How to Invest In Multifamily

Choose Your Investment Style

How you choose to invest is determined by how much time and capital you are able to apply to building multifamily wealth.

Individual (IRO) Photo

Individual (IRO)

(Individual Rental Owner (IRO)

Typical profile– Investor with strong balance sheet looking to own properties with no partners. Not only do they have to come up with the down payment, they need to be able to qualify for the loan on their own. Net worth needs to be greater than the loan amount and post-close liquidity needs to be greater than 10% of the loan amount.

ADVANTAGES – You control investment decisions; no limited partners to answer to; ability to roll gains to larger properties through 1031 exchange.

DISADVANTAGES – Depending on amount of capital, might not be able to acquire large enough units to get full time property management; must sign as loan guarantor; must find property yourself; higher concentration risk due to owning fewer properties; Must asset manage deals.

FOCUS – Finding new deals to invest in; Asset manage existing deals

Limited Partner

(Passive Investor)

Typical profile – Investor who has limited time but has money to invest. Doctor, Lawyer, Accountant, Engineer who has a good W2 income but doesn’t have time to find and manage deals.

ADVANTAGES – Do not have to find deal; no management responsibility; receive depreciation tax benefits; receive benefit of economies of scale of larger properties; diversify across multiple general partners and markets; leverage experienced operators; learn from experienced operators.

DISADVANTAGES – No management control; no control of cash flow as general partner makes investment decisions on sale, refinance, and distributions; lower return due to sponsorship equity general partner gets for putting deal together; Typically cannot 1031 exchange investment gain.

FOCUS – Finding general partners to invest with

Limited Partner Photo
General Partner Photo

General Partner

(Syndicator, Lead Investor, Sponsor)

Typical profile– Investor who puts deals together leveraging other limited partner money, other people’s balance sheet, and 3rd party property management. Typically cannot come up with down payment or qualify for the loan on their own to buy deals that can justify 3rd party property management (generally 50+ units)

ADVANTAGES – Earn acquisition fee, sponsorship equity, and/or larger return compared to cash invested in deal; control over investment decisions; ability to leverage other people’s money to buy large properties with no size limit.

DISADVANTAGES – Sign on loan as guarantor; must spend time finding and negotiating deals; must raise equity and manage limited partner questions; must be an asset manager managing the 3rd party property manager and operations of the property.

FOCUS – Finding new deals and raising equity from limited partners

Examine Your Personal Finances

If you are a Limited Partner, you either have cash for an investment or you do not. Individuals and General Partners need credit and a balance sheet – This starts with a Personal Financial Statement (PFS).

The Personal Financial Statement summarizes the assets, liabilities, cash position and net worth of the Individual Owners, General Partners and any Guarantors or Key Principals (KP’s).

Contact us to obtain a Personal Financial Statement form and advice on how to complete the form.

GET PERSONAL FINANCIAL STATEMENT FORM

Work with Experienced Mortgage Broker

Pre-Approval/ Pre-Qualification

Apartment lending qualification is very different from single family home loan qualification. In home lending, a lender can issue you a pre-approval based on your personal income, credit report, amount of liquidity, etc. This written approval is based on the borrower’s strength to qualify….and not as much on the property and location of the home. With apartment lending- the quality, condition and location of the asset are the most important factors in underwriting. A pre-approval is not going to be available because 2/3rds of an apartment lending decision is based on subject property. 1/3 of an apartment lending decision is based on you.

Bottom line, the lender can give you an indication on how much you can qualify for, but because the age, condition and location of the asset is so important in an underwriting approval, a written pre-approval before the asset is selected is not worth very much. Speak with your commercial mortgage broker on how to structure the transaction for approval. A good commercial mortgage broker will coach you through the process. They will give you insight on how much you can qualify for based on the total picture. Engage your commercial mortgage broker EARLY in the process. This is a relationship business and the mortgage broker is a critical partner.

Contact Your Mortgage Broker
Individual (IRO) Photo

Checklist of Items You’ll Need to Provide Your Commercial Loan Broker –

  • Updated signed personal financial statement
  • Liquidity verification (bank and/or brokerage statements)
  • Last 2 years of personal/corporate tax returns
  • Real estate resume- detail your real estate experience. “I bought a home, fixed it up, and sold it.” Tell the story of your successes in real estate. It’s like you’re applying for the job of running the property.
  • Schedule of Real Estate owned (what do you currently own; loan balance, value, contingent liability or non-recourse; annual NOI, annual debt service, etc.)
  • Broker’s Offering Memorandum on the property you are looking to purchase
  • Property’s historical monthly operating statements (last two years and YTD)
  • Current rent roll
  • Five digital pictures of the interior/ exterior of the property
  • Your analysis of transaction; share your monthly PROFORMA for the next 12 months. How are you going to operate property?
  • We can help you arrange all of this data in a professional presentation to help you win financing with MY PROPERTY RESUME

