Investing in apartments (known as multifamily properties) seems daunting if you haven’t ever done it. They are so big and expensive and have a lot of moving parts. Mess one up and it’s a lot of money lost – or so that’s the thought.
Then it might seem strange when I say that it’s almost a natural progression for investors that started in single family to move to multifamily. Sometimes they become accidental landlords and inherit a building or maybe are like me where I fixed up a house and intended to sell it but the economics were better for renting.
New investors start to see the benefit of expanding and want to do more and suddenly they’re doing multiple single families. Somewhere along the line they get introduced to multifamily and see the economies of scale where they can have multiple renters in the same structure and now they no longer have multiple property tax and insurance bills.
Not everyone feels this way. There’s plenty of successful landlords in the single family space. If it turns out that you’re someone who’s interested in multi-family, this is the post for you.
7 Steps to Multifamily Investing
Step 1: Education. Learn the differences between single family and multifamily. One of the biggest is learning to evaluate deals based on the income method. When you get to five units and above stop talking about sales comps (comparison into what other houses in the area sold for) you start talking about cap rates. Think of the cap rate as kind of a global sales comp for your area.
Step 2: Start underwriting. This is the process of looking at the numbers and determining if the deal is a good one for you. You’re looking at all the income and expenses from the property heading it all together to come up with a net operating income. Divide that NOI by the cap rate you’ve arrived at your value. Start doing that for as many for sale properties as you can find, even if you don’t attend to buy them yet. You’ll have to look at 99 stinkers before one is worthy of a deeper dive.
Step 3: Find a good agent. There’s plenty of residential agents who would be tickled to represent you but you need someone who deals in this space all the time. Look for properties that are for sale and call up their agents and interview them. Meet with at least three and select your agent. Discuss with them in depth about the exact criteria for what you’re looking. If you are very early on, I recommend house-hacking a 4-plex. House hacking means living in one unit while renting out the others. Living in 4 units or less lets you take out a low money down FHA loan. If you can’t take advantage of this, go big. If you won’t house-hack I recommend an eight unit multifamily building. You want to have some value add such as some minor repairs but I wouldn’t find one with a major value add to start with.
Step 4: Find a banker. I recommend going to local banks. Don’t go to credit unions because they will not be likely to offer commercial loans. Don’t go to national banks because they’re either geared towards the huge commercial investors or people trying to buy residential property. What you want is a local or regional bank that has a commercial arm. Call the bank and ask to speak with their commercial banker. Similarly with agents you will want to interview a few. Relationships are important and you should value these over getting the rock bottom rate. Shopping around banks will end up making you pay more in the long run. Discuss with your banker your personal finances and any other deals that you have. Your goal is to show them that you have the knowledge and possibly expertise to own a multifamily property. The biggest question is how much money you need to put down. Once you’ve determined this you can calculate how big of a property you can buy.
Step 5: Set up an LLC. It doesn’t matter what you call it just make it unique and not dumb. It doesn’t need a website. An attorney can do this for you for around $1,000 and you can also do it yourself but I wouldn’t recommend that one starting out. Definitely don’t do it yourself if you have partners.
Step 6: Find an accountant. Interview at least three accountants that do commercial property. I think the best way to find them is to speak with other multifamily owners at local meetups and ask for who they use. Find out what they need from the property manager (see step 7).
Step 7: Find a property manager. Yes, you want a property manger. When doing multifamily investing trying to manage yourself seems like a huge savings. But it also sucks time and will stunt your growth. Start interviewing property managers. If you don’t have one already you want to find one who manages multifamily units. Find out what property management software they’re using. They should be using one. Discuss your needs for accounting and make sure that they are agreeable with that. Have them tour your perspective properties with you. Can be a valuable resource for determining what the rent should go for.
Step 8: Make your offer. That’s it. Good luck.
