What Are The Steps To Start Buying Multi-Family Real Estate?

What Are The Steps To Start Buying Multi-Family Real Estate?

Joe: Hey, it’s Joe Crump. “Hey, Joe, what are the steps to start buying multi-family real estate?” Well, I think the first thing you should do when you start, when you become a real estate investor is buy single families. They’re more liquid, they’re easier to find, you can – people understand single family because they’ve lived in them. They understand how they work, they understand values. It’s easier to find the values. It’s easier to get financing on, it’s easier to work with the seller instead of an investor, you know, seller, when you’re working on them. So, there’s some real advantages to doing single family homes.

Joe: And once you understand how the zero down structures work, how financing works, how filling a property with tenants works, how managing a property works, then it might be time to go do the multi-family homes. Now, I like single family, and most of my portfolio is single family. But I do have multi-family properties as well. I find they have a little bit smaller cash flow, surprisingly, than single family homes, especially when you start figuring in depreciation, you start figuring in appreciation on the property, and the values as they go up. Because you don’t see the same kind of appreciation on multi-family that you’re going to see on single family most of the time unless you’re doing substantial repairs and changes to that property.

Joe: The best deals that I’ve done with multi-family have been properties that we’ve gone in and bought that were deeply distressed, that had most of the units vacant and were in bad shape and we had to go in and fix up all the different properties. And then turn around and fill that property again. And that would bring the value up on that property so we could turn around and either sell it or keep it for the long term and have income from it. So, those, you know, those are things that you can do.

Joe: But, my suggestion of going with single family first is it’ll teach you how to do seller financing. Seller financing works just as well in multi-family as it does in regular, you know, in single family homes. One of the things that I think is a mistake, and I have students that are doing this and I know it’s viable, but I find it to be less exciting because it deals with banks. They go to a bank and they can get a loan on a property based on the value of the property, not even necessarily based on their own income, but on their own experience. As long as they’ve got experience people that are helping them manage and rehab their property, they can usually put together a deal and go out and buy a 50 or 100 unit building and get bank financing for a$4M, $5M, $6M property and be able to make it make cash flow and put all that stuff together.

Joe: It’s a huge amount of work getting all that stuff in place. You can get other people to do that for you once you get the deal together, but you really better pay attention to it because ultimately you’re relationships with that bank is going to be on the line. Although your personal credit probably will not because it’s going to through an LLC. Now, you have to find a bank that’s going to work with you, and again, they’re going to want to work with people who are more experienced or who have more assets, something that they might be able to attach, something they might be able to collateralize as well. So, be careful that you don’t lose the things that you already have when you move into multi-family.

Joe: I’ve seen people who have had beautiful single family portfolios of 50 or 100 properties where they got in, and then they decided I’m going to get in to multi-family. They start borrowing money and using their existing properties as collateral and then when they run into problems with vacancy rates or other things in the market that might happen, like we’re dealing with the virus, where people have lost their jobs and can’t make their payments and you have a higher vacancy rate, that makes it very possible for you to lose that property, especially if you paid higher prices, or you put a lot of money in rehab on that property. Because you’ve got a big nut that you’ve got to meet every month and that debt can bring you under.

Joe: So many of the investors that I’ve known that in 2008, way back in 2008 when the crash came, that were buying properties. I had a friend who was buying a lot of properties in Florida. Florida, at the time, before 2008 was going up 25% to 50% in value every year. So, he bought a property and in three years it had gone up $400,000. And he did that with multiple properties. He had a dozen properties that he’d all gotten mortgages on. And he was so excited because he had millions of dollars in equity in these properties. And these were $400,000 condominiums in Florida.

Joe: And they rented for $1,200 a month, which is not enough to cover the mortgage. So, when the crash came in 2008 he wasn’t able to cover the mortgages because the mortgages were closer to $2,500, $3,000 on each of those things and he couldn’t come up with all the money that it would take to keep them all afloat.

Joe: So, he lost all the money that he put down on those properties, because he was putting 20% down on a lot of those properties. He lost all that money. He lost the properties. He trashed his credit. And it was all because the market took a big deep dive. I would expect right now to see a big deep dive in the market that’s coming up soon. I think it’s going to happen in, you know, one year to two years we’re going to start to see a major number of foreclosures happen, unless something dramatic happens in the economy before then. Because there’s just too many people right now that are late on their mortgage.

Joe: Right now they say it’s about 7% and that it’s going to go up to 20% or 30% in the next few months. So, I think we’re going to see a lot of foreclosures that are happening. It’s going to take probably a year-and-a-half before they actually start hitting the REOs and before they start bringing down the values of all the other properties in those markets. And some markets are going to drop faster than others. If you’re in California, the likelihood is the drop will be harder and faster than say, Indiana, where the values don’t drop as much. But in some areas they do.

Joe: What I’m going to do when that market drops is the same thing I did in 2008, 2009, 2010, 2011 and 2012. I’m going to buy properties at 20¢, 30¢ on the dollar, go in, rehab them and put tenants in them. Properties that are under $100,000. And that’s going to build my portfolio, hopefully double it during that time, if all things go as planned.

Joe: So, what I’ve been trying to do over these last couple years, because I’ve been seeing this coming, because I know that the market’s been soft for a couple of years. It’s not just the pandemic that’s causing this problem. Since I’ve been watching this for a while, I’ve been trying to decide how to structure my assets, what cash to keep available, what properties to sell, what properties to keep. And being prepared for this to happen. So, when this does happen, I’ll be prepared for it, to take advantage of it.

Joe: I’ve seen it happen once before and I wished at that time that I was even more prepared than I was. Although, I can’t complain about how that worked out as well.

Joe: So, if you want to build a multi-family portfolio, the first thing I would suggest is buy single families. Learn how to do that first. Learn the structures, learn the deals. And then once you’ve gotten that all together, then go out and buy the multi-family properties to build your portfolio, if you find that it’s more profitable for you. I find that that’s not necessarily the case, so make sure that the deals that you get still make sense.

Joe: You’re also typically buying from investors rather than homeowners and the sophistication level may be a little bit higher with investors so the type of deal that you get may be a little bit less exciting. On the other hand, I’ve bought a lot of properties from investors who were just worn out and didn’t want to deal with the properties any more. And those are some great deals to come across as well.

Joe: All right. I hope that helps. If you like this video, check out the subscribe button below. Got to JoeCrumpBlog.com and sign up for my free newsletter. Got to PushButtonAutomarketer.com for the automation techniques that we teach and the systems that we use to build our portfolios. And then of course ZeroDownInvesting.com is my mentor program where I work with you for six months personally to help you build your business.

Joe: All right. Good luck to you.