Discover how to buy your first multifamily small apartment building. You'll also learn the personal benefits of owning small multifamily apartments, the investing advantages of going "small", how to find the best deals, why you should start with 5 plexes and NOT 4 plexes or below, and finally, 5 different ways to finance your first deal, including if you are short on cash or credit. This is an extremely powerful training that may have a lasting impact on your financial future. Here's how to buy your first multifamily small apartment building.
Personal Benefits of Small MultiFamily Apartments
What are the personal benefits associated with small multifamily apartments? First off, it is much easier to wrap your mind around an 8 unit apt vs a 100 unit apt. When you first buy a multifamily apartment, it is best to work your way up by starting off small. Secondly, a smaller apartment requires less equity, simply because you are dealing with smaller sales prices. This makes it a much more affordable option. Thirdly, it is easier do creative financing with a small apartment complex. Next, because of the smaller deal size, all it can take is a single investor to satisfy any credit or down payment requirements. Lastly, a smaller property equals smaller mistakes. This will make it much more affordable for you, and hopefully more profitable in the long run.
A benefit to investing in a multi family small apartment is lower competition because you are dealing with individual investors, not hedge funds or large institutions. Another investment benefit is less sophistication regarding the owners of these small apartment complexes. You don't have to worry about trying to negotiate with large institutions or corporations. They are often owned by mom and pop operators who are afraid to raise rent, leaving a lot of money on the table for you. In small multifamily complexes, there will be no large ownership approval with lots of red tape. Once again, you will be making a deal with either a single person or a husband and wife team, allowing you more room to creatively finance the deal. By going "small" with multifamily apartments, there is more potential for higher cash-on-cash returns and IRR because your cash flow per unit on average is higher. Lastly, wholesaling a deal like this one is much easier as there are more investor-buyers willing to buy as compared to large apartment deals.
How to Create Your Own Deal Flow
Learn how to create your own deal flow when investing in small multifamily apartments.
Real Estate Agents
The first question to ask yourself is "what you are looking for?". You will be looking for 5-20 unit apartment with some sort of upside, or some element where you can add value. You do not want war zones or 100% vacant properties. As a beginner, taking on those risks will not benefit you.
Loopnet.com is a great website to look for deals online. Search for small apartment buildings in your areas and make an effort to call the agent, which is your next step.
Make the Call
Call the agent and develop a relationship with them. You are not after the property you are after the relationship with agent. Make sure to always thank the agent for their time and exchange contact information.
The ultimate goal in building these relationships is that when the agent gets a deal they send it to you first. You want to be the first person they think of when they are presented with a deal. The best deals come from good relationships with other real estate agents.
Precision Direct Mail
In order to develop a precision direct mail marketing campaign, you need to first develop a list of property owners and periodically send them letters so that they call you when they have a property for sale. This is how you get the best deals.
3 Unique Advantages
Firstly, there is no real estate agent involved. Real estate agents can often hinder you from doing anything creative with the property and add a 6% premium to the property price. They are there to protect the owner, therefore getting in your way of a good deal. Secondly, there is a perception that the deal is good because it is coming directly from the owner without an agent. Thirdly, deals where you go directly to the property owner are simpler to wholesale because of perception that it is a better deal. Investor-buyers love this as it gives the implication that they can work directly with the property owner and not through a real estate agent.
3 Keys for Completing a Direct Mail Campaign
#1. Target absentee and out of state owners first
These type of owners tend to have problems with cashflow, repair issues, and property management. They are often mentally and spiritually detached from the property, due to their physical distance. They are just looking for a solution to their property problem and YOU are that solution.
#2. Use a fresh list from a reliable source
The second key is to find a good list source that you can rely on and is up to date. This will make you more efficient in your direct mail campaign.
#3. Reminder that this is a campaign (3-5 touches)
Remind yourself that you will need to remain in the minds' of the property owners. This campaign is quite similar to that of a political campaign, meaning that you must convince the owners to "vote" for you. You will need to send out your campaign letter every 4-5 weeks, at least 3-5 times. That is the average time it takes to receive a reply from a property owner.
Why Start with 5 Unit Apartments, not 4?
4 unit apartments
These type of multifamily complexes are considered residential properties ( 4 units and below). Its value, after renovating and raising the rents, is constrained by the sales comps in the area.
5 unit apartments
5 unit small multifamily apartments are considered commercial property (5 units and greater). Its value is based off sales comps AND NOI. To calculate NOI, take your income minus your expenses. As NOI goes up, so does your property value, an incentive to start with 5-plexes as opposed to 4-plexes. A way to calculate the value of increasing the rent of a commercial property is Value equals NOI increase divided by your cap rate.
Financing Your First Small MultiFamily Apartment Deal
There are two paths that you can take when financing your first multifamily small apartment building.
With conventional financing, you either take your loan package to a local bank or loan broker.
- Local bank
The loan officer in this case is a salary person. They submit your loan package to a board for approval or denial.
- Loan Broker
A loan broker works strictly off of commission, so they will likely be more motivated and work harder for you. They will submit your loan package to 20 or more lenders to find financing for your multifamily property.
As a reminder, Creative Financing in small apartment investing has lower dollar amounts and the sellers are mom and pop operators, so they are easier to deal with. These attributes will give you more room to creatively finance your multifamily property.
In Seller Financing, the seller becomes the bank for you and finances the loan. This can be of use to you if you do not have the money to finance your multifamily property if you need a loan. In a few years, you can re-finance and return the money to the seller.
The lender might require 25% down that you do not have, so the seller carries a second loan to cover what you do not have. Seller Carry is a very popular way of financing deals when you do not have the entire 25% as a downpayment.
This is a personal favorite, as you do not need a lot of experience or cash down and you do not have to go through a bank! I have a 20 minute video that goes into further detail about Master Leases.
Wholesaling is a great way to make money if you do not have a lot of funds or experience. Find a great deal, get it under contract, then assign the contract to an investor buyer for a fee. You collect the fee at the closing and the investor buyer takes over ownership.