Bigger Deals, Better Profits: 10 Steps to Your First Large Multifamily (#497) | BiggerPockets Real Estate Podcast with Brandon Turner and Brian Murray

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Key Takeaways

  • Multifamily real estate investments are more about creating a successful hands-off business system rather than you being the go-to resource. You don’t do this alone. Build a specialty team with a common purpose.
    • Don’t be afraid of fees and/or equity offerings – partnerships are what makes your multifamily investment business possible
    • Surround yourself with the multifamily investor community to learn and build your team
      • Local meetups, mentors, social media resources
      • Investors, mortgage brokers, lenders, underwriters, more
  • More creative financing opportunities with bigger multifamily properties
    • Capital stack – a combination of equity and debt for the investment structure, where the money is coming from
    • Syndication – a partnership between several investors to combine skills, resources, and capital to purchase and manage a property they otherwise couldn’t afford
  • Defining your ‘crystal clear criteria‘ helps define how value analysis translates into profitability for your investment team
  • Other outlined tips and strategies include commitment, team building, underwriting, finding deals, asset management, and more

Intro

Intro to Multifamily Investing

  • More forgiving investment – your income is spread across more tenants; you can afford more conflict
    • Commercial or retail assets can put you in the negative if tenant conflicts arise
    • Multifamily has a more generous and good population of consumers
  • More creative financing opportunities with bigger multifamily properties
  • Understand your challenges with single units and be honest with yourself on if you can scale your solutions to multifamily complexes
    • “It is easier to manage a 100 unit property than a duplex” – Brandon Turner
    • Multifamily investments are more about creating a successful hands-off business system rather than you being the go-to resource. You don’t do this alone. Build a specialty team.

Commitment

  • Wanting to do it is not enough, commitment is absolutely required
  • Even though multifamily is supposed to be passive income, there is a lot of hard work to set up a team, scale, and maintain
  • Successful multifamily investors surround themselves with like-minded investors
    • Local meetups, mentors, social media resources

Crystal Clear Criteria

  • Highly involved up-front research to define your investment criteria profitability strategy:
    • Location, local markets – proximity does have its advantages (start with this before going national)
    • Understand the local average cost of properties
    • Population and job growth trends in the area are more important in multifamily, but they can be typically ignored when looking at single-unit properties (singles can be flipped and move on)
    • Area crime rates
    • Walk the area – for example, is there a Starbucks nearby? Nice grocery stores?
    • Local landlord/tenant laws
    • Hot markets tend to have high competition and low-profit margin

Financial Structuring & Organization

  • Capital stack – a combination of equity and debt for the investment structure, where the money is coming from
    • Debt: any source of capital that you’re going to have to pay back
    • Equity: rights to the profits generated from the investment
    • Usually multiple sources of both equity and debt
  • Syndication – a partnership between several investors to combine skills, resources, and capital to purchase and manage a property they otherwise couldn’t afford
    • Offer ownership equity profits to investors in return for upfront cash
    • 506b – non-advertised, partnership with existing relationships, don’t have to be accredited
    • 506c – must have accredited and qualified investors can be advertised, observed by 3rd party

Multifamily Debt

  • You can get great debt terms when investing in large multifamily properties
    • Lenders view them as a safe and stable investment
  • Engage the services of a mortgage broker – they know how the lender wants to see the investment
    • Highly knowledgeable on who the best source of lending for your criteria is
    • Again, don’t do this on your own!

Building a Team

  • Understand your strengths and weakness and delegate the gaps to fill
  • Don’t be afraid of fees and/or equity offerings – partnerships are what makes your multifamily investment a business
  • Real estate can be lonely, doing it with a team makes it a lot more fun, and mitigates stress

Finding Deals

  • Off-market vs on-market deals:
    • The bigger the property, the harder to find an off-market deal
    • Off-market deals typically derive from established relationships
    • Large properties are usually sold on timeframe or within contracts rather than stress selling or interpersonal situations which leads to having an already established potential off-market deal

Underwriting

  • Much more complex than smaller properties but not impossible. Invest in software to assist with underwriting
  • Return value = income – operating expenses
    • Understand your projections both short term and long term
    • Create your offer to match your return value goals for everyone involved – what kind of return do you want/need your investors to have?
  • Underwriting is not plugging the numbers into a spreadsheet; it’s understanding your ‘crystal clear criteria’ and finding the numbers

Due Diligence & Asset Management

  • Audit financial information, walk through every single unit, and do a proper examination before signing the deal. Make sure you are truly getting what you invest in.
  • Add value to the property:
    • Rely on a 3rd part management company for asset maintenance to drive revenue and manage expenses
    • Add more income sources to property, laundry, or vending machines
    • “If you take care of the real estate, real estate will take care of you” – David Greene
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Notes By Drew Waterstreet

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