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The multifamily market is challenging to navigate when you’re first starting out. There is so much to learn such as real estate terminology, how to communicate with professionals, how to analyze deals, etc. Fortunately, there are so many educational platforms that you can learn from including YouTube, BiggerPockets, etc. With that being said, I want to dive into a few of the lessons (“cheat codes”) my team and I have learned while navigating the multifamily space. This post will be part 1 of a 3-part series with each additional post coming in the next couple of weeks. The lessons here have been learned through a combination of trial and error. Like everyone, we didn’t know everything when we started our syndication company. However, we’ve embraced our failures and ran with our successes.
Start Small
When you’re starting in real estate it’s unrealistic to assume that you will tackle a large deal right off the bat. Looking back it’s funny I mention that because when we first started we were looking into any deal that we came across from as little as 10 units to as large as 100 units. The first deal we got under contract was a 78-unit value-add deal with proven upside. While we had all the pieces in place to begin due diligence, the investor group we were working with ended up not being on the same page and we quickly learned that we needed to find a different source of equity. Long story short, we had to back out of that deal and we learned the importance of starting out small so as to be able to have equity set when the time came. Quickly thereafter, we pivoted to looking into smaller deals (under 25 units) within a set criteria after sourcing equity so we knew we could close on the next deal. A few months after the 78-unit, we took a 20-unit property under contract and that deal became the property that we own and manage today. The 20-unit was being sold together by two sellers and while one of the sellers backed out leaving us with only 8 units, we gained experience which boosted our confidence. I bring up this story to highlight that it’s good to dream big, but you need to have realistic standards/goals so as to not get crushed under your own pressure. Starting out with a flip, rental, or small multifamily deal is ok. The crucial thing to realize is that getting a feel for the market and the process is what matters. As the Engish writer John Heywood said long ago, “Rome was not built in a day.”
Know Your Numbers
Real Estate at the end of the day is a numbers game. Whether you invest in a flip, rental, or multifamily property you have to be able to understand how the property operates from a financial perspective. Being able to underwrite (a definition can be found on our glossary page) is critical because without it, you could end up in a world of hurt and you’ll be wasting your time. If you overpay for a property you run the risk of never making a profit or dare I say losing money. If you’re syndicating a deal, investing in a property where the financials don’t make sense could not only lead to a loss of your money but that of others. More so, a deal gone south could tarnish your reputation which is worth more than the money you’ll lose. A tarnished reputation could hinder you from being able to put together another deal.
When analyzing properties you’ll want to understand the ongoing expenses, what returns you can expect, the rental income, and a multitude of other factors. Taking the time to underwrite many deals before investing in your first one is a good idea because that way you could map out what criteria it is that you’re looking for. Something to remember is that properties can be analyzed from different perspectives. For example, you could invest in a class-A property but if you’re looking for cash flow (i.e. a high cash-on-cash return), that is not the place to start. Class A properties are usually bought with the assumption that they will appreciate greatly during the hold period and thus the payout is on the back end. On the other hand, investing in a class C property and thinking that it will appreciate as much as a class A property is foolish. Class C properties are typically bought knowing that the cash flow will be high. Sellers are not ignorant when it comes to the price they could fetch for their property (for the most part) and thus you need to be able to underwrite the deal you’re looking into to negotiate a purchase price accordingly.
Build a Team
Real estate investing is a team sport. You’ll need to line up the right people to get to the closing table. The team you’ll want to put together will need to be comprised of a real estate attorney, an SEC attorney (if you’re syndicating), a broker (unless you’re negotiating directly with the seller), an insurance agent, a CPA, an inspector, and a lender. This team may vary a little depending on exactly what you’re trying to do, but the people I mentioned are essential. While with a couple google searches you could find all the individuals you’ll need to close, that isn’t very effective. What my team and I have found effective when putting together our team of professionals is that it’s best to get referrals from people already doing what you’re trying to do. For example, if you’re trying to close a multifamily deal, find a multifamily operator and ask them to refer you to the professionals they use to get their deals closed. More likely than not they’ll agree to introduce you to those professionals. We sourced all the professionals that helped us close our first deal by talking to other multifamily operators. Furthermore, you’ll want to get a feel of how reliable those individuals are and how they communicate. In terms of reliability, if those people are busy or don’t have good communication skills, you’ll want to look elsewhere for someone that can get the job done. Although, if you’ve asked successful people doing what you’re trying to do for referrals, chances are those referrals will be competent and helpful. As a strong word of advice, seek to understand the communication style of the people you work with. You’ll want to adhere to their style of communication so as to make their lives as easy as possible. No one likes to work with people who make their lives difficult. You need to know what you’re looking for and what you’re talking about to be as successful as possible when working with others. All this is to say that a team is critical in order to close on a property and working with others requires strong communication skills and knowledge.
Conclusion
This brings us to the end of the first part of a three-part blog series on real estate cheat codes. I trust that after reading this first part you now understand the importance of starting small, being able to underwrite a deal, and putting together a competent team. Something I didn’t mention is that there is no need to be doing all of this yourself, it’s a good idea to find a partner(s) so your workload is lessened. My team and I constantly rely on one another to operate JP Acquisitions and at this point the thought of one of us taking on all the tasks we rely on each other for is stressful. Nevertheless, if you have yet to close your first deal I have faith you’re capable of getting it done. If you’re experienced, chances are this blog post has reaffirmed what you already knew to be true.
If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, writing for his blog (tedinvests.com), looking for multifamily deals, working out, and researching stocks.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.
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