Category Archives: Finance Right: How to Get Financing for Multifamily Apartments

If you’re following our three essential steps to being successful in multifamily real estate, then you’ve already read through our Buy Right and Manage Right blogs. The final step of our strategy is Finance Right. In order to be truly successful in real estate, you need to learn how to secure long-term financing.

Our Finance Right blogs will teach you how to get financing for multifamily homes and how to make the most of that financing. Once you’ve read through this archive, you’ll be one step closer to having the knowledge you need to succeed in multifamily real estate.

Exploring Seller Financing Pros and Cons: What You Need to Know

In the realm of real estate transactions, seller financing has emerged as an intriguing option for both buyers and sellers. This innovative approach offers a unique set of opportunities, along with some potential pitfalls. In this article, we’ll delve deep into the seller financing pros and cons, shedding light on how this arrangement works, who it benefits, and the challenges it might present. Whether you’re a prospective homebuyer, a property investor, or a seller looking for alternatives, understanding the nuances of seller financing can empower you to make informed decisions.

Seller financing, also known as owner financing, involves a homebuyer securing a property directly from the seller, bypassing traditional mortgage lenders. This arrangement presents a range of advantages and drawbacks:

Advantages of Seller Financing

Flexibility in Qualification: Traditional mortgage applications often come with stringent criteria. With seller financing, buyers with less-than-perfect credit scores or non-traditional income sources have a better chance of securing a home.
Faster Transaction: Seller financing can expedite the home-buying process since it doesn’t involve the time-consuming processes of a conventional mortgage.
Negotiation Leverage:Buyers and sellers have greater flexibility in negotiating terms, interest rates, and repayment schedules, fostering a win-win situation.
Lower Closing Costs:Buyers can enjoy reduced closing costs as compared to traditional mortgages, making homeownership more affordable.
Diverse Payment Structures:Sellers can offer various payment options such as fixed-rate mortgages, adjustable-rate mortgages, or even interest-only payments.
Investment Opportunity: Sellers can generate a steady stream of income through interest on the financed amount, potentially exceeding returns from other investments.

Disadvantages of Seller Financing

Risk of Default: Sellers are at risk if buyers default on payments, potentially leading to legal proceedings to regain possession of the property.

Incomplete Ownership Transfer: Until the buyer fulfills the agreed-upon payments, the seller retains a stake in the property, limiting their ability to sell or use it as collateral.
Opportunity Cost: Sellers miss out on a lump-sum payment that could be used for other investments or purchases.
Market Risks: Sellers might not receive the property’s full market value upfront, which could lead to financial implications in a fluctuating real estate market.
Due-On-Sale Clause:Some existing mortgages contain a due-on-sale clause that triggers full repayment if the property is sold, potentially causing conflicts with seller financing.
Qualification and Documentation:Sellers need to evaluate buyer qualifications and create legal documentation, which can be time-consuming and costly.

FAQs

Can seller financing benefit buyers with low credit scores?

Absolutely! Seller financing provides an opportunity for buyers with less-than-ideal credit scores to secure a property.

What happens if a buyer defaults on payments in a seller financing arrangement?

In case of default, the seller retains the right to reclaim the property, following the legal procedures outlined in the financing contract.

Are there tax advantages associated with seller financing?

Yes, both buyers and sellers may enjoy certain tax advantages through seller financing. It’s advisable to consult a tax professional for personalized guidance.

Can a seller finance only a portion of the property’s price?

Yes, sellers can choose to finance the entire purchase or only a portion of it, offering greater flexibility to both parties.

How does seller financing differ from rent-to-own agreements?

While both involve non-traditional paths to homeownership, seller financing results in I mmediate ownership, whereas rent-to-own agreements offer the option to purchase at a later date.

Is a down payment required in seller financing?

A down payment is often negotiated between the buyer and seller. It provides the seller with a level of security and demonstrates the buyer’s commitment.

In the realm of real estate transactions, seller financing stands as an alternative path that opens doors for both buyers and sellers. In the current market cycle that we are about to be entering, the buyer’s market, seller financing becomes more prevalent and a powerful tool in your toolbelt to close more deals.

