10 Steps to Your First Small Multifamily
Are you ready to purchase your first small Multifamily Property?
The small Multifamily real estate market (2 – 30 units) is a niche with little competition that’s ripe with opportunities. The majority of the owners of these size properties are “mom and pops” which often means below market rents, value-add potential, and seller financing possibilities. Don’t overlook these small properties! Follow the 10-step plan below to take one down and start building Lifetime Cash Flow.
I’ve compiled this 10-step plan to help you start building Lifetime Cash Flow
1. Evaluate personal finances.
Before you start looking for deals, you should do a self-evaluation of your current financial situation. Do you have money to invest or do you need investors? Can you qualify for an FHA loan? How about an income property mortgage or commercial mortgage? What can you do to improve personal finances?
2. Identify if you want to focus on residential 2 – 4 units, or a small commercial property, 5 – 30 units.
You can clearly focus on both but it’s important to know that there are a variety of differences between residential and commercial multifamily. If you’re interested in “house hacking” or FHA loans, you’ll need to focus on residential. There are many other differences as well such as the loan process, balloon payments, and even your exit strategy options.
3. Determine where you will focus.
There are 2.25 million multifamily properties in the U.S, and you can’t chase all of them. When selecting your market area, focus on four things: employment and job growth, income growth, population growth, and multiple large employers.
4. Connect with a local agent/broker and a local banker.
As you know, the journey to Lifetime Cash Flow is not one you take alone. Two of the most important team members you will need include a motivated and active agent/broker that focuses on multifamily, and a local banker that you’ve discussed loan options with and/or have a relationship with. The first team member will help you find deals, and the second will help you take them down.
5. Start to build relationships with potential investors.
Whether you think you need investors or not, I recommend starting to build those relationships. Remember, you are building relationships, don’t just talk real estate! They key is to find commonality and build strong and sometimes lifelong relationships.
6. Become professional.
One of the most common mistakes new investors make is treating their multifamily endeavors as a hobby, not a business. Don’t go and form an LLC yet, but spend a few bucks and order yourself some business cards, a basic website from Fiverr.com, and a free business phone number via Google Voice.
7. Buy or build your property and owner database.
Having a properly built property and owner database is worth its weight in gold. This will be a vital resource for direct mail marketing, cold calls, and overall knowledge of the area. You can build your list in Excel or use a free or low-cost CRM.
8. Get that first direct mail campaign out the door!
Direct mail is one of the best strategies to find off-market deals for any type/size of real estate, especially small multifamily. As stated above, a lot of these owners are older “moms and pops” and you’re not going to reach them via Facebook or PPC (Pay Per Click) ads.
I just interviewed a young couple in Houston who took my advice and mailed 300 letters and just closed on a 32-unit property which will net them $10K per month!
9. Implement other marketing strategies.
Don’t put all of your marketing eggs in one basket. Implement other strategies as well to ensure you have a consistent deal flow. Utilize auctions, driving for dollars, Craigslist, and the dozens of other ways you can find great off-market deals.
10. Practice, practice, practice analyzing deals.
When it comes to small multifamily you need to become an expert at analyzing both residential and commercial deals. You need to know that 2 – 4 unit properties are valued based on comparable sales and that 5-unit and up properties are based on the NOI and Cap Rate. The only way to become great at analyzing deals is to practice. Spend time every day reviewing deals and kicking the tires. Practice, practice, practice.