How to buy your first small multifamily apartment building.
What's going on everybody?
So in today's video, I'm going to be showing you exactly how I purchased my first small
apartment building.
So I'm going to go over how I found the deal, how I funded the deal, I'm going to break
down the exact numbers from this deal, and then at the end of this 10 minute real estate
video, we're actually going to go on a tour of the property so you can see the neighborhood,
you can see the building, and you can see one of the units, everything like that.
So you're definitely going to want to watch all the way to the end of this video.
And that being said, let's jump into it.
Okay.
So the way I found this deal was actually through a direct mail campaign.
And I have other videos that go more into depth on direct mail, but basically I was
sending direct mail to a certain zip code where there's a lot of development activity
going on, meaning a lot of potential deals.
And not only was I mailing to that one zip code, but also owners of that zip code who
have owned a property for at least 15 years, meaning they probably bought it back in the
day, got an amazing deal, and sometimes they might just want to cash out in as-is condition
and not have to worry about listing the property or doing any repairs or anything like that.
So I got a call from this guy and he had a property, a fixer upper property he was looking
to sell.
I ran my numbers, made him an offer, and he actually rejected my offer.
He went with a significantly higher offer.
However, during the course of a few conversations that we had, we built up enough good rapport
and he said, "Look, this one deal is not going to work out, but I have this other property.
It's a four unit property."
It was four one bedrooms in pretty good condition and it was currently under contract.
However, the person that was under contract was just trying to shop the deal around.
He had no intention of actually closing.
And within the next two to three or even six months, the property was probably going to
fall out of contract and I could be the backup offer if I wanted to.
So I agreed to be the first position backup offer.
And usually you would actually do a backup offer contract and you'd be under contract.
This seller, he was a military guy, he ran a pretty tight ship.
He didn't even want to do any contracts.
He was just like, "Look..."
He gave me his word I'd be in first position as the backup offer.
So I said, "Okay, that works", and we kept in touch over the next few months.
And then eventually he said, "Look, the property's officially out of contract.
Do you want to make the offer that we talked about?"
And so I ran my numbers again.
The property was a great deal.
And instead of meeting the seller or emailing him or even texting him, this guy was pretty
old school.
So we were actually faxing the offers back and forth to get ratified.
So I'd fax him, he'd go to FedEx, he'd fax me back.
But eventually we got the property under contract and got it to the title company.
And I would actually add this, if you're looking for multifamily deals, with residential you
can do more direct marketing and find a lot of these off market deals.
With commercial and multifamily, if you follow Ben Mallah or a lot of these other big commercial
investors, they'll tell you that they get a lot of their deals through networking.
They're networking with other real estate agents, they're networking with other investors.
Just building up your network, that's going to be the best way you can find commercial
real estate or multifamily apartment buildings.
But you can also do some direct marketing, direct mail, cold calling, just direct outreach
to different sellers.
So now that I got the property under contract, I had to line up financing for the deal as
well as do an inspection or my due diligence and everything like that.
As far as the financing, because this was a four unit building, FHA actually allows
you to do residential loans on that property the same way if you were buying a condo or
a single family house.
So I only had to put down 3.5% for this property.
With a traditional apartment building, if you were going to buy a 10 unit, a 20 unit,
even a five unit, local banks are going to require that you put usually at least 20%
down, sometimes as much as 30%.
And they also have to meet certain vacancy requirements and things like that.
You can't just buy a completely vacant building and then expect a bank to give you a ton of
money for it.
So it's always a great idea to check with your local lenders as far as what their criteria
is for multifamily buildings, because you want to be prepared with that information
before going into it.
Myself, I just got lucky that I was able to use an FHA for this property.
And just to add on to that FHA point, the reason I was able to do FHA was because it
was four units like I mentioned, but also because one of the units was vacant.
So three were being rented out with steady cashflow and one was vacant, so I could use
it as my personal residence.
And that's why you're allowed to do it.