The Value of an Experienced Commercial Loan Broker

Whether you are an experienced multi-family operator or new to the business, financing a multi-family property is not simple. Having an experienced commercial mortgage broker on your team can be the difference between getting funded or being rejected. An experienced commercial mortgage broker will be your most valuable partner, because you will have thousands of dollars and your reputation at risk if you are not able to execute on financing and close.

Limited Partner Photo
General Partner Photo

Prep your Story and Team

Before you have agreed to purchase a property you should be able to tell the story to the lender and investors on why you and your team are qualified to purchase and operate a multifamily property. This is your personal resume. When you are buying a property, you must present the purchase opportunity in the most favorable light. Once you own the property it is important to be able to professionally present you, the property, the financials and the property strategy for Lenders, Investors, Brokers and Buyers when you Sell the property. We call this “My Property Resume” and can prepare this packaging with you.

Assemble Your Team

Multifamily Investing is a team sport. You need experts to succeed in the game. Before you start making offers, build your team so that when you are ready to offer, the listing broker takes you seriously and you are in position to acquire the property.

Mortgage Broker

An experienced commercial Mortgage Broker will be your most valuable partner. Unless you are an all-cash buyer, the ability to execute on financing is the number 1 requirement for getting a deal done. The Mortgage Broker sees all types of transactions in the market and can guide you to find the right financing for a deal. The Mortgage Broker knows all the steps in helping you achieve a successful transaction. Contact a Mortgage Broker

Listing Brokers

Listing Brokers not only have current listings for sale but also know deals that may be coming to market soon or know of projects where there may be opportunities. In order to motivate a Listing Broker to spend any time with you, you must appear serious, professional and prepared.

Essentials:

  • Know what you want. What size and style project are you seeking? Where are you looking?How much work are you willing and able to complete in repairs?
  • Know what you qualify for financially (work with your Mortgage Broker)
  • Do your research. Understand what values to expect in the market (price per door, etc). The Broker needs to know that you understand the market and would likely pay market rates not that you are just hoping to find “a deal”
  • Practice underwriting deals. Underwrite 10-15 deals so you understand multifamily financial terminology and valuation.
  • Don’t waste the Brokers time. If you are not organized, focused and serious and just “kicking tires”, you will not get any attention
How to Find a Listing Broker

Attorney

A good real estate attorney is an essential member of the team. They can assist in writing offer terms and certainly negotiating purchase and sale agreements. If you are a syndicator, an attorney specializing in Private Placement Memorandums and SEC rules is essential. Use your network, mentors or investing groups to help you Find an Attorney

Property Management Company

You want a management company that is experienced in managing properties of your size and in your location. A management company with a good track record and reputation will be required by the lenders if you do not have enough experience yourself.

How to Find a Property Management Company

General Contractor

A reputable, reliable General Contractor is a key team member, especially for projects with large rehab requirements. The contractors ability to scope out required rehab projects on a property and estimate cost accurately is the difference between profit and loss in buying a property.

How to Find a General Contractor

Insurance Broker

The cost of insurance, especially along coastal regions, has been increasing at double-digit rates over the past couple of years. You need an Insurance Broker that knows the pricing (and expected increases) and the insurance companies that are friendly to multifamily investors.

Talk to a Multifamily Insurance Broker

Key Principal (net worth, liquidity)

The sponsorship group buying a deal has to have net worth higher than the loan amount plus 10% available cash liquidity to qualify for a loan. If you or your sponsorship group, do not have the required net worth and liquidity personally, you will need a Key Principal(s) in order to qualify.

How to Find a Key Principal

Investors

Unless you are buying a property individually, you will need to raise funds from investors. This can be as simple as raising money from friends and family to as involved as putting together a syndication with General and Limited Partners. There are legal rules on raising funds so you will need a good attorney.

How to Find Investors

Write Winning Letter of Intent

A well-written LOI may be your only opportunity to make a good impression on the Seller and Brokers that represent them. It gives the Brokers talking points to support your offer and helps the Seller feel comfortable you will close the deal.

Winning Letter of Intent

To showcase your projects and add a competitive advantage to your presentations, consider engaging “My Property Resume” for professional marketing package creation.

We own apartments and understand the needs of the apartment investor and what it takes to grow wealth.

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