Beginner’s Guide to Multifamily Investing

The beginners guide to multifamily investing. Discover why you should invest in multifamily and how to get started investing in multifamily right now with these 5 key steps:

 

Why Invest in Multifamily?

There are four tremendous financial benefits of multifamily investing.

• 1. Steady Income: The cash flow from multifamily properties comes in month after month, regardless of the circumstances. Contrary to popular belief, multifamily income was very steady even during COVID.
• 2. Strong Results in Good Times and Bad: The demand for affordable housing is always in high demand so multifamily performs very well in good times and bad.
• 3. Control Value Increase: You have control over increasing the Net Operating Income (NOI) which allows you to force appreciation (or raise the property value); unlike residential real estate whereby you have to wait for the market appreciation for the property’s value to increase.
• 4. Huge Tax Benefits: The income tax benefits of owning multifamily real estate are absolutely incredible.

And those four financial benefits can ultimately change your life. Here are 4 ways four compelling personal reasons why you should consider multifamily investing:

• 1. Financial Freedom: Multifamily investing allowed me to leave my corporate job and exit the rat race. If you haven’t ever heard the details, here is My Story. In fact, multifamily real estate has created more financial independence than any other investment vehicle.
• 2. Retirement: Many become multifamily investors in order to retire.. Conventional wisdom suggests that people need a certain amount of money in savings in order to retire but that ignores the more important fact that you actually need cash flow to retire. Having a large retirement account is helpful, but it still has to be invested into a vehicle that produces cash flow and arguably the greatest cash flowing asset is multifamily. Plus, you can always increase multifamily property income so that your income can increase during retirement.
• 3. More Free Time: Multifamily can provide you with much more free time because it is so easily automated by hiring the right management. It not only provides financial independence, but the asset itself requires very little time once you have optimized it’s performance because there is quality property managers that you can hire to deal with all the details.
• 4. Less Taxes: Multifamily is the best property type to purchase to reduce your income taxes.

 

Step 1: What Type of Multifamily Investor Are You?

There are four main types of multifamily investors and you need to know which one you are in order to successfully reach your goals.

• Cashflow: The cashflow investor purchases multifamily property to add cashflow as a supplement to their current income. Rather reinvest the cashflow into future deals, the cashflow investor uses the cashflow now so they can work less, give more to their church or charities, or travel. This is certainly a popular type and many of our Proteges have taken this path.
• Full-Time: The full-time investor wants to leave their current career and focus on multifamily. This is similar to a cashflow investor but the big difference is the full-time investor hates their job and wants a new career path, whereas the cashflow investor may enjoy their career and just want some additional cashflow. There are pros and cons to going full-time with multifamily so it’s not for everyone.
• Long-Term: The long-term investor builds wealth for their future. They forgo short term cashflow benefits in order to build wealth for the long haul. They reinvest all of their cashflow and cash out refinances into building a multifamily portfolio that eventually allows them to retire and live off their multifamily investments.
• Wholesale: The wholesale investor needs money now and doesn’t have any savings to invest in a property. Wholesaling is a great way to make some relatively quick cash from multifamily. The downside is that you won’t reap the benefits of consistent cash flow, wealth accumulation or tax deductions.

Understanding which of the four above that you are will dictate the kinds of deals you do and how you structure them.

 

Step 2: Know Your Multifamily Numbers

For every multifamily deal, there are a minimum of four calculations you need to make to get the real numbers on any multifamily deal. There’s more to calculate, but as a beginner this is where you start. You need to know how to calculate:

• Cashflow (CF)
• Cash on Cash Return (this is your return on investment or ROI)
• Capitalization Rate (Cap Rate)
• Debt Coverage Ratio (DCR)

We have an incredible resource called 18 Commercial Real Estate Terms You Must Know. It shows you how to calculate cashflow and analyze potential multifamily investments by calculating the cash on cash return, cap rate and debt coverage ratio. Anyone can learn how to do this, even the most novice investor. And once you understand these terms you will be able to make intelligent decisions. Not only that, but this knowledge will also give you instant credibility with your team, agents, and lenders. You don’t need fancy spread sheets to calculate these numbers. All you need is a calculator. Dig into these 18 commercial real estate terms and you will be amazed how quickly you can learn how to analyze any multifamily deal.

 

Step 3 – Know Your Multifamily Market

There are 3 key criteria that you need to consider when evaluating a market to which you intend to investing in a multifamily property:

• 1. Employment: Ideally, you want there to be a steady flow of jobs in the market of any potential multifamily investment. If the job market is steady, that’s great. If it’s going up, that’s even better. But if it’s declining, that could be a problem in the future. If people don’t have jobs, you won’t have paying tenants.
• 2. Location: There is a website called the walkscore.com, and it is a great tool for determining how centrally located your apartment is. It tells you where the nearest bus stop, shopping center, grocery store, and schools are in relation to your location. The higher the walk score, the more likely it is centrally located in that neighborhood. And being within walking distance of shops and services for apartments is key.
• 3. Crime: Unfortunately, if you are in a high crime area then you’re going to attract high crime people that don’t pay their rent or they pay late. You will also have a high turnover of tenants and unpredictable cash flow. These areas are too risky, so you want to invest in low crime areas.

