Whether you’re new to real estate or a seasoned single-family investor, many aspire to eventually own multifamily apartments and benefit from the broad range of advantages it holds over other sectors. Despite their aspirations, many also find the multifamily asset class to be overwhelming and sometimes intimidating. The reality is, however, that multifamily investing doesn’t require ‘A Beautiful Mind’ to analyze deals or a Scrooge McDuck vault of riches to get started.
Yes, you’ll want to learn the basics of deal analysis, particularly as it relates to a comparing the financial viability of different opportunities. No, you don’t want to fall into analysis paralysis.
So what is really holding many people back from leaping into multifamily? Is it fear from your lack of experience? To be clear, I'm not suggesting that finding and putting together great deals is easy, but I am saying that there are approaches to facilitate your first multifamily investment. Moreover, while all investing strategies have their drawbacks, here are three strategies that can shorten the learning curve and help you make the leap into multifamily investing.
Strategy #1 - Owner Occupy
One of the easiest approaches to investing in multifamily is to purchase a property with multiple units and live in one of the units. This especially works great for 2-4 unit properties as you can leverage residential financing, including FHA loans, which may require as little as 3.5% down. That’s as little as $7,000 down on a $200,000 multifamily property. Note that FHA loans require you to intend to live in the property for at least one year, so make sure you’re willing to commit to this living arrangement.
Being an owner-occupant is also an ideal way to ease into property management since monitoring the property and common areas will be the same as monitoring your own home. I used this strategy on my first multifamily and would not have had the skills and confidence to grow our portfolio and manage other properties without it.
One concern potential owner-occupants often raise is living in the same building with their tenant. I would suggest, you should set clear expectations up front and ensure both parties share mutual respect for your homes. And remember that you’re screening for both a tenant and a neighbor. Some municipals allow more discernment when screening tenants for owner-occupied buildings, but it’s imperative that you understand and abide by all applicable fair housing laws and local ordinances.
Strategy #2 - Find a Partner
If you’re eager to start in multifamily, but experience, capital or just finding a viable deal is holding you back, one solution is to find a partner that can add the missing piece to the puzzle. If it’s experience you’re missing, find a partner that is more seasoned in multifamily investing. If it’s capital you need, find a partner willing to invest in exchange for solid returns. If it’s simply finding a worthy deal, consider turning to agents, wholesalers, bird-dogs and even other investors.
Either way, ensure the partnership is mutually beneficial and structured to protect the interest of all parties. If the partner will have an interest in the property once it’s acquired, a formal partnership and operating agreement are necessary to outline roles and responsibilities. In addition, you should clearly outline the equity split, financial responsibility, and how key decisions will be made.
I should note that most partnerships are not actually 50/50, despite what may seem like a “fair” divide of roles and responsibilities. As times goes on, this can lead to a strain in the partnership if one partner feels that they’re doing the heavy lifting so ensure you and your partner can openly communicate and discuss issues and that impact your partnership.
Strategy #3 - Join a Syndication
If you’re looking to enjoy the benefits of investing in real estate, but have reservations about being an active owner or partner from the onset, consider investing in a real estate syndication. To put it simply, a real estate syndication is a passive investment that pools a network of investors together to collectively purchase a property. A syndicate or sponsor spearheads each syndication and has responsibility for all aspects of the property.
This means you don’t have to search YouTube for “how to” videos every time there’s a maintenance request, nor will you need to deal with roommate drama when a tenant decides to move in her boyfriend against a roommate’s wishes (as you may have guessed, it doesn’t end well).
In addition to the passive investment benefits, one of the key advantages to a syndication is the deal flow that the sponsor brings to the table. It takes great effort to scour and evaluate deals, with the best opportunities typically found off-market. A syndicator’s ability to find these deals is a great value to investors.
While learning to analyze, find and manage multifamily apartments are critical to a successful investment, trying to learn and do everything can leave you standing in quicksand while great opportunities pass you by. These three strategies make it easier for investors to take the leap while continuing to build up their experience and confidence.