At ACI, we have seen time and again that on top of all the great unknowns that multifamily investors face during their first transaction one of the most daunting questions that is faced time is again is “how big should I go”? Deciding a first multifamily purchase that is profitable but also comfortable to get used to the market is often times the ideal for a person or partnership looking to invest in multifamily for the first time. Early this week, biggerpockets.com’s Gino Barnaro offered a list of suggested categories investors could be considering when deciding upon the size of their first purchase.
What Is Your Experience Level?
Property investors come from all walks of life, with unique perspectives of goals, education, and expectations. As Barnaro notes, investors with smaller scale experience managing single family rentals may have an advantage over those just beginning in multifamily. “A wholesaler who decides to jump into the buy and hold model already understands how real estate works and has an advantage to someone just starting out their investing career”. Those who have managed a number of single family investments may have the added advantage of feeling more confident taking on a larger responsibility set forth by a larger number of units.
Find Your Comfort Zone
Barnaro notes that comfort level can easily be confused for experience, as they both utilize confidence in making a lasting decision. There is often a misconception that the larger the property being managed the more difficult it is to acquire and manage. “Some of us are just wired to think big and shoot before we aim.” He explains while calling back to an interview he once had with Grant Cardone of Cardone Zone, “Others (including myself) are programmed to be wary, to consider the options and act when we have all the facts.” Barnaro concludes that both mindsets have a place in multifamily transactions, but noted that Cardone expressed optimism toward those who shoot for the stars. He specifically recalls Cardone’s quote: ““Think big. Don’t even waste your time on the small stuff. It’s just as hard to buy 10 units as it is 100 units.”
Much like pre-existing experience, Barnaro maintains that first time investors are often caught unaware of the financial options available to them to supplement their transaction costs. “Novices are often unaware of techniques, such as owner financing or raising private money, to aid them in the down payment.” Without access to the appropriate amount of funds, first time investors are often stuck on the sidelines, unable to play the game until the financial climate changes or they come into the funds needed to start playing. That can take way longer than desired when a market is running hot, so getting into the game with a lower unit number then growing may be your only option.
The Value of Partnership
Barnaro asserts that is you are seeking to begin your multifamily journey with a large scale property; doing so in partnership with another investor may be a safe bet. He explains that not only will you have a combined set of funds to increase the chances of qualifying for more units; banks take immediate comfort in the idea of multiple co-signers. “We all owned 33% of the investment, and were confident in our ability to secure financing from the bank.” He explains while reminiscing of the purchase of a large multifamily acquisition along with two partners, “The bank was more likely to fund a property with three investors each signing a personal guarantee.” Although a partnership can lead to easier property acquisition, potential investors should be cautious to choose partners that share similar aspirations and financial goals. Holding an equal share of a in the upkeep of a property not only reduces your personal cash flow, but could quickly turn ugly if relationships sour.
Always Be Prepared
Finally, being able to seriously take on a multifamily investment with a feeling of preparedness, even if it is only an exterior display can make the difference in convincing those around you about how seriously you want a larger unit transaction. Barnaro suggests developing a “credibility book”, suggesting that it offers investors “a basic business plan that highlights experience, current portfolio and successes, and a detailed plan of how the investor is going to profit with his investments.” He concludes by noting that with this being your first transaction, being able to convince sellers and banks of your willingness and enthusiasm toward the purchase can help you shoot for the stars like Cardone suggests. “Ultimately, it all boils down to a person’s ability to convince himself he is ready to buy a multifamily, and then try to buy the acquire the biggest asset possible.”
Gino Barbaro’s article “How Big Should I Aim for My Very First Multifamily Purchase” can be found HERE.