Financing multifamily investment property is something many of my student-investors struggle with. Often, they worry that they need many thousands of dollars in cash to get into this type of investment.
You need to think creatively about how to use money from other sources to put together ways to buy a multifamily investment property. That has been the very core of my learning and building the sound foundation of my teams and four companies.
Sellers who have apartments that are suffering from poor management and low occupancy are one place to look, especially in emerging markets. I always like to search for these deals in C+ or B neighborhoods. I hardly ever buy anything in D-class neighborhood—I find them to be risky and I also have encountered difficulties trying to collect rents in these areas.
Banks and lending institutions are interested in knowing the cash flow from multifamily properties after all the expenses. That is the basis for what they lend on. They want to see the difference between the property’s gross income and gross expenses.
“OK,” you say, “so how do I do this with no money?”
This strategy works nicely, where you can look through all your relatives, close friends, colleagues and inner circle of influence to find one or more individuals who can partner with you with the cash and net worth and you bring to the table the sweat equity, learning, skills, experience, drive and hard work in pulling the deal together. You may need to give them 20-30% of the General Partner side of the profits. And you may only need that to get started.
In our case, my partner and I did not have much money and we reached out to an individual who trusted us and believed in us and our drive to make things happen. That person loaned us $100,000 at 6% interest only for a year.
For example, here is what Dave Lindahl writes on earlytorise.com:
“If you don’t have a down payment, you still have the option of using a hard-money lender instead of a bank. Most hard-money lenders will loan you 100 percent of the loan amount, as long as you buy the property below 65 percent of replacement cost.
“That may sound difficult at first, but think about what it means: 65 percent of after-repaired value. Say you buy a property for $650,000 that has low rents or low occupancy. Once you increase the rents or occupancy, that property may be worth $1,000,000 or more. In that case, you’ve just bought your first million-dollar property with no money down,” earlytorise.com writes.
The most common way to buy a property with no money down is to use owner financing. This occurs when the current owner agrees to finance either all or some part of the purchase price, instead of getting the cash now.
You’ll be surprised how many people own their properties free and clear and are willing to finance the entire amount or a good portion of the mortgage. Usually, though, you will be getting secondary financing from the owner. That means you
will get the majority of the money (the first mortgage) from another source, like a bank, and the seller will give you the rest in the form of a second mortgage.
If you’ve got a great deal but don’t have the money for a down payment, find a private lender. This is any individual who has extra money set aside that you can use for your purchase.
This person can be a family member, friend, dentist, doctor, dry cleaner, a member of your real estate investment club, etc. Private investors are everywhere; you just need to start asking.
Ask if they have money in an IRA or a savings account that they would like to get a return on, of 8–10%, secured by real estate. This is very appealing to lots of retired or very busy professionals who would love to get cash flow coming each month exceeding what they can earn in interest in certificates of deposit or bank accounts.
After you get one or two lined up and you start to use them successfully, watch what happens: They will tell their friends, who will tell their friends, and so on. It’s human nature to brag at cocktail parties or at the gym about what a great investment
you just made. Before you know it, you will have all the funds you need, and your business will explode!
It’s imperative that you choose the right partner from whom to get the money, such as a trusted relative, longtime friend, or business associate with whom you have dealt previously. It’s highly recommended that you get a coach or a mentor who has done these kinds of structures and has the knowledge and experience to help guide you.
Doing due diligence on the multifamily property is also very essential so you can avoid any surprises after take-over. It’s the job of the general partner and sponsor to find all the defects in the exterior and interiors of the buildings and discrepancies in the financial data provided by the seller and the broker of the asset you are looking into acquiring.
Definitely set up a strong legal structure for your partnership; make sure you are protected. It’s important to be smart going into a partnership, and it’s also important to be smart legally with the partnership. Spell everything out so there is no question later.
I have always felt since we started 12 years back that having a legal counsel is so important to avoid mistakes and challenges later in structuring and running the businesses. We used a service call Prepaid Legal when we started (I think it’s called Legal Zoom now).
So get going and don’t wait on the sideline even if you don’t have money to start in the multifamily investing. This is the perfect investment vehicle for a great lifestyle and for earning passive or active cash flows!!!
Disclaimer: I am not a legal or tax professional, and all matters of real estate partnering should go through either legal or tax professionals (or both) before being implemented.
Vinney Chopra is the Founder and CEO of Moneil Investment Group and President of Ideal Investments Group. Since coming to the United States more than 40 years ago - with only $7 in his pockets - he has built four successful businesses as well as his passions: a multifamily syndication academy and youth academy. With a bachelor's degree in mechanical engineering, he added a master's degree in business administration in marketing from The George Washington University, shifting his focus to marketing and motivation. He has been a professional fundraising consultant and motivational speaker for more than 35 years and also is a licensed real estate broker in California. Vinney and his wife started their real estate investments in 1983. He currently owns single-family homes and multifamily units in Texas, California, Atlanta, Arizona and India. People often call him “Mr. Enthusiasm” or “Mr. Smiles” for his positive attitude and commitment to bringing great value to everyone whose lives he touches.