m just teasing that right now that something may be coming in the next year. That’s kind of cool about that, that I’m really looking forward to because there’s just such value in getting around people who are just doing big things. I’m excited about that. That’s why I started doing the Maui masterclass thing out here in Maui, so I could get around Brian. I don’t know if people knew that, like Brian and I met because he came to my mastermind out here in Maui and we got talking, we got hanging out, and I get to see who he was.

Brandon:
I’m like, Man, this guy’s killing it, or I should say he’s crushing it in commercial, and apartments. It’s great. So commitment, huge, and getting around people is a great way to get committed. So number two, what else do you have for step number two in getting into the large multifamily?

Brian:
So in Volume I, we talked about your three Cs, crystal clear criteria and if anything, it’s even more important when we get to large multifamily. So the depth of the criteria, some of the upfront research might be a little more involved, but we’re starting with location, and everybody looks for different things, but there’s certain things that you want to jump out and consider and probably the first is to look for … Consider local markets first.

Brian:
So I think that you can look nationwide, and we do with Open Door Capital, and I do, but certainly all things equal, proximity does have its advantages and that has a lot to do with familiarity with the market, the specific neighborhoods, where things are trending. So I always encourage people to start with that, and if it’s not a fit for you, or maybe the trends aren’t looking very good in terms of population job growth, those are some of the things that we look at very carefully, then you can look further afield.

Brian:
Because when you’re doing a large multifamily, you’re not going to be out there painting the sides of the buildings yourself. You’re in the big leagues now. You’re going to have a third party management company. There’s quality management companies that exist for large multifamily in most major metropolitan areas across the country.

Brian:
So before you determine that market, I do think you look at things like I already mentioned, population growth, job growth. You could look at other demographics, the housing market. What’s the average house selling for? We always look at Open Door Capital, we’re looking at crime. We don’t want to buy in a sketchy neighborhood or that we know that there’s going to be costs associated with that. It’s going to be more challenging to rent.

Brian:
So you want to think about your location, you want to take a really hard look at the property. Know what you want. The other thing, before I move on from location, one thing we’ve been looking at more and more lately is landlord tenant laws. There’s some really alarming trends out there right now that are affecting large multifamily owners. Affects the small ones too, but when you’re starting out and you’re trying to address location, I think it’s a factor you need to weigh.

Brian:
It doesn’t mean you can’t be super successful in a market with difficult landlord tenant laws, but certainly will make your life a lot easier if you end up in a state with more favorable laws from that standpoint.

Brandon:
Things like population trends, they matter and all that stuff matters with small but not as much. Honestly, this might sound even sacrilegious, but I will buy a duplex in an area that has a declining population. I’m not really worried about it, as long as it’s not like people are fleeing it by the millions but an area that’s declining population, it hasn’t been growing very much, as long as the numbers make sense on a duplex, triplex, fourplex, I’m not real worried.

Brandon:
Because I know that I’m a very like one deal out of thousands, or millions of properties in the area. I’m not horribly concerned about those big macro economic things, but if you’re buying 100 unit or a 200 unit apartment complex, and you’re raising money, those things become really important. Because your investors money is at play here and if the demographics of an area, if rent drops by $100 a month, and you have 200 units in an apartment complex, that’s a lot of money you’re losing every single month there because you didn’t pay attention to the trends.

Brandon:
That’s one of things I liked about Volume II a lot, Brian is how much time you spend going into all of these things and why they matter. I’ll just point out one last point is a lot of … Point out one last point, that’s redundant. I’ll make one more point. A lot of people will ask the question, “Well, what’s the best real estate market to invest in?”

Brandon:
That’s a hard question, because everything you just named here, Brian, things like population and trends, employment base, crime, demographics, housing market, supply, landlord tenant laws, valuation levels, proximity to retailer and all of that and then knowing the fact that every area has sub markets that are better or worse than other areas. So you can’t just say this is the best market. It’s got to be what’s the best market for your criteria? It’s what do you want and now you can go and do some research.

Brian:
Absolutely. The other factor to consider is, if you look at what the very best market are in the country, what are you going to find? Those are also the most expensive markets. So the ones that come out on top, unless you factor in valuation, and you say, hey, everybody would love to have apartment complexes in the hottest markets in the country, but your returns might be really low, and the competition might price you out and you might not be able to generate the kind of returns that you want.

Brian:
So you have to weigh all those things. In Volume II, we go through that in quite a bit of detail. Then, I guess the last thing to mention is just, there’s all these micro considerations, and I referenced a neighborhood earlier. Every city, and most of the listeners already know this, but every city has a good area and a bad area and is trending in different ways.

Brian:
So you’re going to do that macro look, but then you also have to look at micro. You actually want to walk the neighborhood, you actually want to know what it’s like at night, not just in the daytime and see, oh, look, it’s near a Starbucks or it’s near another higher end retail place. Then you know that, hey, those companies with all these highly paid, really smart site selectors, analyzed that, and they did some really hard work to figure out that’s a really good location with a lot of promise, and you’re kind of validating your choice.

Brian:
So lots of things to think about, lots of detail in the book to help you with that further, and you want to look at the property. So you got to think about what type and real quickly, I’ll just share the list of the different property types in large multifamily.

Brian:
We have high rise, we’ve got mid rise, garden style, walk up apartments, manufactured housing, which is mobile home parks, which Brandon and I are invested in a lot of mobile home parks. Then you’ve got all types of special purpose housing that might be out there. Student housing, senior housing, subsidized housing is a whole nother area. Where might be HUD housing or other types of housing that’s affordable that’s getting some type of government assistance for your tenants. That introduces a whole nother level of complexity into it.

Brian:
You want to think about what class of property. So there’s a whole classification system out there that’s used, which is A class, B class C class, D class, and that indicates different types of things about a property. Actually, there’s similar considerations with the small multifamily. I don’t know, Brandon, if you want to comment on the class types.

Brandon:
Just that there are different class types, obviously. So paying attention to them, knowing what you’re getting into and then knowing that … Here’s what I would say about … There’s area class types, property class types, and tenant class types. So the logic I usually make is, the tenant you attract is going to be the average of the class of property and the class of neighborhood.

Brandon:
So if you’re in an A class area, but you have a D class property, you’re going to get like a B minus tenant, but if you have a B class property in an A class area, you’re going to get a B plus or A minus tenant. So just something to be aware of, as you’re getting into this is that there are classes of people, classes of properties and classes of whatever I didn’t say. You get the idea. Moving on, moving on.

David:
So the way that I like to look at multifamily versus single family, a quick way to understand it, multifamily is more powerful. You will make more money over the long term. It’s like a battleship. It could just plow through things, but it also is much harder to change course with a battleship than multifamily. Small multifamily is just like a jet ski. You go the wrong way, you can shoot off to the side, it’s not a big deal.

