The investor/buyer of a new apartment building should keep in mind what I consider to be the most important rule of thumb for multi-family investing:
First, the new apartment investor MUST find a profitable property
This may sound obvious, but in my role as an apartment building financing specialist, I talk to dozens of aspiring investors every week who call or email me to say they found a great piece of real estate, with a super CAP, in a great area, which is 95% occupied and who would like to find a loan to buy the apartment building. Unfortunately, for many of these “great deals,” upon closer inspection of documents such as rental schedules and income and expenses, it becomes clear that the apartment building is NOT “debt service.” This simply means that the real estate property does not produce enough annual income to cover all expenses, including loan payments, taxes, insurance, and maintenance costs. After doing the math, the investor returns to the field, armed with more knowledge. Persistence usually pays off because there are plenty of profitable properties for sale, it just takes some time to find them.
After finding a profitable apartment building THEN the investor must look for financing
Commercial mortgage companies and apartment building lenders almost always require a buyer contribution of 20% of the purchase. The purchase price should not be confused with what the buyer thinks the property is worth, or even with what was recently appraised. Banks are only going to lend money based on the purchase price of the apartment building. Of course, there are exceptions to this rule. An exception is when the investor is purchasing the site to do a construction rehabilitation of the property. In this case, the loan process is usually more complicated and more documentation is required.
Many of the prospective apartment building buyers I work with do not have the liquid capital necessary for the 20% down payment required by the bank. Here are some of the strategies that DO WORK in the real world. There are no secrets, despite what many “real estate gurus” want, to financing an investment in an apartment building with little or no money up front.
Many investors are not aware of all the creative methods that can be used effectively to raise investment capital. These are some of the ideas I’ve seen succeed in the real world, with real investors, buying real multi-family buildings with less money up front.
1) Incorporate a limited company and raise money from other investors.
Forming a limited partnership for the purpose of raising money for an apartment building investment is a great solution if the investor currently does not have the liquid capital needed for a 20% down payment. A limited partnership should be formed under the direction of an experienced real estate attorney who understands the intricacies of this type of partnership arrangement. The limited partnership typically consists of a general partner and one or more limited partners. The general partner is the only member who has the power to make executive decisions regarding investment in apartment buildings. Limited partners invest their money with the expectation of receiving a return on their investment when the property is sold or as structured monthly net cash flow payments. The investor/general partner must prepare detailed financial statements about the project to present to prospective limited partners to convince them to invest their hard ownership money. A good real estate lawyer should also be able to help with this aspect of the partnership.
two) Raise capital from friends and family.
This may seem like an obvious solution, but it’s amazing how many investors refuse to look close to home when trying to finance a good multi-family investment deal. Unfortunately, if the investment does not work out as planned, the investor is not only risking their investment capital, but also risking a close friendship or good relationship with a family member. Because of this, it’s generally a good idea to have a qualified real estate attorney draft a formal agreement that clearly spells out the responsibilities of all parties involved.
3) Get Owner Financing
Most multi-family property owners are seasoned investors who are financially savvy. They are used to receiving and using some type of financing from the owners to structure their investment projects. Many great properties have been purchased from sellers who, for one reason or another, have neglected the property or are ready to retire. Sellers who are motivated to relinquish ownership of their apartment building will be more willing to offer some form of flexible owner financing.