How to Buy Your First Multi Family Small Apartment Building

hi everyone out there this is Peter Harris from commercial property advisers and author of this book commercial real estate investing for dummies and coach and mentor to many commercial investors all across America the title and subject of today's video is called how to buy your first multi-family small apartment building contrary to what some real estate groups say you don't have to buy 100 units to read units to make a big profit in fact don't get caught up and the bigger-is-better mentality and miss out on some of the most profitable deals right in your own backyard so we're going to define small multifamily apartment buildings as between 5 and 20 units that could be your golden ticket so in this short video we're going to go through five different things we're going to go over what the personal benefits of small multifamily apartments would do for you secondly what the investment benefits of going small are number three how to create your own deal phone deals coming to you and number four this is very important why we start out at five units and a five flex instead of a four Plex very important and number five lastly how to finance your first apartment deal I'm going to go with you not one not two but five different ways to finance your deal okay so let's get started all right number one let's go into what the personal benefits are and the investment benefits our multifamily small apartment buildings let's begin with the personal benefits number one it's easier to wrap your mind around an eight unit rather than a hundred unit right you agree with me all right secondly a small deal the small apartment building it's going to require less equity just because of your dealing with smaller sales prices all right so you're not going to need a gazillion dollars to close on a small apartment deal in fact if you can be creative with it it can be hundreds of thousands tens of thousands or maybe even a few thousand dollars alright next create a financing well dealing with smaller properties believe me it is ten times easier to do something creative when you're dealing with the smaller multifamily apartment buildings next is single investor let me explain that let's say you needed help with a down payment or you needed help with your credit because of the smaller deal size perhaps all that Allah can take is a single investor to satisfy that requirement for you alright next is smaller property equals smaller mistakes let me share a quick story with you a long long time ago I bought a form Plex when I first started investing in apartments a long time ago and because of my arrogance and because of my lack of knowledge I end up blowing it I end up making mistakes on the property and actually a building was boarded up over the winter time because of my expert management but what happened was because the investment was small the sales price was very very small just a four-plex was very very cheap I was able to afford the mortgage and pay the taxes for those for those three months has it been a big deal I don't know what have happened all right but to make a long story short spring came up I humbled myself in the property end of being a very profitable for me but because I start off with a smaller property in that deal out of state I have smaller mistakes and I survived and thrived all right next is let's get into what the investment benefits are number one there's going to be less competition and that's because you're dealing with single investors you're not going to be dealing with hedge funds large institutions REITs you can be dealing with individual investors are going to be either one person or maybe a husband-and-wife team that's you're dealing with alright number two there's going to be less competition from these type of owners all right and I'm sorry sophistication on these type of owners now one of me by sophisticated is there going to be single people just one person or it can be a mom-and-pop team you're not dealing with the large institutions the corporation so many times these less the biscuit owners are afraid to raise the rent so they will leave dollars on the tables for you that's the benefit of dealing with these smaller properties number three when you're negotiating a deal and you try to do something creative all right where you trying to put down less equity when you're dealing with launch ownership groups it's it's difficult to negotiate with them because it has to go through a group of people has to buy pistil about three attorneys but when you're dealing with small apartment owners again they're a single person or a mom-and-pop team is easier to get your deal done you will not be dealing with large ownership groups to get approval for your deal and number four but there's a potential to get higher cash and cash returns and higher internal rate of return here because on average when you're dealing with these small apartment buildings again on average your cash flow per unit on average is higher all right and lastly it's easier to wholesale and that's your thing if you want to wholesale this deal is usually a wholesome the reason why is there are more investor buyers out there for small deals because the smaller numbers then you are for the large deals all right so I hope you got something out of this let's move on to how to create your very own deal flow number three how to create your own deal flow for your small multifamily apartment buildings all right we're going to use two different methods here the first method we're going to use are Rania's real estate agents secondly we're going to learn how to construct a precise direct mail marketing campaign the goal for both are one in the same the goal is to get pocket listings and get off market deals they're the same all right so whether you're using a real estate agent or you are using direct mail campaign the goal is the same off-market deals pocket listings let's start with real estate agents the first question you have to ask yourself is what are you looking for all right here's what you're looking for I'll tell you you're looking for 5 to 20 unit apartment buildings with upside with some element of add value what I mean by that you're looking for deals where you can raise the rents where there's maybe a management issue you can take advantage of where the property could use some rehab you can raise the rents or