How to Buy Your First Multifamily

Almost every week someone is asking me HOW do you get started in real estate.

The problem is that you will get 100 different answers from 100 different people. 

That’s because everybody has their own niche in real estate and a unique way which they started in the business.

When I try to answer the question, I realize that I’ve already begun to forget what I didn’t know when I got started.

Recently, though, I’ve been transitioning from small multifamily to large multifamily, and in some ways, I’ve asked the same question…

How do you get started in multifamily?

Transitioning from one niche to another is quite similar to a person that is starting from nothing. It’s different in that my foundation of knowledge and experience is 95% related to my new niche, but it’s similar that a transition requires one to grapple with the same set of questions.

That is… the HOW question.

I’ve always invested in small multifamily but I’ve always done it with my own money. This limited the size of the deal to smaller multifamily deals under 5 units.

The fundamentals of analyzing an apartment complex are virtually the same as analyzing smaller rental properties in a portfolio (I’ll go over that later) but the key difference is how the equity is put together.

And figuring out that piece made me feel stuck. It felt like I had to take 5 different “first steps,” but you can only take 1 “first step.” So, I set out to learn everything there is to know about apartment buildings and syndication.

Through that journey, I realized two things: 1) If you can buy 20 units then you can buy 200. 2) If you can buy 2 units then you can buy 20.

Ultimately, I realized that investing is investing. Though the details may change slightly depending on the niche, the process to learn it is the same.

What you need to quickly get started and become successful in real estate (multifamily or single family included):

1. Mentorship
2. Strong understanding of the numbers
3. Bring something to the table
4. Great plan
5. A team (property manager, lender/broker, agents, attorney etc)
6. Get funding (create a pool of investors/partners)

Regardless if you are a brand new investor or an experienced investor changing niches, the overall process is the same. So let me break it all down a bit further.

1. You need a mentor to get started in multifamily (but don’t pay a fortune for it)

I’m putting this as the #1 item only because I don’t want the readers to ever buy into something and waste their money.

As soon as someone decides to get into real estate, they look online and find a seminar to go to. Often, the seminar is a gateway to the short weekend boot camp which then feeds into a super expensive mentorship program.

I love meetups and boot camps can be a great way to meet other investors. But, if you find that you’re second guessing yourself or you feel like the only way to succeed is to pay them, then you are being sold to.

At one event I went to, I actually questioned myself and my own ability to succeed in real estate. Granted, the self-doubt lasted only .0034 seconds (I timed it), but it was there. If I felt it then I can only imagine the pressure that a newbie feels to open their wallets and fork over $30k or more.

Don’t get me wrong, I’m not against “mentorship.” In fact, I’d say it’s almost mandatory to have one. I’m against what I call “guru” model where they make you feel like everything is impossible without paying them tens of thousands of dollars, and the answer is always through the door in the next seminar (which costs more). If you get the feeling that they are the only way you can be successful, then walk away.

If you get the feeling that they are the only way you can be successful, then walk away.

Instead, you need to find a true mentor and, unfortunately, they are usually hard to find. Mentors usually don’t have big advertising budgets and many aren’t even actively looking to train new people. The best way to find them is through networking though some maintain websites (such as myself and a few others).

The two types of mentors

Pay everyone fairly for their time and knowledge – mentors included. There are two primary ways to compensate them.

The first and most obvious way is to just pay them and learn what they have to teach. The “gurus” give it a bad name but it’s also quite common for normal mentors.

This is good because you are giving a fee and expecting knowledge in return. One the other hand, the mentor is not financially invested in your success.

The other way is the partnership model. The mentor essentially partners with you on your first deal (or multiple deals).

The costs are low up front and the mentor is financially invested in your success. The other side of the coin is the partnership will probably bring them in far more income than if you had just paid them outright.

2. Understanding the numbers in multifamily is your #1 priority

The most important part of real estate, regardless of the niche, is to know the numbers. People falsely believe that it’s harder to make mistakes with rental property because it’s a long-term play. While it’s true that time and appreciation can help offset mistakes, it still cost you in the end.

A lot of people told me that analyzing apartment complexes was completely different than single family or small multifamily (that’s why you need to pay a guru, remember?). So, I paid for a weekend seminar and picked the brains of everyone who would answer questions.

The information at the weekend event was great and the networking opportunity was amazing as well, so I definitely recommend going to one. What’s key is that I walked away knowing how to analyze any deal using “industry standard” analysis.

You know what I found?

Analyzing multifamily communities is no different than running the numbers on a 3-family

Before you jump straight to the comment box to ridicule me, hear me out. I’m not saying every number is the same because it’s not.

