The brand new apartment building investor/buyer should be aware of what I consider to be the most important rule to multifamily 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 speak to dozens of aspiring investors every week who call me or email me saying that they found a great piece of real estate, with a super CAP, in an excellent area, that is 95% occupied and that they would like to find a loan to purchase the apartment building. Unfortunately, many of these "great opportunities", upon closer inspection of such documents as rent rolls and the income and expenses, it becomes clear that the apartment building does NOT "debt service". This simply means that the real estate does not produce enough income on an annual basis to cover all expenses including the loan payments, taxes, insurance and maintenance costs. After doing the math, the investor goes back out into 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 should seek financing
Commercial mortgage companies and apartment building lenders almost always require a buyers contribution to be 20% of the purchase. The purchase price shouldn't be confused with what the buyer thinks the property is worth, or even what the real estate recently appraised for. Banks are only going to lend money based on the purchase price of the apartment building. Of course, there are exceptions to this rule. One exception is when the investor is purchasing the place to do a construction rehabilitation of the property. In this case, the loan process is usually more involved and more documentation is required.
Many of the potential apartment building buyers that I work with don't have the liquid capital required for the 20% down payment mandated 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" will you, to financing an apartment building investment with no or little money down.
Many investors are not aware of all the creative methods that can be used effectively to raise investment capital. Here are some of the ideas that I have seen be successful in the real world, with real investors, buying real multi-family buildings with less money down.
1) Incorporate a limited partnership 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 does not currently have the liquid capital needed for the 20% down payment. A limited partnership should be formed under the direction of an experienced real estate attorney who understands the intricacies of this kind of partnership agreement. The limited partnership normally consists of one general partner and one or more limited partners. The general partner is the only member who has the power to make executive decisions concerning the apartment building investment. The limited partners invest their money with the expectation of receiving a return on their investment when the property is sold or as structured payments from monthly net cash flow. The investor/general partner should prepare detailed financial statements on the project to present to potential limited partners in order to convince them to invest their hard owned money. A good real estate attorney should be able to help with this aspect of the partnership as well.
2) Raise capital from friends and family
This may seem like an obvious solution but it is surprising how many investors neglect to look close to home when trying to fund a good multi-family investment deal. Unfortunately, if the investment doesn't work out as intended the investor not only is risking his investment capital but he is also risking a close friendship or good relationship with a family member. Because of this it is generally a good idea to have a qualified real estate attorney draw up a formal agreement that clearly spells out the responsibilities of all parties involved.
3) Obtain owner financing
Most owners of multi-family properties are experienced investors who are financially adept. They are accustomed to receiving and utilizing some form of owner financing to structure their investment projects. Many great properties have been purchased from sellers who have for some reason or another neglected the property or are ready for retirement. Sellers who are motivated to relinquish ownership of their apartment building will be more willing to offer some form of flexible owner financing.