Four “Must Do’s” when Purchasing Your First Multifamily Deal
Buying your first investment property can be a daunting goal to achieve. However, with the right steps and preparation, the whole process can be much smoother for everyone. This list of general do’s and don’ts for purchasing your first deal is a great place to start!
- Assemble a Team
- Decide What and Where you Want to Buy
- Do Your Market Research
- Have an Exit Strategy
Assemble a Team
When you first decide that you want to buy an investment property, you may be inclined to tackle this goal all by yourself. However, if you want a higher chance at success, it may be worth your while to build up a network of people and parties that can aid you in your process. People like brokers, lenders, management companies, utility providers, general contractors, plumbers, roofers, etc. are imperative to the success of your first deal. Further, knowing these people before you find your first deal will make the process much less stressful.
A great way to assemble a team of professionals is to attend networking events in your area and set up coffee shop or even virtual meetings with them to make sure you have a shared understanding of goals and potential outcomes. There are several online networking events available in the Middle Tennessee area that are filled with vendors that could potentially be a good fit. Our annual “Meet Your Match” event was created for this purpose, enabling investors to meet vetted vendors in our area.
On top of this, you need to decide how you want to fund your investment. Do you want to syndicate? Do you want a partner? Or do you want a couple of partners? Whichever route you decide to take, you’re going to have to find people that can bring something to the table. Whether that thing is capital, experience, or an area of expertise, everyone should have a good reason for being a part of your team.
Decide What and Where You Want to Buy
Once you have a solid team/list of contacts, you need to figure out the parameters of what you want to buy and the general area you’d like it to be. Do you want a duplex? Or something bigger than that? Does the property have to be close to where you live? Or do you not mind it being a little further out? These are all things that need to be figured out before you even start looking for your first deal.
Since it’s your first deal, getting a “plex” property (meaning duplexes, triplexes, and quadplexes) is likely the most optimal route to take. The reason for this is because “plex” properties are mortgaged through residential loans rather than commercial loans. This makes it much easier for new investors to get approved for a mortgage for their deal. There are also advantages for purchasing 5+ units, to learn more about those advantages we would always recommend talking to a licensed broker or a lender who can give you case specific examples.
Do Your Market Research
Once you have some sort of parameters set, conducting extensive research of the market you want to invest in is vital. FInd out what exactly is selling in that market, and for what price. Find out who’s selling, and why. Learn about the good, the bad, and the ugly about the city, neighborhoods, and streets that you’re interested in investing in. Now, this isn’t something you will have to do all alone. Assuming you put together a solid team that you can trust, many of the people on your team will be able to answer these questions.
Once you have narrowed in on a property or properties in a specific area the research continues on that specific deal. At this point bringing in a contractor and a real estate agent will be key to help you see through the facade to see what lies underneath that particular deal. Evaluating things like your Debt service coverage ratio and T12s will be a needed step of this process, and until you feel comfortable looking at those numbers it is always helpful to get a second opinion.
Have an Exit Strategy
Before making the deal, it is vital that you have your exit strategy solidified. Many investors stick with the BRRR Method (Buy, Rehab, Rent, Refinance), which is a great way to build up a portfolio. However, if you’re looking for a large payout or don’t want to deal with renting units out and managing them, you can always buy, rehab, and sell. Either route you take, it is important to have this plan in place before you purchase the property. It is also important to note that the terms of commercial loans look different than a traditional mortgage; where, even though amortized over 20-30 years, the loan must be paid back with a balloon payment after 5-15 years (depending on the loan terms). So, when dealing with properties of 5 units or more, this is something that needs to be taken into consideration when creating your exit strategy.
An exit strategy does not mean you are leaving the Multi-family market. On the contrary the exit strategy is there to help you continue to maintain or even grow your profitability after the initial business plan has been implemented. This is where your team once again becomes an important component. Having tax attorneys and a licensed realtor who is a multifamily specialist will be integral in setting you up for continued financial gains. If you do things right before long you will be looking to broker million dollar deals and you will find that having all the pieces in place will make it easy for you to scale from 2 or 3 to 200+ doors in a relatively short amount of time, setting you up for financial security for yourself and possibly even your children and grandchildren.