What I’m saying is that the overall analysis is basically the same.

To prove my point, I went back and pulled my P&L from 2016 on all my rental properties and compiled it. I broke down all the income and expenses the exact way you’d find them laid out for a 200 unit complex and then took my income and expenses and compared them to the “industry” standard. Guess what I discovered?

My overall costs were exactly the same.

Some costs were allocated slightly differently (for example, insurance was more but property taxes were less) but the overall cost/door was exactly the same. Also, I found that many of the rules of thumb, like the 50% rule, still hold true most of the time for apartment complexes (read about the 50% rule).

Now, there are some key differences you need to be familiar with. For example, NOI and cap rates determine the value of multifamily (learn all about cap rates and how to use them) while comps determine the value of small properties (learn how to do a comparative market analysis).

The key, regardless if it’s single family or multifamily, is to analyze a ton of deals so you know the numbers inside and out. Right now I’m analyzing 1-2 deals every day just to become an expert at picking apart the spreadsheets.

3. Experience

This is a tough one because if you haven’t actually done it then you don’t have “experience.” I’ve never bought a 100 unit property so I’m not experienced at all, right? Well, since I’ve already broken down the numbers in #2, single family and multifamily rentals clearly count as experience, if you have enough of them.

The issue with multifamily is the numbers truly sound impressive. “I own 200 doors” sounds really impressive, but it may have only been one deal. That’s not to take away from the accomplishment because it IS a big deal and it’s not easy.

All I’m saying is that a person who has done 12 or 15 single family rental deals is more experienced in a number of areas than the person who has bought one or two multifamily deals with 200 doors.

The point is experience is relative. A person may own way more but have way less experience in many areas.

That’s why you shouldn’t worry, even if you’re a complete newbie. You may have experience in areas that others lack. Take a look at me:

I have a super strange mix of skills that few people would ever have or want to have. I have planning/operations/personnel management (military officer), analytics/market analysis (PhD program in economics),  project management (contractor), marketing (MBA and my website), and sales (commission only sales experience).

This combination of skills and knowledge is what I bring to the table more so than my rental experience (though that’s valuable too). The fact is a lot of people have real estate experience but not everyone can bring something completely unique to the table.

So, find what you uniquely can offer and find partners that need that experience or knowledge.

4. A great plan

Like I said before – I felt like I needed to take 5 “first steps” but you can actually take only 1 “first step.” This can overwhelm a lot of people and it leads to “analysis paralysis” where you spend months or years learning and analyzing but you never take action.

That’s where a plan comes in. It’s a simple fact that you are far less likely to succeed without a great plan.

I’m not going into great detail on how to write a business plan since I’ve written about it elsewhere. Instead, let’s focus on setting goals to build a plan around.

Each individual property will have its own “business plan” though the complexity of it depends on the size of the deal. You aren’t there yet so your plan should focus on what you are doing to grow yourself and your business so that you can buy your first deal or grow to a level you want to be at. Here are a few areas you need to think about:

• Networking – How often and where will you network to meet other investors, brokers, etc? Make a list of the kind of person you are looking to meet, then focus on finding those people. At the next event do it all over again.
• Building a team – Once you have met some people through networking, you should figure out the people you want on your team. I like to continually ask for referrals. For example, I might ask a property manager to introduce me to the best listing agents. Then, I ask those agents for their favorite property manager who I then ask for more agents.
• Finding deals – How do you plan on finding deals? Will you use relationships with agents or property managers to find deals? Will you do mailings or go scouting for them? A lot of ways work, as long as you have a plan to execute.
• Funding deals – Where will your debt and equity come from? If you don’t have the cash and your network doesn’t, you’ll need to find a JV partner to help fund deals. Also, you’ll need to find lenders or brokers who will fund the debt portion as well.
• Building a brand – Everybody is their own brand in one way or another. You should manage your own brand so people can know or learn about you.

5. Building a multifamily team – nobody succeeds alone in real estate

I briefly touched upon how I get referrals in section 4. Here, I’ll talk about who you need on your real estate team and why:

• Property manager – A professional management team can bring a lot of knowledge to your corner. Although you may be more knowledgeable with running the numbers and finding value in a deal, they will understand the rents and costs associated with running your property. They will also have their finger on the pulse of the city and know which neighborhoods are going up or down.
• Listing brokers – In commercial real estate (large multifamily included) you need to know as many listing agencies as possible and get on all their distribution lists. If you are focusing on smaller real estate, you should find one agent who is really amazing.
• Mortgage brokers/lenders – You need to know where your loans will come from, so find them early. Also, good brokers will take a look at the numbers before you get far into the deal which will save you time and money.