So in addition to financing, you want to have an inspection or due diligence time period
to look at rent rolls to evaluate the property to make sure it's in the condition you thought
it was.
And actually with this property, it was a four unit and I actually waived my home inspection
contingency completely.
This was an off market deal that the seller was selling at a discount and he just wanted
to sell the property in as-is condition.
And it wasn't even that bad of condition either.
Like I said, he was this ex-military guy, he ran a pretty tight ship, and what he told
me over the phone, I believed him as far as the property condition went.
And so I was basically buying the property sight unseen.
I'd never seen the property.
I saw it on Google maps and ran some comps, but that was about it.
However, I did have the FHA addendum in there.
And that was for the type of financing I was using.
So if the seller had been completely lying to me about the property and there was mold
everywhere and broken windows, then FHA wouldn't lend on the property and I can use my FHA
addendum to basically back out of the deal.
But when we did the appraisal, we walked through all the units, everything was in great condition,
basically exactly like he had told me, and we were able to get the FHA financing locked
in.
And additionally, when you're looking at four units, five units, 10, 20, especially when
the amount of units gets larger, you really want to evaluate the rent rolls, the leases,
you want to make sure that everything is as the owner says it is because sometimes tenants
don't pay rent and you want to know exactly what you're getting yourself into, especially
with a larger scale project.
So as far as the numbers of the deal, I purchased the property for $490,000.
The property appraised for $500,000, and honestly it's probably worth a good amount more than
that.
This wasn't one of those flips that you buy at like half the price it's actually worth.
But there are comps on the street that were selling, or at least active, in the $600,000,
$700,000 range.
And for multifamily, the comps are a little bit harder to come by.
So I'm not expecting to flip this property tomorrow and make a huge profit.
My plan with this property is really to hold it for 10, 20 years, and eventually trade
up for 10 units, 20 units, 30 units, things like that.
As far as the rental numbers for this deal, each unit has about $1,100 per month in rent
for a total of $4,400 per month in rent.
And then my mortgage is about $2,900, so there's a pretty good difference in there.
And then once I refinanced the property out of FHA and I stopped paying PMI, and PMI is
private mortgage insurance, so if you're buying a property with less than 20% down, those
tend to be a little bit riskier loans for the bank.
So they're going to charge you a few hundred extra dollars per month in your mortgage payment.
But once I get rid of the PMI, it's going to bring my total monthly payment down to
about $2,600, $2,700, and then I'm going to have the $4,400 per month with the potential
to increase those rents.
Now with multifamily properties, a lot of investors talk about value add, and that's
basically properties that might need a ton of renovation or maybe properties that are
like 50% vacant and you can fix up the property a little bit, put some tenants in there, increase
the rents, that type of thing.
And the value add for this property, there's a couple items.
Number one, there's this massive basement which you'll see at the end of this video
when I do the walkthrough tour, which could either be converted into one, maybe two units,
or it could have the first two units on the first floor be converted into a two or three
bedroom property.
A two level property essentially.
So that's something I'm definitely going to keep in mind, probably for down the road.
And a lot of other times with value add, it could be a bad property management company.
This property is just a four unit.
It was self-managed.
So there's not a ton of savings there.
I'll basically be the property manager for as long as I can take it.
So far the tenants are really good.
And then the property is also really close to a ton of development going on in the area.
There's actually a casino, MGM, a pretty good brand name casino, which I would think would
increase property values.
I'm not sure.
That could be one of those things that goes either way.
But also close by is, I think, a billion dollar project going on.
And then it's also just a very short drive away from the downtown part of the city.
So I'm hoping that the neighborhood goes up over time, which it currently is honestly.
I've seen some properties on the street selling for $700,000, even 800,000.
They haven't sold yet, but there's a lot of potential for this area.
Another thing I want to add with multifamily is, ideally you want to start small and you
want to start local, because you just want to learn how the process works.
How to go through financing, how to get your leases up, how to evict people if you have
to.
Hopefully you don't have to do that.
But you just want to get a sense of the business before you expand.