David:
That’s why there’s so much analysis involved in multifamily, and why a book like this is so important, because if you buy in a bad area, you’ve bought yourself a significant challenge for a long time that you can’t do a whole lot to improve and it’s very difficult to get out of it. Just like a battleship, if it’s going the wrong way, it takes a long time to change course. So that’s why it is so important that you understand what you’re getting into when you go after an asset class like this versus some of the single family houses that I buy, especially if I’m just going to rehab it, if I don’t like what I ended up with, I’m like, well, I fixed it up, I made it worth more, I’ll sell to somebody else. It’s kind of no skin off my nose, or however that’s said. So this is a very important book.

Brian:
I love that analogy, David and I always think of it as swimming upstream too. It’s like you’re trying to make a difference with a property, you’re trying to improve it, raise the rents, but if the neighborhood around it is trending down, and you’re trying to trend your property up, you’re swimming into that current. So I think of it in a very similar way.

David:
That’s a great point. It’s a lot like being the one person in your circle of friends that’s trying to improve your situation, while everybody around you is trying to suck you back down to status quo. I really like that.

Brian:
Absolutely.

David:
Okay, next step is going to be structuring. So properties like this are obviously more complex, there’s more pieces involved, which is good. That’s why it’s less work, because you have more people to delegate that work to, but that means structure now becomes important. Can you talk a little bit about what you’ve learned about the right way to structure these deals or how to do it?

Brian:
Yeah. So one of the things we talked about in the book is something called the capital stack. Capital stack is one of those fancy terms that people high up in the large multifamily field use, but it’s really not that complicated.

David:
Yes. You know what it reminds me of, side note, is when people say agency debt, re-trade. Re-trade is another one that sounds so much more cool than when a single family person just tries to negotiate a better price based off the inspection report. Yes, there’s a lot of that in multifamily.

Brian:
I love that you added on to that because I’ll say right now, if any of you guys who are going to get out into the large multifamily space, don’t get deterred by the jargon. There’s too many people out there who throw that stuff around, they use it to try to intimidate or make themselves sound smarter. They are not any smarter than you. They love to throw those words around and fortunately, we’re going to teach everybody about what all that jargon means and you can throw it right back at them if you want to.

Brian:
So, capital stack, it’s basically the combination of equity and debt that you’re going to use to buy the property. Basically, where’s the money coming from? So there’s a lot of different ways, but in a high level, it’s some combination of debt, and equity, which is the cash that goes into it. Things can get sometimes as you get bigger and bigger, there could be multiple sources of debt, there could be multiple places that you get that cash from.

Brian:
If you layer them all up, you say that’s the capital stack and the capital stack is usually ordered by the people who are the safest thing get their money first, if something goes wrong. So on the bottom of the capital stack is usually that bank debt, and they’ve got the first rights and they have the least amount of risk, because if something happens to that property, they’re going to be the ones that get paid off first.

Brian:
If they’re made whole, there may be a second source of debt, and they’re going to be made whole next and then you’ve got someone who put in some cash, and then you might have someone else who put in cash under different terms. So as you learn more about large multifamily, one of the things you’ll be thinking about is, how am I going to pay for this and what’s that going to look like? How much of it’s going to be paid through debt? How much of it’s going to be paid with cash or equity?

David:
Can you briefly describe the difference between debt and equity there?

Brian:
Debt, any source of capital that you’re going to have to pay back. So obviously, the most common one would be a bank loan, but anytime you’re going to use money to pay for your large multifamily that you’re going to have to pay back at some point, that’s debt. Equity is usually that cash … Equity is usually associated with some sort of ownership rights in the property or the rights to the profits that are generated from that property.

Brian:
So the equities, it doesn’t need to be paid back usually and that basically entitles whoever’s putting that money in to some type of either ownership stake in the company, or rights to the profits that it’s generating. So that’s your equity versus your debt.

Brandon:
Can you give an example of let’s say, there’s a $3 million apartment complex. What would be an example of a capital stack, just for people who are still maybe struggling to put together the jargon into real world.

Brian:
I’ll use a real life example. There’s a property that Brandon and I are working on right now, apartment complex in Colorado and the capital stack has basically three sources. The first is bank debt. So we’re borrowing money to purchase this. I don’t remember the exact percentage right now that we’re going to use, but it’s a loan from the bank. It’s going to cover somewhere in the neighborhood of 75% of the purchase price, and on the capital stack, that would be on the bottom, because if anything were ever happened and we had to liquidate the property because something went into distress or something like that, that bank is going to get their money back first.

Brian:
Then above the bank on the capital stack is that equity sources and in this case, there’s two levels, two different types of return structures. So that other 25% that has to be in cash, we’re going to raise from investors. Some of the investors are going to get preferred equity and the terms for them is they’re going to get a 10% return on their money every year, and all the way up until we pay them back the money that they put in.

Brian:
So that’s like a preferred type of equity. So that’s next above the debt. Then you have your common equity above that. Those people are going to get, every year, they’re going to get a seven or 8% return on their money. They can participate in the upside, because they’re owners, and if the property goes two to three times up in value while we hold the property, they could make two to three times their money on it.

Brian:
So they’re going to get that lower return, but they get to upside, but the reason it’s ordered that way in the capital stack is the preferred equity is taken care of first, and they’re going to get their money back first. It’s a 10% return, which sounds great, but they’re not going to participate in the upside. So it might sound a little complicated, it’s really not once you get comfortable with it, and it gets a little bit of experience with it, but that’s a fairly straightforward. There’s three levels in that stack and you’ve got the debt, got the equity, two types of equity, all kind of layered in the order of who’s taken care of first if things go south.

Brandon:
Here’s what this gets … I’ll add one more. The next level up I guess, I don’t if you call this in the capital stack but technically, the bank gets paid back first, let’s say it was at 75%. They get their loan back or paid back at the end of the deal. Then, like you said, that first level of the … What’d you call it? The 10% people. Preferred equity. So they get their 10%. Make sure that those people get paid their 10%.

Brandon:
Then the next people who get paid are the people who got their 7%. Plus, they get let’s just call it 70% of future and that can change. There’s some complicated stuff we won’t go into, but then after all of that, there’s a split. The GP, which would be, Brian, you and I, and plus all of our partners that are in this deal, get paid after all of that.

Brandon:
So people might be thinking, well, this is really complicated. Is this all worth it? Yes, because we’re buying a 30 some million dollar property that we’re going to turn much more valuable over time. It’s going to go up in value a lot, we’re projecting. So everyone gets paid out their money and if everything works the way we think it, we’re going to walk with potentially millions of dollars at the end of the day.

Brandon:
I’m not saying like, wow, look at how great we are, but I’m just saying like this is how great multifamily is. This is why we love large multifamily is because we put all these pieces in order and now everybody wins. The tenants get a better property to live in, and get managed really, really well. It’s kind of mismanaged right now. So they get a better property managed better.

