What I’ve Learned from My Journey into Multi-family Investments
I am a SF Bay Area resident with a W2 job who has discovered a passion for real estate investing. I am also co-founder of Foliolens, a startup that specializes in automating mundane tasks around real estate portfolio and property management, while delivering valuable insights to real estate investors.
Prior to this I spent about 5 years in real estate investing primarily on residential and small commercial deals for my family portfolio. One of the financial principles I observed growing up in my family was that everyone had one or more real estate investments that they would consistently rely on as a secondary source of income. This would eventually become comparable or grow in scale to their W2 income, giving them retirement options and the independence to make further investments.
I was obsessed with this idea. After buying our primary residential property in the East Bay, I started closely following the pursuits of friends and family to understand how they were building out their real estate portfolios. Now, given the pandemic, 2020 has obviously been a rough year for a lot of folks, but I’ve been fortunate to come out the other side in one piece and with a few investments under my belt. I wanted to share some personal experiences on building passive income through a class of real estate investments which I had personally never worked with – multi-family properties.
How easy is it to get leads on multi-family properties?
I never realized that a quick chat over coffee with my brother-in-law and one of his real estate brokers would lead to a multi-family investment opportunity. I had just tagged along to see how the conversation would unfold! But chatting about vacation rentals and hunting somehow gradually led us to conversations about the supply and demand of single-family homes or multi-family properties. And that’s how it all began.
What can I buy –if anything?
Obviously as you are listening in on a conversation between an experienced real estate investor and a broker, you start to wonder how one scales from one to two or more. Some other questions which come to your mind are:
- What can I afford to buy, if anything?
- What location should I invest in?
- What should my investment strategy be, and how do I figure it out?
- Do I have a short term or longer-term investment strategy, or is the property old enough that a fix-and-flip would bring additional revenue over buying and renting it? That is, should I buy and hold the property or just buy, fix, and sell it (also known as flip)?
- Should I choose a single-family or a multi-family property? One of the benefits of choosing a multi-family over a single family is that your operational unit costs are lower when you scale vs. when you own multiple SF investments. Also, rental income will be higher for multi-family homes.
- Should I choose a new or an old development?
- And so on…
There is always an element of risk involved in investing, and you want to have some contingencies in place before going down this path…
Some topics that I considered in identifying mitigations were:
- How do I protect my primary residential investment from any risks due to secondary real estate investments?
- What is the amount of capital I can invest?
- Will I have 3 to 6-month emergency funds available in addition to the investment capital?
- Can I identify an investment location with a personal link? (For example, travelling there often, living there or having some familiarity via a personal network or support).
- What is the local industry and business like, what is the general economy built around, and do people mostly rent or buy in this area?
How to build out your multi-family real estate investment
I had the benefit of building some preliminary skills while participating in family investments. If you don’t have that exposure, however, then buying a primary residence for yourself or assisting a friend will give you useful baseline skills and tools to draw on when building your real estate investment portfolio.
Things I knew which I could quickly rely on:
- A Personal financial statement (also known as a personal net worth statement)
- A Home Inspection template
- A local real estate broker
- Redfin / Zillow based market and property tax rates by location
- Local tax laws accessible from the web
Things I learned hitting the ground running were:
- How to analyze broker-provided deals against NOI, Cap rate (>5 percent), and the1 percent rule
- To ask about any special assessments or major infrastructure costs which I need to account for in my annual cash flow
Do I need to worry about having enough capital?
Despite identifying an initial budget for my capital investment, I quickly realized that sometimes, when good deals come by, you may need to get creative and stretch your finances a bit.
In such situations, having the right kind of financing can make or break a deal. You should investigate financing options with banks, i.e. between local vs. national, and conventional vs. commercial. Also investigate interest rates and down payment requirements, and the possibility for seller carryback financing. This allows you to close a deal out based on the capital you currently have, and exit out of seller-provided financing options with funds accumulated later.
The possibilities are endless when it comes to securing the right financing for the deal, so make sure you talk to lenders and build the right relationships – you never know when the ideal opportunity will present itself.
So, you’ve closed on the property. Now what?
Some common questions that will help you tackle Day 1 are:
- Have you identified a property manager or property management company for your investment property? What do their fees look like?
- Do you have any existing tenants, and how quickly can you convert their leases?
- Do any of your homes need any urgent maintenance work done? If so, how can you be fiscally prudent when conducting maintenance? Avoid over-renovating units and focus instead on functional aspects like broken appliances, and cosmetic changes to increase appeal to new or existing tenants.
- Have you separated regular maintenance costs from property management dues?
- Do you have adequate coverage if your property manager is unavailable, or will tenants contact you?
- Do you have an adequate buffer for urgent renovations?
What does the future hold?
This multi-family investment experience has certainly helped me prepare for future investments, and I’ve been able to devise a playbook and several analytical tools to sue in future. Going forward, some of the other areas I’ve started to address are:
- Re-thinking savings from my daily expenses and strategizing on ways to pull capital together.
- Looking into future deals where I can reduce operating unit costs by expanding into larger apartments from MF homes.
- Automating tasks and tracking expenses to identify overages or avoid penalties with late fees.