A Fresh StartPosted on April 8, 2014 by
Have you hit a wall with looking for deals? Are you having trouble finding deals that make financial sense or that will cash flow at all? Are you having trouble getting started with your multifamily investing business? Not sure where to get started? If this is the case, I can help you with a fresh start. If you are just beginning then this article will help you to avoid a lot of unnecessary frustration and to jumpstart your investing career.
What size deal should I start with? This is one question most people ask when they get started in multifamily investing. Let’s take a close look at the answer.
To qualify for a commercial loan these days most lenders want to see that you and your partners have the net worth equal to or greater than the loan amount. So if you are looking at a $1,000,000 dollar deal then you plus your partners must have a collective net worth of about $1,000,000. Notice I said “collective” net worth. That means you can have $0 net worth and use the value of your partners to cover it.
Next step is to decide what your net worth is plus the net worth of the people closest to you, ones in which you think will join you in a multifamily deal. This may be family, friends or close business partners. Once you decide what your collective net worth is, you have the first piece of a formula that will lead you to success.
Now you need to take that net worth number and decide how many units in your market that will buy. For example if I decide that my teams net worth is $1,000,000 then I should be looking at multifamily deals that are selling for around $1 million. Keep in mind that this buys a different amount of units depending on your market and asset class (A, B, C or D). In Georgia, where I am from, $1 million buys a lot more C class units than it does in Miami or New York.
Now you need to do some research to see how many units your collective net worth equals in your market. This will give you a size of property that you should start with. The next step is to start calling brokers and agents and telling them to find you deals that match that size. You may be asking to see only 10 units or maybe its 100 units. Remember this will be decided by your total net worth and the general price of C/B class units in your area. You will be much more confident in asking the agents to show you these types of deals because you will be more confident that you have the ability to qualify for a loan and actually close on that size deal.
Now that you have a general size and price range for your first deal, we are going to use the 80/20 rule.
80% of the time you need to be looking at deals that you have the highest probability of closing. These are the deals that match your collective net worth. 20% of the time you can look at the big deals or deals that have a less likely hood of you closing.
One of the biggest mistakes I see new students make is to spend too much time trying to take down a deal that is too big for them. They waste a lot of time and energy only to realize they can’t close. This leads to frustration and sometimes an early burnout in the business. The idea with this formula is to keep you from wasting a lot of time in the beginning of your multifamily career looking at deals that you are not likely to close.
Decide on your collective net worth. Decide on what exactly it is you’re trying to buy (apartments, self-storage, commercial etc.). Then decide how many units in your market that your net worth will buy. Start your marketing and calling agents to find that size deal. Do this with most of your time and you will find that you are off to a fresh start!