property where the occupancy is low where you can put more people in and increase the income all right what we're not looking for we are not looking for properties in war zones and we're not looking for properties that are completely 100% vacant all right got it no more zones and no properties that are hon % bacon all right you are a beginner and you do not need that to take that risk of those two but two different things all right the next thing what you do is I want you to go on to loop Netcom and once you're there search for your areas multifamily and apartment deals between 5 to 20 units once you do that I want you to do something very brave I want you to make the call to the agent now you're not after the property when you make the call what you're after is their relationship all right you will hear me preach this so many in so many different videos that commercial real estate is a relationship business so when you make the call most likely you make the call from the property listed on Luke net but we're really not after the property we're after the person with the deals all right well he's on loop that he or she is on a loop net all right the next thing when you make the call is I want you to nurture the relationship with the the relationship is so important because when they place a a deal on loopnet alright here's what happened so they receive the the the listing for one of their owners all right and then they try to sell the property to the A+ clients if they could not sell them to a Plus clients they try to sell it through other people in their office if they couldn't sell it there then it goes out to the MLS then it goes out to Luke net and that's when the general public could see it but at that time has been fished over by too many people it is probably not a good deal got it again you are after their relationship and not the property alright so when you make the call with the agent the call should go something like this I mean I'm going to share with you what I do on the phone and make sure when you do it though it sounds more like you maybe just take some points off of my call so basically called goes like this you pick up the phone you go hi Jim this is Peter Harrison my local investor how are you today he goes I'm doing great Peter how are you great Jim I saw your listing at 1 2 3 ABC Street and I find it very interesting well Peter how can I help you well Jim what I'm after is I'm after 5 to 20 in apartment buildings that have upside where I can create some value you know such as maybe management problems lower rents maybe loosen rehab or for some reason it has low occupancy I'm going to stay out of war zones and I don't want any problems that are hundreds and vacant and Jim do you deal with profits like that stop there us all you have to say all right at that point you're good that's all you have to say at that point the next thing one should do is I want you to after the conversation I want you to thank Jim I want you to exchange contact information then I want you to follow-up and then the follow-up email all you have to say is dear Jim thanks for your time today I look forward to future business with you all my best Peter that's all you have to do at this stage okay now that wasn't too hard right so at this point you may want to back up the video a bit and get the points just a conversation to have the Asian that's how you start off the relationship all right the next thing is what is your ultimate goal with the ancient what is the ultimate goal here is the ultimate goal Jim gets a brand new listing on Monday morning all right he thinks of you and he sends the deal to you first why does he do that is because you and Jim have a great relationship over the weeks over the months he likes you you like him you guys want to do a deal together all right that's why I say that this business the best deals come through relationships got it all right let's move on to making up a precision direct mail marketing campaign now again what that is is you're going to develop a list of property owners and then you're going to send them letters periodically for any and your goal is for how them to call you to have them sell their property to you that's the goal so you're going direct to the property owner and why do we go direct to the property owner it's because that's how you get the best deals again our goal is to get off market and pocket listing deals there are three unique advantages to going direct to the property owners number one is there's no real estate agent to muddle up the transaction real estate agents are there to protect the owner from you from getting a lower deal they're there also to get commissions so when you deal with real estate agents not only are there going to hinder you from doing something creative there are going to also add a 6% premium to the price all right so when you deal with with Sony deal make a deal when you go directly to property owner what rotate involved there's a key advantage there next is the the second unique advantages is there is a perception that the deal is is is good because it's coming direct from the owner without an agent sometimes that's true sometimes it's not but you can use it to your advantage third deals where you go direct to the property owner they are simpler to wholesale and that's your thing and the reason why they're simpler to wholesale and that your Wester buyers love these deals is because there is that perception of it's a group a better deal because no agent and also because there's no agent to muddle up the waters all right so your investor buyers will love these type of deals when they can come direct from the property owner through you to them now lastly I'm going to share three keys from for doing a successful direct mail campaign number one is I want you to target absentee and out of state owners first all right when you when you source your list you're going to come up between 250 to over a thousand property owners because again when you deal with small properties like we are here there's a lot more of those than there are other larger products you can generate easily two hundred to a thousand leads there now we're going to first target the absentee and obviously owners and the reason why is these type of orders tend to have problems with cash flow with property management and repair issues and because they are so far away since their absentee and they're out