Multifamily Investing for Beginners
This discussion assumes that you are wanting to invest yourself and not passively, meaning you’re not giving your money to someone else to buy property and pay you a dividend later. There is a ton of real estate investing advice out there that doesn’t tell you the big dirty secret, which is there's a lot of upfront work you have to do before you start looking at real estate. Reputation is huge in this business and as you know you only get one chance to make a first impression. One of the ways to make a good first impression is to be able to react quickly to opportunities, quickly to offers, quickly to due diligence, and quickly to closing. In order to do this, you have to be set up on the front. I’m going to take you through 12 steps that'll walk you from point zero, knowing nothing, to closing on your first property, and what you should do next after closing. Step number one: Establish three kinds of lending sources. I suggest a local bank or credit union, a national bank or credit union like Wells Fargo, and a mortgage broker. A mortgage broker has access to lots of banks and institutional financings like Fannie and Freddie, which offer really good rates and terms on multifamily loans. Now, I suggest having one or two choices within each of these categories so they can be available to you when you need them. And I also suggest that you get to know your lender. Take them to lunch, become friends with them, and understand their process. You want to make sure they know your financials. Let them help you understand what you're capable of purchasing. The more they know about your capabilities, the faster they're going to be able to get you approvals. You don’t want to wait until you’re under contract before establishing banking relationships. You'll never get it done in time. Step number two: Assemble a full team to include property managers, inspection companies, surveyors, an attorney, insurance companies, an environmental company, a handyman or general contractor, as well as an appraiser you know and trust. And in each of these categories, I also recommend having two or three options to work with in case one or another is too busy to jump on the deal, or in the case of insurance you’ll want more than one quote. This will definitely take some time. Step number three: get liquid. You want to make sure that you have the equity to purchase a property available and ready to go immediately. The last thing you want to do is scramble for deposit money. You need to have access to somewhere between 1-10% of the purchase price for the initial and second deposit if applicable. The initial deposit establishes the deal upfront. The second deposit usually comes after the inspection period is over. By the time you close in 60 to 90 days, you will need to have access to somewhere between 20-40% of the purchase price, depending on the loan terms. Get this done upfront so you don't have the stress during due diligence. Step number four: If you want to do some next-level kind of stuff and make a serious impression and establish an incredible reputation, create an “About You” package. Your “About You” package should include your investment criteria, a short biography, letters from bankers, and any seller or broker testimonials you may have. If you don’t have any yet, perhaps you know a person or two you can ask of one for. This often makes a huge impression on me and the sellers I work with. On the investment criteria, you want to keep it fairly broad so you don't miss out on opportunities. I recommend providing at a minimum a unit range, locations you'd buy-in, and what type of apartments you're looking to buy. I suggest you start with conventional because student and affordable is very niche. You also want to tell them whether you're looking for something that needs a little bit of work, or value add. Or that you want something more stabilized. If you're a beginner you probably want something more stabilized that's cash flowing right away. A biography helps to humanize the transaction. When the seller feels like there's a connection, it's so much easier to get deals done. Especially when things come up. Including your background, things you've accomplished, where you went to school, what you currently do for a living if you're not full-time investing, what your hobbies are. I know it sounds kind of corny, but if you love cars, they may love cars too. Put in a picture of yourself or your family as well because that builds extra connection. Testimonials are basically from folks you’ve worked with confirming that they have a professional relationship with you. In the case of a banker, they would also be confirming that you are established enough to purchase up to a certain amount. The whole point of this “About You” package is to remain competitive. There’s a lot of competition out there and you want to make yourself marketable and instill confidence in the seller and the broker. You want to let them know you've got your stuff together and can perform on closing on the transaction. Step five: Do some market research. I can’t stress enough that you need to be able to look and sound like you know what you're talking about. There are all kinds of tools out there to help you learn everything you need to know about the markets you want to buy in, including sale prices, rent amounts, absorption demographics. If you know everything about the market and the subject property, you’ll be able to jump quickly on an offering. Step number six: Make sure you have an LOI, or letter of intent template, and a purchase contract template set up and ready to go. I carry an LOI template on my website at beaubeery.com. Just click on the Resources tab at the top, and then click on Templates and Guides. If you decide to use my LOI template, please be sure to share it with your attorney. For the purchase contract, I recommend that be put together by your attorney and that it be easy to read and concise. Having these templates ready upfront will allow you to move quickly and with confidence, because you already know the documents. Stay tuned for part 2.
- Created on .