Seller Financing Techniques for Multifamily Investors

Investing in multifamily properties can be a profitable venture, but it often requires substantial capital. For many aspiring investors, securing traditional financing might be challenging due to stringent requirements or lack of a substantial down payment. In such cases, seller financing emerges as an attractive alternative. This article explores seller financing techniques for multifamily investors, providing valuable insights into this financing option and its benefits.

## Understanding Seller Financing

Seller financing, also known as owner financing or seller carryback, is a real estate transaction where the seller takes on the role of the lender and provides financing to the buyer. In the context of multifamily investing, this arrangement allows investors to bypass traditional lending institutions, enabling more individuals to enter the market. While this financing option can benefit both parties, it’s crucial to grasp its pros and cons.

Advantages of Seller Financing for Multifamily Investors:

Increased Accessibility to Funding: Seller financing expands opportunities for investors with limited access to traditional loans or those struggling to meet down payment requirements.

Negotiation Flexibility: Investors can often negotiate terms directly with the seller, leading to more flexible loan structures.

Faster Acquisition Process: By circumventing the bureaucracy of banks, the acquisition process tends to be faster and more efficient.

Disadvantages of Seller Financing:

Higher Interest Rates: Seller financing may come with higher interest rates compared to traditional bank loans.

Shorter Loan Terms: The repayment period may be shorter, requiring investors to manage higher monthly payments.

https://www.youtube.com/watch?v=NqyUOleuxuI

How To: Pro's and Cons of Seller Financing (https://www.youtube.com/watch?v=NqyUOleuxuI)

## Key Seller Financing Techniques

### 1. Lease Option

A lease option, also known as rent-to-own, allows investors to lease the multifamily property with an option to purchase it at a later date. A portion of the rent paid goes towards building equity, offering potential buyers time to arrange traditional financing while securing the property.

### 2. Contract for Deed

A contract for deed, also called a land contract or installment sale agreement, involves the buyer making regular payments to the seller until the property is paid in full. The buyer gains equitable title, while the seller retains legal ownership until full payment.

### 3. Seller-Carryback Mortgage

In this arrangement, the seller acts as the lender and provides a mortgage to the buyer. The buyer makes monthly payments to the seller, covering both principal and interest.

### 4. All-Inclusive Mortgage

An all-inclusive mortgage, also known as a wraparound mortgage, allows the buyer to assume the seller’s existing mortgage while paying the difference between the existing mortgage and the property’s purchase price.

### 5. Wraparound Mortgage

Similar to an all-inclusive mortgage, a wraparound mortgage combines the existing mortgage with an additional loan from the seller. The buyer makes a single payment to the seller, who then distributes the appropriate amounts to the original lender.

## Evaluating the Property and Seller

Before proceeding with seller financing, investors must conduct thorough due diligence on the multifamily property. This process involves inspecting the property’s physical condition, financial performance, and potential for growth. Additionally, evaluating the seller’s financial stability and motivation to sell is equally crucial.

## Negotiating the Seller Financing Deal

Negotiation is a crucial aspect of any seller financing agreement. Finding common ground on price, down payment, interest rates, and other terms is essential for a successful deal. Effective negotiation skills can lead to more favorable conditions for the investor.

## Drafting the Agreement

Seeking legal advice is paramount when drafting a seller financing agreement. Experienced attorneys can ensure that the contract includes all necessary clauses, protects both parties’ interests, and complies with relevant laws and regulations.

## Navigating Potential Challenges

While seller financing offers unique advantages, there are potential challenges to address. Some sellers may be hesitant to offer financing, requiring investors to educate and build trust. Property appraisal discrepancies may also arise, necessitating additional negotiations.

## Mitigating Risks

Diversifying an investment portfolio and developing a well-defined exit strategy can mitigate the risks associated with seller financing. This approach safeguards investors from potential financial setbacks.

## Seller Financing vs. Other Financing Options

Comparing seller financing to traditional bank loans and other financing methods allows investors to make informed decisions about the best funding option for their multifamily investment.