Network Like It’s Your Job.

Most people are absolutely shocked when I tell them I’m an introvert.

It’s because I’m fairly outgoing and talkative at most social events.

Most relationships won’t sprout into anything at all, but some of them will grow into something huge. – Eric Bowlin

In December of 2016, I decided I would attend at least 4 networking events each month in order to further my goal of building relationships.

I’ve been to networking events before but I usually just sat in the corner and didn’t interact much. I realized this wouldn’t further my goal so I started to look at networking like it was my J.O.B.

Literally.

You Don’t Grow in Your Comfort Zone

I had to attend these events in order to meet people so I could further my other goals. I had to follow up with everyone to create the foundation and then follow up with them over time to foster those relationships.

Most relationships won’t sprout into anything at all, but some of them will grow into something huge. But, like gardening, you need to plan your networking and relationship building.

Here are some key ingredients I found useful:

1. Know exactly who you want to meet – create the avatar of who you want to add to your network, then go seek that person.
2. Focus on getting to know 3-5 people in any one event. Any more and you’re not building rapport any less and you’re potentially being too shy and wasting time (this is heavily dependent on the length of the event).
3. Focus on the follow-up. I’d have to say that at least 90% of people never follow up after meeting someone. So, I focus on being one of that 10% who follows up with everyone.
4. Find a way to add value. Naturally, people are focused on themselves (even if they don’t realize it). So, find a way to add value to what they are doing and it will help you take that first step toward building a relationship.

I go into a bit more detail about networking in a recent article I wrote networking like a pro.

Relationships Are Like a Vine

At these networking events, I began to meet some awesome people. In January 2017 I went to a simple meetup about apartment investing. There, I met some other people who were hosting an event, so I went there too.

I went to their event and learned a bit about multifamily and met some other great people. The key here was that I started to develop a solid relationship with the guy who hosted it, who owns around 2,000 doors with his wife.

Just by being around them, I began to pick up knowledge. Also, as I built relationships with them, I was able to occasionally call and ask some questions about deals I was underwriting.

The relationship I built gave me the foundation I needed to meet my future business partners a little later.

So, even though I haven’t done a deal with any of those people who were influential to me, those relationships helped me in ways one could never have predicted.

Go to Conferences to Meet Other Apartment Investors.

Conferences are weird environments. You’re away from your family for 2-3 days, bored at the hotel, and hungry for knowledge.

But, everyone else is having the exact same experience! So, you get to spend 48-72 hours with people that are all bored and looking to meet other like-minded people.

The best part is that you can build some solid relationships in a 48 time-frame if you’re spending hours and hours with them.

So, I started going to conferences to meet other apartment investors. One, in particular, was looking for deals in the Dallas area which is where I was living.

We got to know each other a bit during that conference and decided to keep in touch after leaving.

Keeping in Touch

Since I had become so good at underwriting deals and because I was living in Dallas, he would occasionally call me and ask me about deals he was looking at. Often, we were looking at the same deals and we’d bounce things off each other.

What do you think about the labor costs over at this place?

I’d respond:

I think this is a good deal but I’m not sure about the sub-market.

And so on…

The seed was planted at the conference and the continuous back and forth was nurturing that relationship and building trust.

Then one day we realized we were both going after the same deal pretty hard and he suggested perhaps we go after it together. So we teamed up and put in an offer together.

We didn’t get that deal, but the seed sprouted.

You never know what kind of seeds you’re planting at a conference, but the key is to get out there and start planting them!

6. Secure funding and financing for your multifamily deals

People always think about getting a mortgage but the other piece of the equation is the equity. People rarely have a million or two laying around to buy a $6 or $8 million deal. Believe it or not, a lot of real estate is actually owned by relatively normal people.

They simply pool money from a group of people to go tackle that deal. Most people don’t have $1 mil, but a lot of people have $50,000. It only takes about 20 people to put together $1 million if everyone puts in $50k.

This isn’t necessarily easy or hard. It can be hard to build a list of like-minded people who want to invest in real estate. It can also be hard to overcome the mental barrier of actually asking people for their money on a deal.

But this is what you need to do.

Start by talking to friends and family about multifamily

It’s probably not a good idea to bug your family about their money, but it’s good to tell them what you’re doing. They may be close with other people who are trying to find better investments and they can connect the two of you.

You can also put a list together of your friends who are savvy and in a financial position to invest. Just like with family, I wouldn’t strong-arm them into investing, but they may be tapped into a larger network of people who could want to invest.

Talking to others about multifamily

Unless you come from a rich family, you’ll need to meet more people and get them to invest with you. You need to be cautious though because you can not solicit someone that you don’t have a “substantive” relationship with.