There are 3 technical metrics of the market that you need to determine as well. These are benchmarks, and like in any business, knowing whether or not these benchmarks are met will help you make the best decisions.

• 1. Sales Comparables: You need to know how your potential investment is priced compared to similar properties in the area. This will help you determine whether the property is priced below, above or at market value. If yours is priced higher than other properties, that means you’re paying too much. But if you’re priced lower, then you’re paying under market and getting a good deal.
• 2. Market Cap Rate: It is essential to know the neighborhood’s cap rate. This is called the market cap rate, and it is different from the deal cap rate. The market cap rate is a marker to help you gauge where your property is in the market. For example, if you are in a six cap rate neighborhood where everything in your neighborhood is selling for a six cap but your deal is penciling out to be a five cap, that means you’re overpaying. Likewise, if you are in a six cap neighborhood but your deal is penciling out to be a seven cap, that means you’re under paying and you have a good deal.
• 3. Rent Trends: Knowing what other units are renting for in the area will help you determine whether there is any rent upside potential in the deal. If the rents are below market, raising the rents can be a part of your value-add plan.

 

Step 4: Build Your Multifamily Team

Step four of the beginner’s guide to multifamily investing is to build your team. If you are a beginner investor, you need experienced people on your team to help you do things the right way so you can avoid making costly mistakes.

Property Manager: The first person on your team is a property manager. A property manager will look at a potential property for you and give an analysis of the area and the condition of the property. They can walk through the property with you, give you their opinion on where the rents can go, and the type of repairs or updates needed. Having a property manager on your team to help you assess a potential investment is important when evaluating a deal.

Lender: Another important member of your team is a multifamily lender. You do NOT want a high-volume residential lender that does a little bit of multifamily on the side. You need a lender that specializes in multifamily because commercial real estate is different than buying a fourplex or a single-family home.

Broker: You will need a broker that specializes in multifamily and apartments. If they list single family homes part-time or full-time, you don’t want them. Trust me, the difference is night and day. The agent that doesn’t specialize in multifamily doesn’t have the expertise needed to help you.

Attorney: You essentially only need an attorney for two things if you’re beginner: to help you put the contracts together, and to help you with the uniqueness of every closing. You do not need them for due diligence. They’re not investors, they’re attorneys.

General Contractor: When you get a property under contract, you need a general contractor on your team that can give you an estimate on any needed repairs. Why is this important? Because once armed with a professional opinion and estimates, you can go back to the seller and negotiate a more accurate deal.

Mentor: A mentor can help you build your team. For example, a good property manager is key to being successful in apartment investing. But how do you know which property manager to choose? Well, quite frankly, you don’t. However, we do. In fact, we employ hundreds of multifamily property managers across the country, so we can pick out the stinkers and know the winners. And not only can we guide you to a reliable property manager, we can help provide other resources you need to build your team as well.

One of our students is a great example of how a powerful team is key to building a multifamily portfolio. Dave is full-time truck driver and busy with family commitments. He has assembled a portfolio worth $6 million, and he did it part-time. How did he do it? By building the right team: How to Build a Multifamily Portfolio Part Time from Scratch.

 

Step 5 – Get Help and Start Making Offers

You need to make offers. If you don’t start making offers you are wasting your time. But as a beginner you need help and it’s critical you hire a company that specializes in apartment investing. In fact, I have a video called 5 keys to a Multifamily Mentor that you need to watch before you hire a mentor. Whether you join or program or not, make sure that your multifamily mentor has these five keys.

3 Reasons Why You Need a Mentor:

• Fast track you to success
• Avoid costly mistakes
• Apartment investing is process oriented, start to finish. A mentor can guide you through each step so you can be successful.

With the help of a mentor, you can start making offers. Here is a simplified outline of the steps to making an offer:

1. Locate a good market for multifamily investing.
2. Find an off-market deal. Most of the student deals we feature on our website were found off market. They were not found on MLS or any website, so you must learn this skill to find the best deals.
3. Analyze the deal. You need to know your numbers and learn how to analyze a deal.
4. Create a razor sharp exit strategy. An exit strategy is how you will get your money out of the deal, whether you sell or refinance or 1031 exchange. Whatever it is, that needs to be determined before you close or even when you’re making the offer. Your exit strategy needs to be structured into the deal and there should be multiple exit strategies.
5. Make the offer. I know what you’re thinking. “Peter, I’m not ready to make an offer,” but let me say this. If you don’t get here, you’re just wasting time. Making the offer is where analysis paralysis stops and generational wealth is created. And even if you make an offer it may not go through. In fact, there’s a high chance your offer doesn’t get accepted. There’s a high chance if it does get accepted and you do your due diligence, it may not close. But that doesn’t matter because you will be learning as you go along and you will have an experienced multifamily mentor to guide you step by step through the process.

Every successful multifamily investor has a mentor. Get your mentor here:  https://www.commercialpropertyadvisors.com/protege-program/