## Conclusion

Seller financing presents multifamily investors with a viable alternative to traditional bank loans. It offers increased accessibility to funding, negotiation flexibility, and a faster acquisition process. However, it’s essential for investors to conduct thorough due diligence, negotiate favorable terms, and seek legal guidance when drafting agreements. By understanding the benefits and challenges of seller financing, multifamily investors can make well-informed decisions that contribute to their long-term success.

## FAQs

**Is seller financing suitable for all multifamily properties?**

– Seller financing can be suitable for various multifamily properties, but it depends on the seller’s willingness and financial capacity to offer financing.

**Does seller financing impact the buyer’s credit score?**

– Seller financing is typically less stringent on credit requirements, making it accessible to buyers with lower credit scores.

**Can I refinance a seller-financed property later?**

– Yes, investors can refinance a seller-financed property at a later date if they secure traditional financing.

**What are the typical interest rates for seller financing?**

– Interest rates for seller financing can vary widely, but they are often higher than those offered by banks.

**How long does a seller-financed deal usually last?**

– The duration of a seller-financed deal varies, but it typically ranges from a few years to a decade, depending on the agreement.

How To Get Into Your First Multifamily Real Estate Syndication

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A syndication is simply a partnership between a group of investors pooling their resources into a single investment. I wish executing a syndication was as simple as the definition I just presented. In this article, I am going to lay out the steps took to close our first syndication, and include a video on the benefits of a syndication. Here is our video on What is a Multifamily Syndication.

What Is A Multifamily Syndication?

The first step, and most important, is to understand the process of investing in multifamily. We teach our students the three-step framework: Buy Right Finance Right & Manage Right®. If you have yet to master how to buy deals, and how to manage them, it would irresponsible and dangerous to go out and raise capital from investors.

As a syndicator, you are in effect taking money from investors and becoming the steward of their hard earned capital. If you don’t know how to underwrite deals, finance the deal appropriately, or asset manage the deal, I would hold off before starting to raise capital. I look at the three-step framework as the foundation to your syndication business, and if the foundation is weak, then your business will fail. Please take the time to educate yourself on investing in multifamily, and to create your own business plan.

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Once you are comfortable in your skills as an investor, the next step is to learn the different laws that govern syndication. When we decided to pursue syndication, the first call we made was to a syndication attorney. We had no idea about structure, type of syndication, time line, docs needed, and on and on. I would visit Kim Taylor’s website Syndication Attorneys for access to a treasure trove of articles and free resources. With all the content out there, you will still need to schedule your call with a syndication attorney.

In fact, that first call lasted over two hours!! I thought the call would last around an hour, and was ready to go fishing afterwards. No fishing that night! Don’t wait until you have a deal under contract. By then, it’ll be too late and you’ll have dozens of other tasks to attend to.

The next step is to begin to assemble your team. Here is a complete list of vendors for your syndication business. It will be virtually impossible to have them all lined up before you begin, so I would focus on your syndication attorney, CPA, website, legal entity creator, and property management company. Remember, Rome wasn’t built in a day, and neither is a syndication business.

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Vendor List:

Website designer
Website Hosting
Self Directed IRA company
Legal Entity creator
Syndication Attorney
Property Management Company
Property Management Software
Cost Segregation Specialist
CPA
Credibility Book Designer (for raising capital)
Zoom (for conference calls)
Customer Relationship Manager (CRM)
Investor portal
Virtual Assistants
Insurance Broker
Laundry provider
Secret Shopper
Cable Company
Social Media Platforms

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This next task is a difficult one for most entrepreneurs. It really depends upon where you are in your investing journey. Are you working a full time W2 job while ramping up your syndication business, or are you a full time investor? Be honest with yourself on your strengths and how much time you have to commit to your business. We were able to hire for investor relations, while creating content to convert those investors, and we also asset and property managed the deals. There are many different moving parts in a syndication business. That’s why we say multifamily is a team sport.

