“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
If you’ve read this far, you pretty much know my real estate background from my single family home on Glenville Circle to smaller multifamily homes on South St and Carver Circle. For the next few weeks, we are going to take a small break from What’s Up with Carver to talk about large multifamily properties.
During our journey with Carver Circle and South Street, I saw the great benefits that multifamily provides and the even greater benefits of larger multifamily assets. The more I thought about it “why am I sticking to just smaller multi-families and getting only up to eight units when I could buy a 10 unit or a 50 unit or a 100 unit with one transaction and get all the benefits that come with it, i.e. more cashflow and tax benefits?” Not to mention that it would be the same amount of headache as I would get with my single family home and the smaller Multifamily plus much lower property management fees.
If you continue to follow our story, I’ll dive further into why larger multifamily properties are so great in a multipart series and share my own stories of failure and success in this area. In the meantime, I want to explain the 5 main reasons why I turned my sites on investing in larger multifamily assets…and why you may want to as well!
By far the best reason to invest in multifamily assets is the fact that you can use OPM or Other People’s Money! That means that your excuse that “I don’t have money and can’t get started” is just that—an excuse. Investors are clamoring to invest their money in stable, tax-free cashflowing apartment buildings and you as the operator provide them the incredible opportunity to earn passive income and generate long-term wealth. Whether that is in the form of a Joint Venture or Syndication (see below), you just have to make it worth their while.
When people ask me, “what do you I need to get started in real estate investing?”, I tell them they need 1 of 3 attributes: time, money or experience. If you have at least one of these, you can fill the other two gaps with knowledgeable partners. But where do you find these partners? Go to a multifamily conference, attend a local REIA, sign up for a mentorship program. Talk to everyone about what you’re doing and you are guaranteed to find individuals—in the form of mentors or peers—that invest in apartment buildings and are willing to partner up with motivated hustlers like yourself.
Partners can fill a multitude of roles: guarantor, capital raiser, mentor, boots-on-the-ground, risk capital, investor relations, due diligence and asset management—to name a few. Delegate responsibilities and overcome challenges as a cohesive, well experienced team. But be careful who you choose to partner with—a partnership is like a marriage, you can’t fire them. Use your intuition, clearly define responsibilities and have the difficult conversations up front (i.e. What if it doesn’t work out? What is one of us dies?)
When buying smaller properties (under $1M) is uncommon to find a loan that is non-recourse. Recourse loans mean the guarantors of the loans hold their personal assets at risk if the loan is defaulted upon. This, however, is not a preferred option when you are purchasing multi-million dollar properties. For larger multifamily loans (over $1M), lenders typically offer non-recourse commercial loans. This means that in the case of a default, the lender’s only “recourse” for the default is the property itself and the income it produces. This is much less risk and exposure for the general partners and guarantors. You’ll find many multifamily investors look for properties in the $2M and higher range for this very reason. That being said, the caveat to a non-recourse loan, however, is a carve-out clause which provides the lender full recourse in cases of negligence or fraud. Another word for this carve-out is “bad-boy” clause.
The purchase process of a large apartment building or commercial property is very similar to the closing process for a smaller residential property: submit, negotiate and sign a purchase and sales agreement; perform an inspection and due diligence; find and secure financing; raise capital (as needed); negotiate price after inspection (if required) and finally closing. There are a few different nuisances and the closing process takes an overall longer amount of time but it follows the same general path. If the process and stress from the closing process is similar, why not purchase a larger property? If my goal is 50 units, I can purchase a 50-unit property in one transaction or I can purchase 50 SFHs in 50 separate transactions. Why not get more bang for your buck?
Once purchased, larger apartments offer less relative risk in regards to vacancy and stability. With one SFH empty, I have 100% vacancy and no income coming in. With one unit vacant in a 50-unit building, I have 2% vacancy and now spread the risk across multiple units. I can still cover debt service, operating expenses and provide the returns to my investors I promised.
As a general partner, there are numerous fees you can tack onto the asset to compensate for the work you provide. These include Acquisition Fees (due upon closing of the property), Asset Management Fees (provided as a set percentage of cashflow to the GPs that manage the asset), and Disposition Fees (percentage of the profits from the sale or refinance of the property).
Cashflow is king and should be the ultimate goal of any investor. Depending on how you set up your investor terms, GPs get a portion of the cashflow. Typical investor terms are a 70/30, 60/40 or 80/20 split (GP/LP split).
Just like a typical single family rental or smaller multifamily buy and hold, tenants pay down your loan for you; continuously building equity within the property.
One of the absolute best reasons to invest in multifamily properties, the US tax code allows a buy and hold property (SFH, MF, CRE) to depreciate over a set amount of time. I will cover this in more detail in the next post.
Historically, real estate naturally appreciates (average 3%) just by inflation alone. However, this appreciation may be accelerated if a particular market is “hot” or actually depreciate if the market is “not.” Although we never buy for appreciation, only cashflow, it doesn’t hurt to have appreciation work in your favor.
If that doesn’t sway you to invest in large apartment buildings, next time I’ll drop 5 more reasons to invest in multifamily including tax benefits, stability and forced appreciation! Don’t forget to Like us on Facebook and Follow us on Instagram too! We are putting out graphics on our Instagram every time we post something, so keep an eye out!