Brandon:
The people who are more conservative, they get their 10%. The next layer gets a little bit lower, but they have more potential for higher, and then the GP is going to make a bunch of money and it’s like a win, win, win, win, win across the board. Everybody wins and this is why I love … And you know what, for all of that, Brian, you and I have to work very … Overall, Open Door Capital takes a lot of effort as a big company, but on that individual deal, it’s very little work. In fact, I would say it’s more work for me to buy that duplex than it would be to buy this $37 million apartment, which is why we love the large multifamily. Agree with all that? Did I make all sense?

Brian:
It could be very rewarding to … A lot of people have that fear of approaching people and raising capital, but what I’ve found is it adds this whole other layer of self fulfillment to know that we’re putting ourselves in this position to make this opportunity to build wealth for so many people. It’s one thing when you’re doing it just for yourself, but when you can turn around and make a whole group of other people wealthy and make a difference in their lives, that’s really rewarding. So it’s not just about us. So it’s exciting to think about everybody else who entrusts their money and puts in the returns they’re going to get, the potential upside and potential to make a real difference.

Brandon:
That’s cool, man. Just to put in perspective one more thing then we’ll move on the next tip here is think about this way. If over the next five or 10 years, you’re listening to this right now, and you go buy $100 million of real estate, you go buy $100 million of real estate and over the next few years, you turn that into let’s call it $150 million in real estate, because you’ve added value, the rents have gone up, whatever.

Brandon:
You have just made 50 million … And that’s not an absurd proposition. That’s actually a very normal thing. Okay, fine, maybe you only made $40 million. Now, again, you’re going to split that with your investors, your investor, which we’ll talk about here in a second. The people who gave you the money for that are going to get a sizable chunk of that, majority of that money, but you might still walk with 510 $15 million at the end of that decade.

Brandon:
Show me another business where that’s likely to happen. You might build the next Starbucks, but that’s so much less assured than multifamily real estate and large multifamily, and so many people do multifamily. There’s so much content out there and step by step instruction like The Multifamily Millionaire books, it’s like, why is everyone in the world not doing this? I don’t know. It’s pretty exciting stuff. There’s so much to be made by helping everybody win. All right moving on. So that was number three, I think was structuring but it kind of play with number four, I know Brian, right?

David:
So my understanding Brian, of what you said is you’ve got debt and equity. As the person who owns the asset, let’s say, that’s Brian here, he’s the general partner, you would prefer to give away debt versus equity. You’d rather pay an interest rate to the person lending you the money, than you would give away equity in the property. So the majority of the financing for the property, say the 80% from the bank is done with debt, because that’s better for you.

David:
Now, you got to make up the 20% of the down payment. You could use your money, or you could borrow it from other people. If you’re borrowing it from other people, you’re normally giving away equity. Is that a rough summary of what you’re describing there?

Brian:
Yeah, it absolutely is.

David:
I wanted to clarify, that’s what we’re talking about. Now, step four has to do with the way that you actually create the organization to support that model. Am I understanding correctly how you guys are doing it?

Brian:
That’s right.

David:
So let’s hear what do you do when you’re going to create the syndication so that you’re borrowing some money from the bank for debt, some money from investors for equity, and how do you determine who plays what role?

Brian:
This is part of the magic. This is one of those things that when we talk about syndication, basically, syndication is a way of raising money from investors to pay for your deal. I think that when Brandon and I both heard about syndication and we were on different paths, heard about it at the same time, but we’ve talked about this, and I think both of us, and I definitely could speak for myself. When I first heard about syndication, it seems so complicated.

Brian:
If you talk about jargon, when people talk about different types of syndication, they’re actually citing specific laws and regulations, and they’re throwing numbers around 506(b), 506(c), and you’re like, “What are you talking about? 506(b)? Is that an apartment number?” That’s a specific law. I still recall going to a mastermind, and I actually reference in the book, and Brandon referenced it earlier, where I was with 30 other multifamily investors and at that time, I was literally the only one in the room that wasn’t doing syndications.

Brian:
I was like, people ask me why, why aren’t you doing it, and I came up with all kinds of excuses. I’m like, I don’t know, but the truth was, I was intimidated by it. I didn’t understand it. It seemed complicated, it sounded really complicated when people talked about it and since then, I’ve learned that it’s really not. So there’s people … Again, it’s one of those things, you don’t need to do it on your own.

Brian:
There’s attorneys that can help you out. There’s people that specialize in this, but basically, what you’re doing is you’re forming a general partnership. It could be one person, it could be multiple people who are raising the capital. They’re considered the general partners, and you’re going out and you’re offering equity or participation in the deal or ownership to people who are putting cash and to help you do the deal.

Brian:
So that allows you as a syndicator, to potentially buy a large multifamily property without putting any of your own cash in to buy it. So if you want to talk about, is it possible to buy a 100 unit, a 200 unit, a 300 unit apartment complex with no money, it is actually possible and syndication is how you do that. So, high level, as the syndicator, you’re the general partner, you have the liability, you’re the one who’s signing on the debt for the bank, but the cash is actually coming from other people who you’re involving in the deal.

Brian:
They put the cash in, and they get a certain percent ownership and certain rights to the profits from the deal. It can be structured in a lot of different ways and there are securities laws around it that you need to get a basic familiarity with. I won’t go into depth on that, because it’s all in the book-

Brandon:
It’s in the book.

Brian:
But it’s something you need to educate yourself on. The two most common they call them, I just referenced them, they are 506(b), and a 506(c). 506(b) is basically … There’s not really any … I think the probably the 506(b), the most notable thing about it is you can’t advertise it. It has to be with people you already have an existing relationship with. So there’s some limitations in terms of … One thing to think about, you would say, why are all these rules and regulations in place?

Brian:
Basically, when you raise money from investors, it’s almost like a stock offering. You’re going out there and saying, “I have an investment opportunity for you.” So that’s why the SEC gets involved. They have certain rules, they want to make sure that people are not taken advantage of and that they’re knowledgeable, and that they can afford to make these investments.

Brian:
So they have different guidelines that you need to follow. So if you’re going to go out and publicly broadcast and try to raise money, then you actually follow a different set of rules, and you’re going to follow what’s called a 506(c) and you’re going to make sure that you’re responsible about who you’re accepting money from.

Brian:
You have to have what they call accredited investors, and a third party comes in and verifies that they have the income and they have the net worth that makes them qualified to invest in your deal. The 506(b), you have to have that relationship, but you can also accept money from non-accredited investors. It’s like family or friends that maybe don’t have that high net worth or high income but you have to have a pre existing relationship with them. It’s really not that complicated, but there is a lot involved and you have to figure this out it or read the book and you can get all the information you need.