In conjunction with deciding upon your time commitment, do you invest in your first syndication as a passive investor to learn and get your feet wet, or do you jump in head first and take on the responsibilities of becoming a general partner. There is no right or wrong answer, only what’s right for your unique circumstances. You may even enjoy the freedom of investing passively and pursuing your career or your family. BUT, you still need to understand to Buy right, finance right, and manage right, especially if you are going to invest in someone else’s deal.

I can share with you what Jake & I did when we starting investing in multifamily. Our first several deals were done without syndication, and we were able to use creative financing and refinancing properties to expand our portfolio. Syndication was not prevalent when we started. There were deals out there, but there was very little capital to invest in those deals.

Once we felt comfortable with our business model, we decided to test the syndication waters. We had the team built out, and when it came time to raise the money for our first syndication, it was rather easy.

The challenge that we faced was the quickness with which a syndication moves, and the responsibility to the investors. Losing your own money is bad enough, but losing your investor’s money? That was a huge block for me. My limiting beliefs of working with investors held me back from trying syndication sooner. Trust me, don’t let it hold you back!

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Education * Action = Results®

Have you ever heard the term Proximity is Power? This brings us to our next step, to join a community of multifamily investors, and to begin to attend live events and meetups. Those who are rich in relationships are rich in life, both personally and professionally. There is no substitute to talking to an investor eye to eye, shaking their hand, and developing rapport with that person. Our Jake & Gino community allows the students to network amongst themselves, partner up on deals, and more importantly, share resources and ideas to expand their businesses.

As you attend these events and groups, the next step is to commit to raising capital. It is easiest to first go to friends and family when raising money for your deal. These are the people that know and trust you, and you will have the greatest influence among them. We have written a booklet on how to raise capital. If you would like to learn more, click here à How To Share The Benefits of Multifamily Investing

If raising capital isn’t your skill, you have two choices. You can either learn to raise capital by learning how to sell yourself and your vision, or you can focus on another responsibility in the syndication business. How about asset managing, property managing, or running the day-to-day duties? Just don’t sell yourself short on the fact that you have never asked anyone for money.
I didn’t either when I started, but the epiphany I had was that I was not asking people for money, I was offering them an amazing opportunity to invest in one of the top asset classes in the investing space. Multifamily is a basic human need: Food, clothing, and apartments!

`While you are learning the art of raising capital, your responsibilities extend to sourcing deals. I always get asked what should you do first, have the money or find a deal. If you are syndicating and opting to do a 506 B offering, you need to have a substantive relationship with any investor you offer the deal to. Once again, check out Kim’s site for definitions and structuring. Basically, if you do not have a relationship where you’ve spoken to an investor to understand their goals and their level of sophistication, you can’t present them the deal you have under contract. First, the relationship, then you can offer the deal. So, you better be out there sourcing capital for that juicy deal.

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Finally, once all of those pieces are in place, it’s time to go out there and put a deal under contract. Down below, I have summarized all the steps for you.

Learn how to Buy Right Finance Right & Manage Right®.
Learn model of syndication and laws.
Hire the right team members.
Decide upon your strengths, your time commitment.
Decide whether you are LP or GP.
Join investor groups and attend live events.
Learn how and commit to raise capital.
Source deals.
Get deal under contract.

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Syndication is an amazing tool in your real estate toolbelt. It can allow you to enter into the business with limited funds, and can allow you to scale your existing portfolio. A friend once told me the quality of your life is dependent on the quality of your options. Syndication is a powerful option for you to use in multifamily.

I would love to know if you bought your first deal through a syndication, or if you used your own money. Please leave us a comment down below.

~ Gino Barbaro

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How Do Limited Partners In A Syndication Get Back Their Initial Capital

By Joel Heck

One of the most important responsibilities for a sponsor in a syndication is protecting their investors’ capital. The business plan for a syndication may last 2, 5, or 10 years, but eventually the limited partners in the deal will want their money back. If you’re a limited partner in a deal, it’s important to understand how and when you’ll receive your initial capital back because it can impact your returns.

