Ok, this is a little bit of a rant.
I get many phone calls from investors seeking financing for large multi-family complexes in other states. These investors are typically seeking the down payment funds to purchase large complexes in emerging markets. I don’t know any hard money companies that supply down payment money for commercial purchases, because the hard money loan would then be in second position behind the conventional loan used for the bulk of the purchase. Even if the buyer is assuming a mortgage, that assumed mortgage will stay in 1st position. So the usual procedure is for the buyer to solicit funds from other investors, pooling the money to come up with the down payment for the purchase. So far, so good. There are a number of local investors who have done very well with this strategy, and I’m all about cash flow, so I think that’s great. There is of course a local guru who teaches just this strategy. This post is not about those experienced investors.
The issue comes when the investor is brand new, and is looking for funding for a 200 unit complex in anywhere, usa. Let’s just choose Topeka, Kansas for no particular reason, or for the reason that I don’t know anyone looking for multi’s in Topeka. I’m sure the guru tells them that you don’t have to have experience with multi’s to do this particular type of investing. And if the guru is your partner, or your partner is very experienced, then maybe that’s true. But if you are doing this on your own, and have never so much as owned a duplex, how on earth can you know what you don’t know?
Most of us who have been investing for a while have made some big mistakes. And hopefully, we made them on smaller deals, learned from them, and re-adjusted for the next deal. I know I did lots of things wrong on my first few deals. I even built an entire house 2’7″ too close to the road. (But that’s the subject of another post on another day.) The point is, when you’re new, you make mistakes. And you don’t even know what the gotcha’s are until you live through them. Which is what I mean by you don’t know what you don’t know. You are too new to even conceive of some of the issues.
On large multi-family properties your mistakes are multiplied by the dollars involved. So a bad decision on a 2-family might cost 10,000. Multiply that by 200 units, and you’ve made a $1,000,000 error. And if you are risking your own money, and you want to give it a shot, then by all means go for it, if you can find a financial institution that will fund you.
But here is the rub: If you are raising other people’s money, and using that money to put either into an equity stake, or at best a second position mortgage, then you are risking their money without even knowing what you are in for.
So I don’t want to pee in your cheerios, so to speak, I want everyone to go out and be very successful. But for goodness sake, go buy a small multi first. At least then you’ll have some experience with what to look for, at least on a small scale. Believe me, it will be eye-opening at the very least. And don’t tell me that you’re going to use a property management company, so you don’t need to know anything about managing apartments. How will you know what to look for in choosing a management company, if you don’t know anything?
I could go on and on, but I think I’m all set with the Cheerio analogy. Way too visual, isn’t it?
I welcome comments on this topic, please chime in, especially if you disagree.