Brian:
That’s the beauty of it. So who would ever thought you could buy some large apartment complex without putting up your own capital in, but it really is possible to do.

Brandon:
If I can sum up just with an example. Let’s say there’s a million dollar property, the bank says, okay, fine, you can buy this million dollar property, but you’re going to need $300,000 down. Okay, fine. You go get the $300,000 from some partners. They’re the limited partners, they bring the $300,000 down, and they bring the money needed to fix it up, if it needs money to fix it up. So you’re doing this basic with no money and we put money in all of our deals, Brian.

Brandon:
You and I do because we we want to show our investors that we’re committed but there are syndicators who don’t and that’s fine. So basically, a million dollar property, your investors bring 300 grand of that money and now the investors get a large chunk of it. Now they don’t have rights to tell you what color to paint the building. They don’t tell you all that stuff, but they bring the money needed. You manage the deal and you just split profits however you define it. That’s how I look at a syndication. Is that a good summary of why a syndication is so awesome?

Brian:
Yeah, absolutely.

Brandon:
By the way, this same concept, just so everyone’s aware. Again, I’ve said this in the last episode, and this one. The game is the same. Duplex, triplex, fourplex, 200, 300, 400 unit property, you can do the same strategy. In fact, one of my very first properties was a triplex. I didn’t have the money for it. The property was $50,000. We needed $10,000 down, we needed $20,000 for rehab cost. I needed 30 grand.

Brandon:
So I raised that from a partner. They brought all the money. We split the profits later on. Now we did 50-50 later on. Now most syndications are usually more like 70-30, But regardless, it’s the same game. So anyway, syndication is awesome and a large piece of The Multifamily Millionaire Volume II is about how to understand syndication. So we don’t need to probably belabor the point here, but the point is, it’s awesome. You guys will love it. So maybe we move on to number five. What do you got for number five tip or step here?

Brian:
Number five is multifamily debt, and we referenced in the last episode that there’s some significant differences between small multifamily and large multifamily, but you could get some great debt terms for large multifamily. That’s another reason why I love multifamily is lenders love multifamily, because lenders see that, hey, that’s a stable investment and I’m not at high risk of losing what I lend.

Brian:
So you can get some amazing terms from lenders on multifamily, but it’s a different approach. So what a lot of people do with a large multifamily is they engage the services of a mortgage broker. So there’s tons of mortgage brokers out there, and what they do is these are people who are very familiar with all the different sources of money that you could borrow.

Brian:
They know that hey, they can look at the property that you’re planning to buy, and help you identify who the best people are out there to borrow it from. Like which banks, which lenders are appropriate for it and they know the whole lending process. So they can tell you what information they need, they put together a packet and as you get more familiar with the process, you can assemble that in advance and take it to your mortgage broker and they’re going to put it in a form that the banks like to see.

Brian:
They know exactly how it’s going to be viewed and they can guide you through that. In exchange, they take a fee when you close. So while there’s several chapters that in detail outline the lending process, I think the most important thing to know is it’s not something you need to navigate on your own. So it’s not something you really need to be intimidated by. Because there’s an entire industry out there of people who are just waiting for that opportunity to go out and help you figure out how to place that debt so that they can get their fees.

Brandon:
That makes a lot of sense. I know we could spend forever talking about debt, but I love that point you made there, there are people that do that. So, bring them on your team. Understand the basic principles, read the chapters in the book, do the research. If you have further questions, Google it, but there are people who do this, but a mortgage broker should be somebody that’s on your team and speaking of team I know that’s number, what? Number six are we on right now? Are you good to move to number six or is there anything else you want to say on the debt side?

Brian:
Just that there are multiple sources, pros and cons to all of them and like you said, you’ve got that person to help you figure it out. So, yeah, absolutely.

David:
I really like how simplified you made that Brian. The mortgage broker covers maybe 80% of the deal, and then you got to figure out how you’re going to cover the other 20% and that’s where the syndication principles and stuff comes into play. It’s really not as complicated as it sounds when we get into the intricate details.

Brian:
It’s not. It’s so great when you’re … Maybe you might not even know how much debt you can get, but a mortgage broker can tell you. They can look at the deal and they could say, “No, this deal, maybe you can only borrow 60%,” and you bring them another deal and they’ll be like, “I think I can get you 80%.” You don’t have to figure that out on your own.

David:
That’s a great point. I really like that and I think that’s just something I want everyone to … Whether they’re single family, multifamily, small multifamily, big multifamily, there’s so much of, I got to know all the answers before … Like my chiropractor example. Thought he needed 20% down to buy a house in the Bay Area, which meant he would have needed around 180, $190,000, which takes a while to save when you’ve got educational bills that are coming due.

David:
There’s people like me that exists that have mortgage companies. So people will go to us and say, “What do I do?” We say, “Well, we’ll give you this much. You got to come up with the rest. Here’s an episode with Brandon and Brian talking about how you can go cover it.” It’s taking that first step. It is not nearly as scary as what people think once you get the experts, which make up your team members.

David:
So many people are thinking they got to learn everything about real estate, and they don’t. You guys are a great example at Open Door Capital. You don’t do everything. You have a whole team of people that specialize in the things that are there. So let’s maybe talk about that. How do you build a team? What do you look for in a team? What is okay to expect somebody else to do versus what do you need to make sure you’re doing to protect your investment?

Brian:
The first thing that I recommend is like, do a really good self assessment. Try to get honest with yourself. Where are my strengths? Where do I derive joy? Even if I’m good at something, if I’m going to be miserable doing it, that’s not necessarily what my role should be. Then I think, from there, you recognize, hey, I’ve got some gaps to fill. Brandon, I think you talk to this often, I’d love to get your take on partnerships.

Brandon:
I am a huge fan of partnering. I have been since day one. My very first few properties … Maybe like the first two, I didn’t use partners, but almost everything else since then has been partnerships, just because I know I lack in a lot of areas. I know there’s things I don’t do well, but there are things that I do do well. In fact, one of the reasons Brian, you and I started talking is because there’s things that I … I’ve got the social media presence right now and the ability to raise, whatever we raised, $75 million in the past year and a half.

Brandon:
I can drive a lot of that, but what I’m not good at is being able to talk to a mortgage broker about mezzanine debt. I’m not that guy but you can have that conversation and you look super smart. I walk in and they’re like, “Hey, man, the shelter’s down the street.” It’s two different skill sets that I have there. So by partnering together, we bring the strength of both of us into one thing and that’s why, for example, the deal we mentioned earlier in Colorado that we’re buying, even in that one, we’re actually bring in two different general partnerships together, like two different completely different companies.

Brandon:
Now on that one, particularly, it’s Whitney Sewell who is another fellow podcaster, and us are doing a deal together, because they have things that they’re really good at, and we have things that we’re really good at. So I love partnerships. It’s like, you may have to give away half your deal or two thirds of your deal or 90% of your deal, but can you do 10 times more by giving away 90% or twice as much by giving away 50%? For most people, the answer is always, yes, with the right person.