Each syndication structures returns a little differently, but I’ll give you a general idea of the different ways a limited partner can get their initial capital back.

It’s important to remember that in a syndication, your returns are proportional to the amount of capital you have invested in a deal. The more capital you have in a deal, the more money you’ll earn. While it’s great to get your initial capital back to spend or place in another investment, you need to be aware of how a reduction in capital invested in a deal affects your future returns.

https://youtu.be/x_Q9AVEfw5M

Pros and Cons of Apartment Investing Syndication (https://youtu.be/x_Q9AVEfw5M)

Selling the property

Let’s first look at the simplest way to get your money back. When the sponsors sell a property, they first return their investors’ initial capital. Ideally, the property sells at a profit, so the investors receive all their initial capital plus a profit.

However, there’s always a risk that the deal doesn’t go as planned and the investors don’t get all their capital back. It’s critical to evaluate the sponsors and deals you invest in to reduce this downside risk.

Cash-out refinance

Another capital event is a refinance. Usually when sponsors refinance the debt on a deal, they look to refinance a short-term loan into a long-term loan and pull out money from the deal because the property has appreciated. They can use this money to return some or all the initial capital their limited partners invested.

When reviewing a deal, check the legal documents or ask the sponsor for how a refinance affects the returns for the limited partners. Usually, the limited partners stay invested in the deal, even if they got all their capital back, but the total amount they get from a preferred return will drop. However, some sponsors may use a refinance to take their passive investors completely out of the deal.

Let’s look at an example. If you invested $50,000 with an 8% preferred return, you’d expect to get $4,000 each year. After a refinance you might get back $30,000 so you only have $20,000 left in the deal. Now the preferred return is 8% on the $20,000, or $1,600. The refinance shouldn’t affect the profit splits, so you’ll still get your split of the profits above the preferred return.

When investing in syndications, expect your capital to be tied up for a few years. Most sponsors plan on holding a property for 5-7 years, but the plan could change depending on the market conditions and how the property is performing. In a rising market, it may make sense to sell or refinance in 2 years, and in down markets sponsors may hold on longer than expected.

Return “of” capital vs return “on” capital

The other, potentially unexpected, way a limited partner may get their initial capital back is through distributions that are a return of capital instead of a return on capital. The distinction is important.

A return of capital means that the monthly or quarterly distributions a limited partner receives reduces the amount of capital they have invested in a deal. Going back to the example of an 8% preferred return with a $50,000 investment, the first monthly distribution would provide the investor with $333 and reduce their invested capital to $49,667. The following month the distribution would drop to $331 because the return is based on $49,667 instead of $50,000. Over the length of the investment, the investor would receive less money than if the distribution was a return on capital.

A return on capital does not decrease your equity, so if there is a preferred return, the limited partners’ distributions should remain the same if the cash flows support them.

As a limited partner, you should review the legal documents and talk with the deal sponsor to make sure you understand how the preferred returns are classified before investing.

Risks

Remember that real estate investments always carry risk, and it’s possible that the limited partners will not get some or all their capital back if the deal sponsor is untrustworthy or a deal performs poorly. However, it’s unlikely that the value of a real estate investment will go to zero since it’s backed by a physical asset. Even if the property burns down, the sponsors will have insurance to protect the invested capital.

Conclusion

To recap, limited partners can usually expect to get their capital back through a refinance and sale of the property within about 5 years, though it varies from deal to deal. They can also get their capital back through distributions that are a return of capital, though that is not ideal. Before investing in a deal, make sure to ask questions and review the legal documents so you understand how the sponsor plans to return your capital.

Email: joel@jheckrei.com

Phone: 720-663-7011

Website: jheckrei.com

How To Create Baby Money Soldiers

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Leverage The Power of Compounding To Scale-Up Your Apartment Portfolio

We bought our first 25-unit property for around US$600,000, in 2013. In 3 years, we made all of our investment back from the property through a refinance. Now, here is where it gets interesting. Most people would have used the proceeds to buy a ultra-luxury car or similar liabilities. But, we knew better. Having or aspiring for a supercar is not a problem, however, we suggest to finance such liabilities from passive income generated from real estate further down the road. That way it is more sustainable and you won’t lose on wealth-creation opportunities while you are in wealth creation mode. Coming back to our story of the first deal, we refinanced all of cash and then some and we rolled that into another deal. It is a simple yet proven way to multiply money quickly. It is like creating baby money soldiers who go further and further in the market and generate multiple streams of income for us. Every dollar needs to procreate and have a specific job assignment.

