I am looking to get into real estate investing, to start multi-family properties, and am looking for some direction. Currently I work full time as a manager of a bank and have a colleague who I am looking to partner with. We both make over six figures and our wives stay at home. We want to start investing in local real estate, mufti-families, to supplement our income. Below are some questions that I am currently researching. Any help would be appreciated.
1. Should we start an LLC…
It depends on how long you’re holding the property. Talk to a CPA for tax guidance.
2. Do we need real estate licenses?
3. How can we get hooked up with a mentor/experienced investor in person?
Talk to a local apartment owner. He won’t be competition for you, and will likely provide invaluable help and advice, if not become good friends with you.
4. Should we use our own funds for financing (i.e. down payments) or should we seek private funds?
The answer to this is enormously complicated, since there are so many variables involved. You may have difficulty getting financing on the properties that would actually cash flow.
You’re not likely to have much cash flow if you’re settling for performing projects. It’s the non-performing, or under-performing projects that push off the cash flow (potentially), and likely not going to qualify for low-priced financing (or any financing at all)
Meantime, on pretty, functional, performing properties, your short-term return is going to be quite low. As the years pass, and your principal amounts are paid off, and rents go up, the cash flow you achieve will theoretically be much better. However, by the time the cash flow is heavy, the tax benefits will become thinner, and you’ll be paying more income tax on the gains.
5. Are multi-family properties the best way to get our feet wet- remember we work full time but our wives have time at home(while the kids are sleeping or in school).
That’s a simplistic outlook. You AND your wife are going to be babysitting these babies. As far as getting your feet wet, if you’re willing to invest in a project that has more than 30 units, you can more easily manage your managers, AND more importantly pay for both onsite management and maintenance help without coming out of pocket. Otherwise, you AND your wife are going to be donating time to the cause on anything smaller than 30 units.
That said, the larger the project, the more interest there will be from all the parties involved to help you buy, including the sellers. Why? Because everybody involved is making more money for the time spent, then dilly-dallying with a four-plex, for example. Why would sellers help? Commercial sellers are more likely to carry paper short term, in order to get their price. Even on larger projects, there is more likelihood of the seller carrying part (or all) of the down payment. This would be more likely if the seller was not wanting to do a 1031 exchange, and wanted to pay any capital gains over time.
Of course 1031 exchanges are impossible to manage when the seller is carrying a second to facilitate a sale. It would mean the subsequent seller would likely need to carry a similar amount back on the 1030 exchange, or agree to some other creative financing strategy. But that’s too complicated to address here.
6. What is the best way to find profitable properties? Through agents/websites?
That’s a whole process that’s too complicated to address here. Suffice to say, you can start anywhere, but eventually you’re going to want to focus on unlisted property. Then you are going to need to become an expert at analyzing properties. I always recommend analyzing the numbers (income/expenses) on 100 potential deals, before settling on the size, location, age of the properties you want to chase. You’ll discover the returns, financing, and management liabilities to be different for each class of property.
The nicer and newer, the less expensive the project will be to operate and manage, and the less cash flow you’ll achieve at the get-go.
The opposite is also true, or keep looking until you find a deal where this is true.
The fastest way to find operating data sheets is to call agents and sellers, both offline and online, and ask for them.
As an aside, I think there’s two sweet spots in finding the profitable deals…
- Before anyone knows the property is for sale…
- After everyone and their dog knows the property is for sale, but now has forgotten about it (stale/expired listings fit this category)
7. Should we approach our mortgage broker with our business plan or should we look else where?
Yes, you should definitely talk with a COMMERCIAL mortgage broker. He can can offer you insight as to what financing terms and rates you can expect to achieve, based on the property type, age, and performance. You can use that information to sift for the particular class of property you want to invest in (and know why). It also helps you in your negotiations. You can use this information against a seller, who’s delirious about his price, or what terms he thinks you can borrow at, etc.
In short, a Class C property should be offering you the highest cash flow in relation to your management liability, but the rate and terms will be less attractive than A and B class projects.
D class properties, for example, are routinely the highest cash-flowing properties (almost by definition), but with the MOST management liability and almost always involved seller financing, since banks don’t like to finance hell holes without charging out the ying-yang.
A and B class properties… your management will be less intensive, but the cash flow will be minimal in the first 10 years of ownership.
My first building was a non-performing, 30-unit building. I put my own management in it, and managed my managers (and the upgrades and stabilization). In 18 months I made more than most people make in five years. That said, I had many years of residential management experience under my belt, so I knew how to manage my managers at the out-set.
In your case, I think unless you stay with very small multifamily projects, that ‘will’ require donated time to the cause, that you’ll become overwhelmed with the process of managing your managers.