Brian:
Absolutely, and how great is it that you could actually take your biggest weakness or something that you absolutely don’t want to do and turn it into a strength, and that’s what partnerships will do. I’ll add one other thing here before we move on to the next step. I started off, for the longest time, I didn’t do any partnerships. I think for the first, gosh, 11, 12 years in real estate investing, I didn’t have any partners and to be completely transparent on that, I was lonely.

Brian:
It’s a lonely road, and when you’ve got partners, it adds a whole nother dimension, that you have a shared experience. I love the camaraderie, I love the partners I’ve gotten to work with and the relationships I’ve built. There’s something fun about playing a sport on a team. It keeps you accountable, it keeps you motivated, and you can celebrate your wins together and when things aren’t going well you can lift each other up.

Brian:
So partnerships can be … That’s the way to go. The bigger the deal, the more work and the more complicated it is, and the more moving parts and if you could tackle that as a team, it’s so much more manageable and frankly, if you get the right partners, it’s so much more fun.

Brandon:
It is. 100%. I don’t think this is talked about enough. We could do a whole episode just on this concept of like, it’s so much more fun and profitable. Think about it this way. You know Mike Williams who’s one of our members on our team and actually when you buy The Multifamily Millionaire, the two books you get a bonus content with an interview with Mike and Mike, another guy on our team, but let’s just use Mike for an example here.

Brandon:
So Mike is the friendliest guy you’ve ever met in your entire life. For everybody lists, if you know Mike Williams, you’re like, yeah, that’s the nicest guy, the best guy I’ve ever known. Everybody loves Mike and you know what Mike loves to do? Talk with people on the phone, and talk about how awesome real estate is and talk about how awesome our company is, and how good our fund is.

Brandon:
He just thrives on that energy. You know what my least favorite thing in the entire world to do is? Talking on the phone with people. I hate it. Mike loves it. So what’s great is now, we bring Mike and Mike gets to do that role that he is the best person on planet earth to do. Then we bring in Micah, he’s the best person for that job. We bring in Walker, who’s the best guy for that, and Jay and Tristan, and I’m leaving out half the people on our team, but everybody is so good at what they do, that they’re excited, they’re having a good time.

Brandon:
We do trips together, we chat, we get on the phone call, and everybody’s an expert at their domain. Because of that, I don’t have to do much, the stuff I don’t like to do and I’m having fun, and we’re buying 10 times more deals than I could have ever bought on my own. Probably 100 times more. So anyway, I don’t know. I’m driving that point forward, but it’s fun.

David:
Here’s what I would say to add some context. I hear a lot of people say, I’m working my job and I don’t want to get into investing, because I don’t want to have to be a part of a team. I don’t want to give up a portion of what I made, because I keep all my money right now and what they don’t realize is they are already part of a team. By nature of having a job, you are working on someone else’s team.

David:
You’re playing a role in that business, you are not playing all the roles. What’s your job? I’m an accountant. That’s a tiny piece of that whole company that you are providing. You’re on a team. So what you’re saying is, I’ll play on someone else’s team, but I don’t want to start my own team, and be a captain on that team and own that team and that’s what’s so ridiculous about that fear-based, I don’t want to share it. The sad thing is you’re already on a team, you just don’t own any of it.

Brandon:
If I can throw in one more piece, so we can probably move on but when I’m thinking team, and again, we go into each of these points in the book, but think about it this way. In a typical multifamily deal, somebody and this doesn’t have to be separate people. One person could do all these, somebody could have two of these roles. Think of them as like a role or a hat you wear. So somebody in charge acquisitions, they got to find properties.

Brandon:
There’s investor relations, if you’re going to be syndicating. They’re dealing with the money from investors. You got a financial person who’s dealing with the banks and the numbers and all that. You’ve got what’s called a KP, or a key principle. That’s somebody who’s rich, basically. It’s like a rich-

David:
They’re basically backing the plays that are being made financially.

Brandon:
If you go to a bank, you want to borrow $10 million and you’re broke, the bank’s going to say no. If you go to the bank, and you got somebody on your team who’s got a million dollars sitting in the bank right now just sitting there, they’re going to be much more friendly. So they’re called the KP. You have an asset manager who’s going to manage the property manager later on and then you have somebody I like to just call captain. Who oversees the whole thing, who’s the captain, the COO, the president, the CEO?

Brandon:
Again, one person could do multiple roles, but when you start thinking, and I’m probably missing roles in there, too. I’m sure you could probably add more like legal and accounting and other things, but if you think about multifamily, large multifamily, these are roles on the team. These are your quarterback and your tight end and your wide receiver.

Brandon:
It’s like oh, well, if we had a really A player on each of those positions, we could dominate the league and win the Super Bowl. Anything you want to add on that, Brian, before we move on?

Brian:
I think the only other thing is when you read the book, you’ll see there’s all different ways to have that, to assemble that team, to find that team and some of them could be contracted out. Your team really might include your accountant, an attorney, a mortgage broker, et cetera, et cetera. So you don’t have to necessarily have eight people in your partnership. It might be two, it might be three and you can have different types of arrangements, whether … In some cases, it might be an employee or a general partner, or it could be a contractor. So the whole point is, you’re stronger leveraging other people’s strengths than doing it on your own.

David:
The Avengers started off with just a handful of superheroes. They added to them as they grew. That’s a great point. I’m over here trying to build the Avengers. I’m trying to build out my teams, because that’s the only way you can ever accomplish anything big. So thank you. That’s a great point. Next step, finding deals. That sounds pretty important. If you have all these pieces in place, but you have no deal to actually exercise them on, that won’t help you. So what are the ways that you recommend people go about finding deals?

Brian:
So things are a little bit different in the large multifamily world, but it really depends on the size of the property. So when we talk about large multifamily, like we talked about in the last episode, we might be talking about 50 units, we might be talking about 500. So just like with small multifamily, you have off market deals and you have on market deals.

Brian:
When you can find an off market deal for a large multifamily, you have this potential to get just an amazing opportunity, but the way it tends to work is the bigger the property, the harder it is to find that off market deal. Why is that? That’s because there’s so much at stake in that sale, that you’ve got just brokers all across the country working their butts off trying to get listings, building relationships with the owners of the large multifamily so that whenever they think about selling, they think about that person who’s been calling them every month for the last five years, and they’re in.

Brian:
So it’s much more challenging to find the off market deals when we’re talking about a 300, 400, 500 unit apartment complex. We’re talking about a 50 unit, a 70 unit, a 90 unit, and even some of the little bit larger, you have a much more realistic chance of finding one that’s off market, building that relationship and in the book, we talk about some of the strategies that you go about doing that. So you can find that off market deal is great, but I would say that overall, brokers tend to play a much larger role in the large multifamily. So one of the strategies is to really build those relationships. David.