Refinancing or Refi and Roll as it is more popularly known is an excellent strategy to access the equity you have accumulated in a property. At Jake and Gino, we have used reinvestment as a tool to consistently grow our portfolio of properties. To date, we have refinanced over US$20 million. The first deal is where it all begins. It is the factory that generates cash flows that can be reinvested. We made so much out of our first deal in terms of cash flows, appreciation in property value and cost aggregation benefits, etc. It is still making us over US$5,000 per month in positive cashflow. As the saying goes, it is not what you make; it is what you keep.

You too can achieve similar results through deploying baby money soldiers like us and leverage the power of compounding. To put it simply, reinvesting returns from investments to maximize profits will result in compounding. It is the smartest and surest way to build wealth in the long term. In Multifamily real estate, this works by reinvesting rental income or income generated from a refi into other properties. Every time an investor cashflows or refi’s a property, the profit should be used to reinvest in another property.

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Even if you decide not to buy another property, you can reinvest returns in remodeling your existing apartment homes. As a rule of thumb, remodeled apartments earn a higher rent because tenants are more likely to pay for properties with additional amenities and upgrades. Reinvesting returns into your property can appreciate the property’s value on an annual basis. Even a small increase every year can add up to a huge profit over a period of 5-10 years. Remodeled apartments also fetch a much higher price, should you ever decide to refi or sell. Cash flows from existing properties can also be used to make a higher down payment on other rental properties. A more significant down payment allows investors to get loans at attractive terms because such borrowers are seen as less risky by banks. This is especially true for Fannie Mae and Freddie Mac loans.

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Building wealth from real estate is scalable if you have a diversified apartment portfolio with multiple properties. Multifamily properties are lower-risk investments because even if there is one vacancy, there are other tenants generating passive income. If you want to build long-term wealth to take care of your retirement needs, reinvesting profits from real estate in other rental properties will generate passive income and save taxes. Even for those who have already reached their financial goals, reinvesting will generate and grow additional wealth.

But keep in mind that real estate compounding takes time. This is the get rich slow game. For investors looking to compound profits, now is the right time to start. It does not matter if property prices are high or if the economy is not doing well. You are investing in the long-term, so what happens right now needs to be evaluated over 10 year time periods. Investors always have the option to spend the money they make right now on liabilities, or they could defer that gratification and increase their wealth by investing in another deal. But do not expect to compound profits overnight. Real estate is a long-term game. Cash flows can vary over a period of time, in case of vacancies or repairs to the property. While apartment prices as a rule tend to rise over the long term, there can be fluctuations in property value. Again, think in decades.

Whether reinvesting real estate income or spending it depends on an investor’s financial goals. Any investor looking for financial freedom and a substantial nest after retirement to maintain their current lifestyle would do well to reinvest real estate profits into other deals. There are certain parameters that investors must keep in mind while reinvesting. The first is ensuring that they have enough cash flows to reinvest, taking the time to screen tenants before renting out properties so that tenant turnover rates are low, and managing existing properties well by hiring a good property manager. Good management of properties is absolutely essential to reduce tenant turnover rates, prevent sudden repairs, and appreciate property values.

Remember, if it don’t cashflow, let the grass grow!

– Jake Stenziano

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The Pros & Cons of Multifamily Real Estate Syndication

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In the previous article, we described what is a multifamily syndication. In this article, I want to present to you the pros and cons of syndication, and more importantly, if the strategy aligns with your goals. Jake and I amassed a portfolio of 1,000 units before we decided to syndicate our first deal. Should we have started syndicating sooner?