of state not only are they physically removed from the property they are also mentally and spiritually detached for the property so there's no attachment there they're just looking for a solution to their problem you are the solution number two the second key is to use a fresh list from Bible source our company we use a company that is the largest data aggregator realistic information out there in a nation so find a good list source all right lastly I'm going to remind you that when you do a direct mail campaign to direct your property owners that it is a campaign it's like a politician when they campaigning the day don't campaign just once they show up two three or four times their commercials are constantly playing to get in your mind for them for you to vote for them all right so there's no different here you have to campaign so that means that you're going to have to send out your your letter your campaign piece your direct mail piece every four to five weeks three to five times all right that's on average how long it takes to get a response from a single property owner all right so I hope this was useful for you the next thing I want to share with you is why we start off at five units on up to 20 and not from four units of the twenty or two units on the twenty we need to start at five all right and it has to do with how much profit you're going to make I'll see you there number four why start off at a five flex and not a four-plex as I mentioned earlier in the video I am defining your multi-family smaller building as between five and twenty units so why did I sawed off between two and twenty or three and twenty or 420 but instead five and twenty and I'm explaining to you right now very important now if you were to buy a four in the building or four Plex we consider that to be a residential property all right four units envelope is considered residential so triplex duplex and a four place by considered residential its value when do you buy it you fix it up and you increase there and you sell it the value is constrained by the sales comparables of the area okay we call those sales cops let's say that a property similar to this recently sold for $50,000 per unit all right so $50,000 per unit times four units that's $200,000 all right follow me so far so you went ahead and you bought their property you fix it up you raise the rents and then you know your value is determined by what other properties that area have sold for now on the five unit side we called anything greater anything that's five units and greater we call that commercial that's in a promotional realm it's the value of the commercial property is determined by two two things number one yes by sales cops okay but also it displays heavily G value and that is you're in you're in oh I but we call that your net operating income and basically what that is is just your income minus your expenses okay that's your Noy as you're in a line goes up your property value goes up with commercial that does not apply to your residential so that's why we start off at a five unit and how to for you is we get this extra bonus here let me give you a quick example let's say you have you bought a five in a building you bought it you fix it up and you raise your mints now you want to sell it so let's say it took you two years to do that let's be conservative so over two years in you in year one you would have had in your razor it's you know $50 per month okay in year two you did the same thing you raised your Vince $50 a month so by the end of year two you raise the risk by hundred dollars per month very reasonable right okay so we have an additional hundred dollars a month times five units all over here okay whoops sorry for my scrutiny math here so we're talking then you have Ray servants $500 a month all right so $500 a month times 12 months is what $6,000 so 12 months equals $6,000 per year follow me so far all right now a way to figure out the value of increasing the rates on a certain fund a commercial property is the following you can use this formula universal value so your your new value from your noi increase is equal to your in a wide increase divided by the cap rate okay your new value is equal to you in a Y divided by your cap rate so I have increased my Noy by 6,000 dollars my cap rate for the area I'm going to pick one beer conservative 8% all right so if I do the math six thousand dollars in five ninety percent I'll come up with my new value the new value is $75,000 all right so what I did here was I did exactly over here what it over here except over here because it's considered commercial and I increase the rent I have increased my property value in additional $75,000 you can't do that over here only over here that's why we start off at five units to begin our search for your first multifamily apartment building now the next thing I'm going to do is I want to go into financing your first multi-family small apartment building and lastly number five financing your deal so how to finance your first multi-family small apartment deal all right two ways number one is conventional a conventional way and number two is the creative way let's start here conditional financing what is that while conditional financing is for for an apartment building is much like getting a loan for a home you prepare a loan package with application you go to a bank with the 25% and then give you a loan for the 75% and today I can also say that the the apartment financing their rates and terms are much like single family homes so it's a great time to finance your deal right so when you take your loan package to the bank you're going to either approach a local bank or a loan broker alright two different things let me share with you what the advantages are alright so a local bank basically when you submit your package the loan officer is a salaried person right so they take your package and you present it to a loan board their bosses for approval or denial of your loan all right so it's pretty simple a loan broker works strictly off of commission right so if if they can't produce a loan for you they do not get paid a local bank the loan officer gets paid regardless so I wonder who is going to work harder for you I prefer to have a loan broker because they will probably work hard if it was their own Commission basically what a loan broker does is they will take your loan package and submit it to 10 20 30 40 