David:
Yeah, that’s awesome. That’s my experience that I found is it’s easier to find an off market deal with smaller deals, because there’s less meat on the bone. So there’s less people chasing after that meat. There’s not as many wholesalers out there trying to get that single family deal before you do as there are brokers who know if I can land that big apartment complex, I’m getting a huge chunk of money. So there’s teams assembled for that goal.

David:
How do I have a relationship with those people and I’ve seen many people make the mistake of saying, “I’m just going to go around the brokers. I’m just going to email that person directly.” Those owners of 500 unit apartment complex are getting lambasted with people that are sending them letters saying, “I would love to buy your property. I’d love to represent you.” Because that’s the case, the gateway often becomes that broker and it’s not much more important to have a relationship with them.

Brandon:
If I can throw on one difference also, a lot of times between the large multifamily and the small is that the bigger deals, like the bigger properties, I should say, they aren’t necessarily selling them because they’re distressed. Remember in the first episode we did or let the last episode we just did about small multi, I said that so many landlords are terrible and they’re mismanaging their properties and blah, blah, blah. The large multi space sometimes the property has been performing great and it hasn’t been mismanaged. If they’re just at the end of their cycle or their loan is coming up-

David:
Or their syndication was created to be done in five years. So there’s an unnatural event that they have to sell.

Brandon:
Correct. So sometimes it’s not like there’s distress here. Sometimes it’s just like well yeah, it’s just the right time for them to sell. They’ve maximized their return, they want to put their money somewhere else. So I was just going to add that sometimes then relationships, if you’re building relationships with brokers, but also build relationships with other multifamily owners. In fact, I think one of the mobile home parks we’re buying right now is because somebody knew that I buy mobile home parks and randomly found my phone number and called me, which always freaks me out a little bit when that happens, but they found my phone number online.

Brandon:
Now I’m going to get like a ton of them, and they’re like, “Hey, I got this mobile home park. Do you want it?” I’m like, “Hey, let’s talk to my team,” and I think that’s actually one that we’re buying is because it was just like they knew what we were buying. It wasn’t distressed. They’re not Mom and Pop. They’re another company who’s just like yeah, we’re at this phase we’re ending. So let’s save ourselves some broker fees and just sell it right to Brandon directly. So the more you can network with other multifamily owners also you can sometimes get properties that way that just makes sense.

Brian:
On top of the brokers, you’ve got wholesalers out there. Same theory applies like they’re going to make a bigger payday if they land a bigger property. So like David said, right on the money, these people are getting hit up. If you own a big multifamily, you’re getting hit up regularly from a lot of different directions. So that said, if you can manage to land an off market, large multifamily, and I actually shared a story in the book, and that’s probably one of the best ways to break into large multifamily is you find that great deal. Be a lot of people that want to start working with you or place money when if you have that great deal, because they’re so hard to find.

David:
After finding deals, we’re obviously at the step where we’re going to have to figure out what do I want to offer on it, do I want to offer on it and how should I make that offer? So what advice do you have for people that are at that stage where they are ready to write the offer?

Brian:
So underwriting for a large multifamily, unfortunately, there’s no way around the fact that, hey, this is a little bit more complex than the small multifamily, but it’s doable. The other thing is, there’s some great tools out there that will help you do that. So you don’t have to be a math whiz. You don’t have to be a professor to underwrite large multifamily, but you may want to invest in some of the software that’s out there and readily available.

Brian:
None of it’s really that expensive. So it’s worthwhile investment. If you’re more mathematically inclined, and you want to try to build a model yourself, you could do that, but what you have to do is very carefully look at you want to look at the rent roll for the property to see how much the tenants are paying. Then you want to compare that to what are other tenants paying in the same market and figure out, hey, is their room for me to increase that rent or not.

Brian:
You want to look at the expenses and figure out hey … And we have guidelines in the book, the typical ranges for different types of expenses, and figure out, hey, is there opportunities here? Are the expenses unusually high? Can I cut them and create more value? Does it look like they’re leaving common expenses out? So you can look in the book and say, “Hey, here’s all the expenses that should be listed on the expenses,” and if there’s something missing, you have to add it back in.

Brian:
Then you’re going to figure out what’s my net operating income, which is the income minus the expenses and that’s what the value of the property is based off of. What you’re doing is you’re looking at what’s there now, you’re looking at what historically it was, so you can see how it’s trending. You’re applying some judgment about whether you have room to maneuver with your income or expenses.

Brian:
Then you’re projecting, hey, what would my first year of ownership look like? What would my second year and you bring that out into the future, and figure out that from that, that’s how you see what the increase potentially in that net operating income is, and how much money you can make. So what you end up doing, will go back to that crystal clear criteria that we talked about earlier.

Brian:
One of those is what kind of return do I need to get? So if you know, hey, for example, I need to get a 15% return in order for my investors to put money in. Once you model out how much your income, how much your expenses and your net operating and how that’s going to change year over year, you can then calculate, what would that return be for everybody involved in the deal.

Brian:
Software can make that super easy, but that’s what’s going to drive your offer price. So you’re going to say, hey, in order for this to achieve a 15% return, this is what I’m able to offer. So that’s a little bit different approach than you take typically with a smaller multifamily where you’re saying, “Oh, this is the NOI. Now let’s go ahead and calculate the value versus what they’re asking.” You actually do it in return.

Brian:
With a smaller one, I guess I should say, you’re looking at your purchase price, and you’re looking at what’s going to result and then you kind of figure out, what’s my return going to be. With larger multifamily, it’s just a subtle difference but you say, “This is my return. This is what my offer price needs to be.”

Brandon:
[inaudible 01:08:11] it kind of goes what we talked about in the last episode about small deals. It applies for single family, self storage, it doesn’t matter. [inaudible 01:08:18] real estate. Every property has a number that makes sense. So this might sound too overly simplistic, but it really is kind of the simple, is we say, what kind of return do we want our investors to have? How much money do we want partners, our limited partners to have?

Brandon:
Okay, that’s the number we want to achieve? Great, work backwards. Boom, boom, boom, boom, boom, there’s a purchase price. That’s it. We go after it, and we get one out of 10 roughly, of our offers accepted. So we just make 75 offers a quarter and it tends to work out.

Brian:
Another thing that people might be surprised who don’t have experience with large multifamily, but most of the properties that come to market, they have no asking price. They say whatever the market will offer, that’s the purchase price. So you actually … Sometimes if you have a relationship with a broker, a lot of times they’ll say, oh, they call it like a whisper price, or you’ll say, you can ask the listing broker, “Is there a pricing guidance,” and they might give you a range of what they anticipate it’s going to sell for but a lot of people find that a little unnerving but it’s very, very common with large multifamily that yeah, this is for sale, but you tell me what it’s worth.