There's a lot of investors that buy multifamily nationwide, and that's great, and that's actually
what I want to do.
However, I wouldn't recommend just going and buying some 50 unit building in Alabama or
somewhere thousands of miles away when you don't really have much experience.
Most commercial real estate investors will tell you to start with a two unit, a three
unit, a four unit, something you can manage, get a feel for, get the kinks out of it.
And then you scale up to the 10 unit, then a 20 unit, then a 30, then a 50, then 100.
And actually Michael Blank, he's a really big multifamily commercial investor, he has
something called the law of the first deal.
And basically what that comes down to is just getting your first deal under your belt, even
if it's just a two unit or a four unit or five unit.
Because after that, this whole world of commercial real estate investing opens up.
And he says a lot of his students would go from buying the two or four unit to the 10
unit, 20 unit, et cetera, et cetera.
And I know a real estate agent, he used to do only real estate residential sales.
And eventually he's like, "Look, I actually want to be the investor on these deals.
I want to start making some money.
I want to stop listing the properties for the investors making all the money and actually
start making some money myself."
And now he's scaled up to the point where he only looks at 100 unit buildings all across
the country.
But the first deal is very important.
And I almost feel like an expert after just doing this tiny little four unit building.
But the next property I look at is probably going to be a 10 or maybe even a 20 unit.
I don't know if I would be comfortable taking on a 50 unit unless it was just a steal of
a deal.
But over the next few months, I'm going to start looking at bigger and bigger properties
and hopefully make some offers on some.
And that's the beauty of commercial real estate investing and multifamily investing, is the
scalability of the business model.
If you wanted to own 50 or even 100 different rental properties, that would take a lot of
time.
That'd be very difficult to manage, driving around to 100 different places, making sure
the HVAC is working on all of them, making sure all the tenants are happy.
Whereas if you just had one 50 or 100 unit building, you can scale that up a lot easier
because it's much easier to manage.
And then if you wanted to increase rents, you could just increase everyone's rent by
$10 a month, let's say.
Just be very conservative.
And that will increase the value of the building so much.
I don't know the exact numbers, and it's obviously going to depend on a lot of things.
There's so much more scalability with apartment investing.
So that being said, hopefully you got some tips out of this video, and let's jump into
the actual tour of the property now.
And then also if you have any questions whatsoever about buying your first apartment building,
just drop them in the comment section below and I'll be sure to personally answer every
single one.
All right.
Here's the newest property.
It's a multifamily property.
Actually this street is basically all just small multi-families as you can see.
Some have been fixed up, some not so much.
This one's actually in pretty decent condition.
So let's check it out.
So there's four units in this building.
I'll just show you one of them.
Here's the vacant one.
Three of the units are filled, but it's got...
Here we have the kitchen, somewhat updated appliances.
And that goes out to the deck, a small deck.
The bedroom.
Got the bars on the window.
Kind of see out.
See the street back there.
Here's the bathroom.
Needs a little bit of updating, but it's not a bad condition.
So pretty straight forward.
We'll go to the side of the property at these tall fences, which are nice.
See the basement actually has potential to be a bedroom.
I'll show you in a second.
And as you can see, the neighbor did parking over there, a parking pad.
So I might do the same thing here.
Kind of knock down this fence, we put three cars parking right here, and then here's the
back of the property.
So let's check out the basement.
This is the thing that has probably the most potential because it's just completely unfinished
right now.
All right, so here's the basement.
It's unfinished.
As you can see, there's a little water that comes in, so I'd have to do some waterproofing.
There's a crawl space over there, but the ceiling height is actually really good.
I can walk around.
So that window right there that's boarded up, this could be an egress window.
I mean, this could be a bedroom, maybe storage.
There's a couple properties on the street that people have finished off this basement,
and it could also actually be just a basement for the two top levels, so that they're two
stories instead of just one story.
So lots of potential.
So that's basically the property.
See there's some people moving out here.
And there's several for sale on this street.
So it's an up and coming area.