different lenders to find them to find the right fit for you that's very important in case you need some assistance well let me give you a quick example we had a student that had to fund a great deal ten units and in Maryland and this person had 10% but didn't have the other 15% but they had a rental property with tons of equity so local bank said no can help you a loan broker submitted this package to several banks and one lender can back and say yeah we will do the loan we're okay with the risk as long as the student get put with 10% and then we can women collateralize the rental property what the 50% and the loan close all right so there's a differences there and that's conventional financing now let's mosey on to creative financing for your small multifamily apartment building before I go there let me give you a quick reminder of the advantages of dealing with small apartments when doing something creative there first imagine is that the dollar amounts are just smaller so it's easier I like to do something creative the second advantage is that the seller of the small apartment building they're not as sophisticated as a large apartment owner so there again easier to deal with easier to do something creative with you're not dealing with CEOs CFOs and CEOs and attorneys and things like that you're dealing with individuals mom and pops husband and wives people like you and I all right now the three reasons we worry why you may have this something creative is the following number one you may not have a lot of money number two your credit may be damaged and number three the property may be in such a condition that alone will be impossible for example low occupancy or disrepair things like that right that hinders a the entire loan process even though you may be qualified to get along all right let's jump into the four different a way to do creative financing for parts number one is called seller financing and that's what it is the seller finances the seller becomes the bank for you let's say for example that the property was free and clear no loan on it and and the you you constructed an offer where the buyer has agreed for you to let's say the property is no loan on it and their properties in disrepair so you can't get along all right so one of these reasons why you're going to do this so what you can do is the seller becomes a bang all right and pretty much you give him a down payment you make payments to him for some odd years right and then after a few years you can refinance and put into a long-term loan and get the seller his money so seller financing has its advantages all right for these reasons number two is seller carry let's say that the lender is required when it is lenders is requiring 25 percent down you only have 10 percent all right so what you can do is you can give the bank the 10 percent and the seller can carry I loan for 50 percent against the property all right there by satisfying the lenders requirement of 25 percent not a lot of banks do that but some do check with your banks and your brokers for that so it's a very popular way very popular way of financing deals when you don't have the entire 20 or 25 percent that's a down payment all right number three master lease all right my favorite way to buy apartment building system masteries number one the reasons why number one is that you don't need lot of experience you don't need a lot of hold cash down you don't have to go to a bank and you have to check your credit and it's just a great way to get ownership of a property without going through all the bank stuff and being able to benefit from the cash flow from the appreciation from selling their property getting all the prophets all the tax benefits it's all there for you using a master lease even though you didn't have to qualify for a loan I have a about a 20-minute video on this subject on YouTube on this channel here so make sure you check it out alright lastly number four wholesale if wholesaling is your thing this is a great way to make money if you don't have a lot of money you don't have credit or experience all right you can do a few wholesale deals save up the money and then you can do your your convention or you create a financier all right so just a great way basically you're going to go out there find a great deal you're going to get an under contract then you're going to assign the contract to an investor buyer for a fee you know twenty-five to thirty thousand dollars or whatever it can be as in that closing you get paid your fee all right and then the investor buyer goes on with ownership of that property and hopefully you can do that the same thing with the same person multiple times and make a good living doing that right so conventional and creative so let's be brave and let's put this into action I'd like to end this video training with a question did I get quite frequently and the question is Peter what does it take to be successful in this business I've been coaching mentoring for well over a decade now and my answer remains the same in fact I'm even more passionate about my answer my answer is this on how to be successful in is business number one you're going to need to have ambition number two you're going to have to be persistent and number three you're going to need specialized knowledge the more ambition you have the more money going to make the more impact the more lives you can impact number two the more persistent you are the longer you're going to last in this business and number three the more specialized knowledge your team the larger deals you will do in your outreach becomes that much greater Sir Richard Branson he is kind of a business hero of mine and he has the following quote and he says that brave people don't live forever but cautious people don't live at all so be brave alright if you want more videos like this and more resources please go to our website commercial property advisors comm or simply subscribe to this YouTube channel thanks for watching this video on how to buy your first multi-family small apartment building I'll see you at the next video

Channel: Commercial Property Advisors

Views: 1,158,546

Rating: 4.9050951 out of 5

Keywords: multi family, small apartment building, Commercial Property (Industry), commercial property advisors, peter harris real estate, multi family investing

Id: lf9_SOZdOjs

Length: 30min 30sec (1830 seconds)

Published: Wed Feb 04 2015