Brian:
Go ahead and offer and it puts the burden back on you to determine how much is it really worth to me. So a little bit different but actually that underwriting step, it’s something that can take a long time when you first get started to build that out, but the more you do it, it gets simpler. You get more efficient.

Brian:
At Open Door Capital, the person doing our underwriting right now is Jay. His name’s Jay. He’s fantastic at it and he’s gotten to the point that within a couple hours, he could tell you pretty accurately what a property is worth. If you’re out there doing it for the first time, it might take you a few days of work to go through and really build out that, and figure out what you can pay.

Brandon:
Or if you’re doing a mobile home park, and the owner doesn’t even know how many units it has or what rents are. So here’s the thing about underwriting that is, again, very different than what I think people think. I think people think of underwriting as plugging numbers into a spreadsheet. That is maybe 2% of what underwriting is because the difficulty is finding the numbers. You can put numbers in a spreadsheet. Anybody can do that.

Brandon:
You could have a five year old kid saying, put this number into spot C7, but it’s the deeper question of like, what are rents actually at right now? What could they be, or what do we think the future is going to hold for this property, or what could the water bill be like next year and the year after? So it’s a lot of assumptions.

Brandon:
We’re making a lot of assumptions when we underwrite, but that’s the best you can do. You do your best, and this is why it is so important to understand your crystal clear criteria. To have your niche, this is what you do. Because the more deep you go, you go the mile deep on a certain niche, or a certain type of real estate or multifamily in a certain area, and you can now make those assumptions a lot better, versus if you’re just looking everywhere all the time. You don’t care what you buy, you’ll buy any kind of real estate deal, how do you know what assumptions to make? But once you’ve analyzed 100 of the same apartments in the same area, you’re going to be way better at that. So again, start with your criteria.

Brian:
You need to tour the property. So a lot of your numbers are going to come from what you see while you’re there. So you’re going to say, “Hey, is there room to make improvements in this property?” You have to figure out what that would cost, you have to figure out what you could charge if you fixed it up. One tip that I would offer is that having that third party management property involved during underwriting, that’s just priceless. That can take a lot of work off your plate.

Brian:
If you build a relationship with a property manager, who already knows the market, is probably managing competitive properties there and knows what the market will come in for one bedrooms, two bedrooms, three bedrooms, in that part of town, different levels of finishes and things like that, a good property management company will help you immensely with your underwriting, and they’ll even look at your numbers and give you feedback on whether they think it’s realistic.

Brian:
Property management companies, they’re also the ones that know, hey, what is the labor cost? How much should your maintenance be in that market for a typical, say, C class, 30 year old property, what’s reasonable for your repair and maintenance number? So that’s just, I think, a really useful tip if you can … We talk about building partners that are third parties. Property management company, if you find a good one, it’s priceless.

Brandon:
I love it, man. I love it. All right, well, we got to get out of here in just a short bit. So let’s move on to the last two tips quickly and just hit them. We don’t spend a ton of time. We got due diligence and asset management. You want to talk about those briefly.

Brian:
Yeah, sure. So you go ahead, and you get that offer in and if it gets accepted, you have a certain amount of time to do due diligence. This is basically where you say, “Hey, I want to make sure that this car that I’m going to buy is actually everything I think it is.” You get to look under the hood, and maybe you know have the mechanic come in and check it out. Again, you could have that property management company come in, walk the property, actually walk every single unit and really dig in.

Brian:
Maybe audit some of the financial information they gave you. There’s third parties that can help you do that. Some of this stuff might sound real complicated, but if you’re noticing a theme throughout this podcast is that, hey, you don’t have to do it alone. There’s people who are experts in practically anything that sounds overwhelming.

Brian:
So due diligence, you want to be thorough, this is where you really dot your I’s and cross your T’s and say, “Hey, before I actually close on this property, I want to make sure everything’s in order.” Then asset management comes after the closing. So you go through your due diligence, and then you have your closing and now it’s time to run that property.

Brian:
So there’s a lot of aspects to that. You’re going to rely heavily again on a third party management company, and this is where you start to execute and look for ways to drive up that revenue, manage expenses. You hopefully will have identified some of that ahead of time, but you still need to execute on it. I think personally, one of the parts of Volume II that I’m most excited About is the value add parts.

Brian:
So there’s an entire chapter on different strategies to add value, and we talk about repositioning the property but then in addition, there’s actually three fairly detailed long supplements about all types of tips and tricks to how to drive up revenue, how to add ancillary revenue, like laundry and different types of sources besides just rent. There’s an entire supplement on how to cut your expenses on a property.

Brian:
This is something that when large multifamily investors get together, they love to hear all those tricks of the trade. How do you drive up that NOI? That’s how you improve the value of the property and get your return. There are well over 100 tips and tricks in those supplements to hit that analyze. So I’m super excited for the readers to be able to get in there and use some of those tips to make themselves a lot of money.

David:
I noticed everybody wants to lose weight, or gain muscle. Nobody wants to maintain the weight they’ve lost, or they want to but it’s very difficult. We don’t put effort into understanding that hitting that goal is not the end. It actually is the beginning and I feel like asset management is the maintenance of the goal you said. You wanted this property, you wanted it to provide money, you wanted financial freedom, you wanted whatever, you’ve got it.

David:
If you don’t manage it right, it’s like hitting your weight loss goal, and then going right back into being overweight or gaining muscle and then it atrophies. So many people ignore this component as if once you get to step nine, you’re done, but this might be the most important component of all, because you put a lot of money and a lot of time, a lot of effort, a lot of everything into this thing and if it’s not managed well, you lost it all.

David:
So that chapter has got to be wildly valuable when it comes to people that have said, “Hey, I did it.” You’re like great, now the journey starts. This is how you maintain it because just like everything else, if you take care of real estate, real estate will take care of you but if you don’t, it’s not a magic pill. It actually becomes a problem.

Brian:
I couldn’t agree more, David. You’re absolutely right. So many people, they leave that closing table, and they feel like they crossed the finish line. What you really did is you crossed the starting line. The outcome of that property and whether you’re going to make money and be successful, that’s day one is closing. That’s not to say everything leading up to it isn’t important. Of course, it is, but now you’re in for the long haul. This is where you can really play out and make a difference. Are you going to generate fantastic returns, make a lot of money, make all this worthwhile, build generational wealth for yourself and your family? This is where the rubber meets the road. So very well said.