When meeting new people, you should focus on telling them what you do in general, but never mention a specific deal. After you get to know them a bit and have had multiple conversations, coffee etc. then it’s safer to bring up a specific deal you’re working on.

You can literally meet people anywhere, from a networking event to a cafe. The key is to just have a solid elevator pitch and tell everyone what you do.

7. Become an Expert at Underwriting.

I began to underwrite deals. The plan was to find a good deal, bring it to a bigger investor, and ask to partner on it. If I was working on a deal with someone, I’d be able to call or email and ask some questions.

I was adding value to someone else and also gaining mentorship at the same time.

I remember several times I would spend 3 or 4 hours underwriting a deal and I would think it was literally the best deal ever. So, I’d package it all up and send it over to someone – the numbers fit, the location was good.

20 minutes later I’d get a one or two line response.

…Adjust the cap rate, change the rents, expenses are too low. Make the changes and let me know.

I’d make the changes and my heart would sink… The deal was no good.

I dedicated to underwriting deal after deal to become an expert at it. I was spending 6-8 hours per day just underwriting apartment complexes. It seemed like a waste of time, but, it was building my experience as an underwriter.

The only problem was, I began to feel like…

There were just no deals.

Looking back, I underwrote around 250-300 different apartment complex deals this year. Every deal varies, but it could take anywhere from 30 minutes to 4 hours to go through just one deal. Overall, I think I spent at least 600-800 hours this year just looking at numbers on the deals I never bought.

That’s equivalent to about 20 typical work weeks.

But, that’s OK. I was still building the foundation and it came in handy.

People want to work with someone who knows what they’re talking about. The only way to know what you’re talking about is to spend the time learning – and the best way to learn is to do it.

So, become a master at underwriting deals, even if you know the deal won’t meet your criteria – you’ll become more of an expert and more of an authority.

8. Build a Brand

I didn’t realize it back at the beginning of 2016 when I started this website, but it would exponentially help me in real estate, apartment investing, and business in general.

Simply having a website with solid content and traffic creates a level of legitimacy to my name. Your experience and knowledge are laid bare for all to see, so they can easily look and glean your philosophy, knowledge, and style from your writings.

Then I started to appear on some podcasts, write for other (larger) websites, and my name recognition likewise grew.

Soon, I would go to almost any networking event and at least 1 person already knew my name and background. It’s weird because I don’t see myself as a guru or anything, but it is immensely helpful to be recognized.

My potential partners would look me up on the web and find my content and website. This creates a great first impression, builds credibility, and allows you to take those first steps to partner with much bigger fish.

Then I started my own networking events.

It was pretty crazy, but I started doing my own networking events in the Boston area. I was nervous that nobody would show up. There is a lot of self-doubt involved with starting something like this.

But… people showed up! In fact, I was averaging 20-30 people per event. Eventually, we got up to around 50 people at some events.

This seriously helped to grow my personal brand.

So, you should build a brand and create your own networking events.

9. Wait…

Alright, so everything seemed to fall into place pretty easily. I learned how to underwrite pretty well, built a team, was meeting a ton of people and building lots of relationships.

Going for coffee 4 or 5 days a week and doing 6-10 networking events per month was fairly normal at this point.

I thought I was doing everything right. Then…

…nothing happened.

Every potential deal fell through. We got outbid by crazy amounts on every deal we made offers on.

By the end of March, I was almost ready to give up. It had only been 4 or 5 months since I started.

I spent months of time, hundreds of hours, and had nothing to show for it.

During this time I had passed over several potential small multifamily deals – my bread and butter. I knew I could have easily made a good sum of money on any one of those deals and I had a lot of cash sitting on the sidelines.

I started to get anxious and thought perhaps my time was better spent doing what I know.

Getting Back on Track

Then, By April 21st someone I consider a mentor was talking me off the ledge.

The deal….Personally, I think there are better deals.  While it is taking a long time for you to actually get a deal, I think this particular deal will be very tough…

He wrote later that day:

I know this extremely frustrating… and I think what you are seeing is fairly normal for the current times.  I think looking outside of Dallas and OK is something to consider.  It is all about relationships which takes time to develop.

It worked for a while, but I started to get anxious again by June.

So I flew back to Massachusetts to start working on my portfolio. I got there and immediately put a 2-family under agreement. That deal closed at the beginning of August.

I felt like I was cheating on my goal to syndicate an apartment building, but I can’t leave that kind of money sitting on the sideline for a year. At some point, you have to put that money to work.

At least, that was my rationale.

Now it’s time to get out there and start finding deals