Yogi Berra is said to have said: “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” I believe this to be true especially in the world of real estate investing. There’s a great deal of misconception that success in the real estate field is achievable with some education and little or no real life experience. The internet has made it easy for rookie investors to gain access to a myriad of articles, books, youtube videos, and webinars on the subject of real estate investing. This is a wonderful thing indeed, but theory does not replace real world experience. Especially, in the eyes of commercial lenders.
I want to address today the most important factor in achieving personal success in the multifamily market. You probably guessed it by now. It is experience, experience, and experience. Nothing can replace the experience an investor gains through years of sweat, commitment, and inevitable failures. No one got to the top without these elements, no one was handed a magic wand to turn their wish into reality. And not everyone that tried succeeded either.
I talk to many potential clients. Many have no real estate experience and some have limited experience, but not in the multifamily arena. Residential experience is good, but not enough to take on a first time intimidating commercial project. It’s about one in a hundred who is a seasoned apartment building investor. The rest are still in the dreaming stage or overreach by trying to take on too much too soon.
One may ask how does he get there, how does a person travel from point A to point Z? First, it’s important to recognize that this is not a straight shot. There are steps called stepping stones, which cannot and should not be bypassed as they are important. From point A to point B, then to point C, and D, and so on. Each of them represents a valuable practice lesson which in the big scheme of things will help the individual get to where he/she wants to be, it’ll turn him/her from an ordinary person into a seasoned investor. The road from A to Z entails sacrifice, focus, and the strength to stand up and move forward when failing.
You’re reading this because I suspect you want to achieve greatness investing in apartment buildings. By the time you get to the middle of your road, you’ll notice that how you perceive success then will be different than how you perceive it today. Think about how you envisioned your future when you were a teen. Compare it to how you view your future now. You grew up, you matured, you are wiser now than you were during your teen years. You couldn’t get to be who you are today without the valuable lessons your life exposed you to. So is the world of commercial real estate investing.
Let’s analyze now how to determine where you’re going. I know your plan is to get to point Z, which is your long term goal. But how do you get to point B, C, D, etc.? There are two ways to get to your next stepping stones that I can think of. One way is to go solo and start small. Start with a smaller property, with a high occupancy rate, in good to great condition, with no repairs needed. No distressed or under-performing properties. Start in a strong multifamily market and a strong sub-market. A city with a high economic growth tends to have a strong multifamily market. Learn to read and interpret statistics and then travel there to get comfortable with the real estate market. In the U.S. the City-Data website http://www.city-data.com/ might be a great tool. Start in a nice area where absorption rates and occupancy rates are high. Check out the local neighborhoods and be sure you’re not looking at buying your first deal in the Top 25 Most Dangerous Neighborhoods in America.
Going solo your first deal implies buying the perfect property, in the perfect neighborhood, in the perfect city. It implies your need to be financially strong. Whether you choose to secure financing or buy all cash financial strength is vital. You must have sufficient assets to buy the property and a substantial amount in liquid reserves for rainy days which are almost certain to arrive. It also implies building a strong team of local professionals. The property management, the realtor, the attorney, perhaps even an accountant, are all going to be part of your team. It’s important to have your team prior to looking for a property so you can proceed quickly once you find one that is worth placing under contract. Timing is everything, and finding a team after you find a property is akin to putting the cart before the horse.
Sometimes I come across those who have been managing someone else’s property. If you’re one of those people who has experience of being a property manager that’s great, but I wouldn’t use that as a substitute for using a reputable management company who has years of experience in the local market and has hundreds or more units under their care.
Be part of a group
Another feasible way to acquire multifamily properties, and one that is probably even more popular from my experience, is joining efforts with other individual investors and forming a syndication. These are folks in similar shoes as yours and they are either intimidated to go solo or prefer to simply share responsibilities, risks, and ultimately profits. In reality this is exactly how many of today’s successful investors have started. They partnered up with others who had similar goals and financial capabilities.
Think about the strength of an individual investing $200K versus the strength of five individuals each investing the same amount. Think about the increase in the purchasing power and the upgrade in the location. Would you rather own (and be fully responsible for) a small multifamily property in a low middle class or poor area of the city or would you rather own (and be partially responsible for) a piece of a large multi apartment complex in an upper middle class neighborhood?
Now as far as the property and location I still recommend you follow the same standards I described in the Going solo section above. Nice property, high occupancy rate, great condition, good area with high absorption rates and high occupancy rates. You must have a team of professionals, the realtor, property manager, closing attorney, and the accountant who’s going to form your LLC, corporation, or partnership. Your accountant will also be able to provide you with tax advice and file your entity’s tax returns. We may even be able to help you with the team building if you’re looking to invest in California, Texas, Georgia, or Florida.
And how about your exit strategy? Have you given enough thought to it? Consider what’s easier to do when and if circumstances in your life require you to cash-out your investment. These kind of events tend to happen during times when the market is just “not on our side”. Selling a house during a down market is not likely to happen without a drastic reduction in the offering price. So you may be forced to sell the house at a loss. But when you are part of a group things could be somewhat easier. Your remaining partners could buy you out (by either each contributing their equitable share or by refinancing to cash you out) or a new partner could be brought in without having to sell the property.
Are you fit to be an investor?
There are three elements describing the successful real estate investor. Planning, budgeting, and managing people. It applies whether you’re going solo or part of a group. All too often these concepts are easier said than done. But again, if they were easy everyone would be successful. They take time and effort. I will elaborate on these in a future article. But for now, think where are you heading and what are you going to do to get there. Write down your plan and the day you’ll start. If you don’t, chances are you’re going to use all kinds of excuses to do it at a future time. If you don’t, chances are that ten years down the road you’ll look back and say “I could have but because of…I didn’t”.