Brandon:
You guys, this has been a phenomenal episode. I know we got really deep into the large multifamily. If you’re still listening to this thing, that means you are a rock star. I can’t wait to see what y’all do with your large multifamily. Now, we’re not quite ready to get out of here. I want to ask one more question of you, Brian, and then move on to the famous four but the last question I got for you is, if you could really narrow it down just one piece of advice for people who are right now, they’ve been in small multifamily for a long time. They’ve got some single families, maybe they’ve done some flipping, whatever and they’re thinking, you know what, I want to do what Brian did. I want to do a Brandon did. I want to do some syndication or some big deal. What’s the one tip you can leave them with?

Brian:
I think, and I guess this would be probably one of your final four. I just can’t overstate the importance of the right mindset going into this, and you could point to a lot of different attributes that you need to demonstrate to be successful. I would say the longer I’ve done this, the more I’ve realized that having that mindset of really believing in yourself, level of determination and grit to get it done. It’s all about your mindset. So I would say, focus on that and we already talked about ways to achieve that. Surround yourself with other people that are doing what you do and think about your purpose. You got to want it.

Brandon:
I love it, man.

David:
Well, thank you. With that said, let’s head over to the last segment of the show. It’s time for our-

Speaker 5:
Famous four.

Brandon:
The famous four are the same four questions we ask every guest every week and before I ask the four questions to you, Brian, or we ask them to you, I do want to say real quickly. I’d mentioned it earlier but I’ll say it again now. The Multifamily Millionaire Volumes I and II are available now for ordering and for buying and we’re going to ship them to your house. It’s also available, we have the audio version on BiggerPockets. You have the physical, you’ve got the digital, you got all that stuff.

Brandon:
You can buy them on BiggerPockets. It’s not that expensive. Honestly for the amount of information you get here, there’s over 700 pages of total content between the two books, plus hours and hours of bonus content. White papers, the mindset thing, plus the four week masterclass that I recorded back in July. I recorded a four week class on multifamily real estate and people absolutely loved it. You get that as well, if you order before the end of August.

Brandon:
So all of that, you can get at biggerpockets.com/multifamilybook. Again, biggerpockets.com/multifamilybook. Get that and more and then take a picture of your book when you get in the mail. Put it on Instagram, tag us. I’m @beardybrandon. Brian, what’s your Instagram handle?

Brian:
@crushingitbrian.

Brandon:
@crushingitbrian, and of course you can tag David Greene just for the heck of it @davidgreene24.

David:
Just for the heck of it.

Brandon:
Just the heck of it, because we all love David. Question number one of the famous four, other than your own, what’s your favorite real estate related book?

Brian:
So I don’t really have a specific real estate book that I end up going back to, but I always like to give a shout out to Steve Burgess’ apartment investing book, because back when I first got started, I found that to be the most helpful for myself. It’s been out for a really long time, but if I have to point to one that really got me going in multifamily, that’s one of my favorites.

Brandon:
When we wrote this, I think we even said that. We were like, our goal is to write a better book than that one and a few other that are really popular. Anyway, I hope we did because there’s some good ones out there, but hopefully we’re going to be added to that list. We’ll see.

David:
Next question. What is your favorite business book?

Brian:
I read a ton of business books. My favorite business book tends to be the one that I read the most recent, but there was one I read last year that most people haven’t read that I really enjoyed, but I’m a big fan of Charlie Munger. He’s Warren Buffett’s partner and he wrote a book called Poor Charlie’s Almanack, and it’s just loaded with … I’m really always been a fan of value add, and Charlie Munger is really into value add investing and even though we’re talking about stocks versus real estate, I just found the stories in there really compelling and that I could really relate to it. He’s just one of the most wise people that I’ve ever come across. So give a shout out to Poor Charlie’s Almanack.

David:
Next question. What are some of your hobbies?

Brian:
Well, my biggest more recent hobby is I started a trail running last year and I’m living in the Atlanta area now and that’s relatively recent for me. I found that I really love to get up in the mountains and start running on trails, and that just grew, and I spent more and more time doing that and culminated a couple of months back when my first ultra marathon out in Oregon at a place called Smith Rocks. So really enjoy getting out into nature, putting the electronics aside and tuning out for bit and then getting out there and hitting the trails.

David:
If anyone has not done trail running, I can’t hype it enough. I never thought I’d be into it. I run because I have to, but I never liked running. I like trail running. It is fun. I don’t know how to describe why it’s so fun. It might be a combination of having to look at the ground. So you’re not focused on how tired you are. You’re looking at the terrain and looking out for rocks that have … Go ahead, Brian.

Brian:
I was going to say that I think that’s a lot of it because if you don’t focus on where you’re stepping, you’re going to take a spill and to me it helps you clear your mind because it forces you to … All the other distractions go away and plus you’re out in nature and that feels good.

David:
So thanks for sharing that. Brandon, you’re up.

Brandon:
Last question. What do you think separates successful multifamily real estate investors from those who give up, fail or never get started?

Brian:
Yes. So I’m going to go back not to raise it too many times, but I really feel that mindset, a focus on mindset and making sure you’re constantly in alignment with where you want to go in life and believe in yourself and doing that. So certainly if you purchase The Multifamily Millionaire from BiggerPockets and you get those bonus materials, absolutely worth the time to listen to that discussion about mindset with Jason Drees and Brandon, maybe you could maybe add to that.

Brandon:
I just think that mindset is the number one most important driver of almost any success in anything. I’ll give an example. We interviewed a guy in the podcast a long time ago who flipped a hundred houses his first year and when asked how he did that, very first year of investing, he said, “I didn’t know that’s not the way you’re supposed to do it.” It was such a telling story because it just shows that, he didn’t realize you’re supposed to do one house at a time and you’re supposed to start small.

Brandon:
Supposed to, I’m put in quotations here. So he just started bigger. So it’s the mindset you start at will determine the level at which you play at. If you start at a higher level and you work on your mindset, improve your mindset, the results that you get, because your actions change and then everything changes. So your mindset changes your actions, your actions changes your results. So take time to work on your mindset. It’s vital. It’s so important, and I love that Brian, you and I are on the same page on that and I think that’s why we make good partners.

David:
Last question of the day, Brian. Where can people find out more about you?

Brian:
So feel free to reach out on social media. You can find me at Instagram @crushingitbrian. You can find me on LinkedIn, Facebook. So I’d love to hear from people.

Brandon:
Awesome, and of course, get the book at biggerpockets.com/multifamilybook. Learn more about it there. We’ve got lots of good testimonials and stuff that have come in. So I think people will like it, and I think you will as well. So thank you everyone for listening to the show. Brian, thank you for being an amazing partner and an amazing human being. You’re the best.

Brian:
Thanks, man. I appreciate you.

David:
This was a crazy good podcast. We could sell this as a course if we wanted. That’s how much information you guys gave about all things, multifamily. If the book is 10% as good as this podcast, it’s going to be a best seller. So great job guys. You blew me away. Let’s get out of here. This is David Greene for Brandon, the multifamily billionaire, Turner. Signing off.

Speaker 3:
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