As we get into the pros and cons, the answer to that question will be clearer. Jake & I run a vertically integrated company, which means that we control all aspects of the business, from acquisitions, to management, to disposing of the asset. It is much more challenging for us to acquire thousands of units per year because we need to scale our hiring for our property management company, and as you may know, we are in a challenging environment for hiring.

We do not want to run the risk of over expanding our infrastructure. If we employed third party property management, this would be less of a concern. So for us, our goal is to acquire up to five hundred quality units per year, and we do not need capital from investors. We can fund the deals ourselves. Early on in our career, we were fortunate to have formed a partnership that had a strong balance sheet for us to qualify for financing.

We were also fortunate to be able to refinance in excess of $15,000,000 out of our current portfolio and utilize that capital to invest in the next deal. Our goal was to hold these assets long term, utilize the cost segregation from the deal as a generous tax break, and own as much equity in the deal for ourselves. If we did not have access to capital, then syndicating sooner would have been a no brainer.

Remember, focus on your goals and what you are trying to accomplish long term. And also remember, you can buy some deals with partners, and you can syndicate other deals. As we said in our previous article, syndication is only one “tool” in your Buy Right toolbox

Let’s jump into the pros & cons.

Pros:

Other People’s Money
Great Strategy To Get Into Multifamily.
Get Into Bigger Deals.
Control More Units
Scale Quicker
Create A Business
Collect Fees

One of the huge benefits on investing in real estate is the ability to employ Other People’s Money (OPM). Syndication takes this benefit to the next level. You are pooling capital from investors to invest in an asset that would normally be much larger than you can take down by yourself, and you are able to own part of that asset with as little as 10-15% of your own capital in the deal.

For most investors, the limiting belief of not investing in multifamily is the fear of where am I going to find the money for the down payment. Syndication crushes that limiting belief by raising the capital from investors. Don’t let lack of capital stop you from pursuing deals in multifamily. Seek out a mentor or coach to teach you the multifamily space, and then utilize syndication to start taking down deals.

Watch the video version:

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With syndication, you will be able to invest in larger deals, control more units, and achieve economies of scale with more units. There are many investors out there who have controlled thousands of units, and have become wealthy the past few years from cap rates compressing. These syndicators may own a bit less equity in each deal, but they control thousands of units. Power comes to those who can achieve economies of scale in multifamily, and syndication is an excellent strategy to achieve it.

Syndication allows you to scale your business much quicker, and to achieve the economies of scale. Remember our path to growth. We did refinance the majority of our assets, but it did take time to reposition the deals before we were able to refinance. In some instances, it took 18-24 months, but our goal was patience and steady growth. For those who want to scale much quicker, syndication is excellent.

Isn’t one of the reasons you want to invest in real estate is to become an entrepreneur. At Jake and Gino, our catalyzing statement is We Create Multifamily Entrepreneurs. It wasn’t that way when we began our investing career. We were not looking at real estate as building a business. We were only looking at buying a few deals that would cash flow. Scaling up, economies of scale, and systems were foreign to us.

With syndication, you can envision yourself becoming an entrepreneur and creating an amazing business. You start by building your database of investors, begin to generate fees and cash flow from the deals, and begin to generate residual fees, such as asset management fees. We treat our syndications as another stream of revenue. We generate asset management fees, acquisition fees where we roll into the deal, profits from general partner side, and passive income derived from investing on the limited partner side. As you can see, once you’ve executed a few syndications, the snow ball begins to grow exponentially!

Cons:

We’ve presented the pros! Now, it’s time to transition to the cons of syndication:

Less Control (More Cooks in The Kitchen).
Investors Are Your Boss.
Investor Relations Is Another Task.
Sharing The Profits.
More of A Fix & Flip Model.
Less Equity inThe Deal.
Another Level of Complexity.
Less Deals That Qualify in This Part of The Cycle.

Before I became a full-time investor, I was the pizza guy. That’s where I got the too many cooks in the kitchen analogy. I enjoyed the simplicity of doing our own deals, not running it by multiple partners, and not having to take the investor’s needs into consideration. As a syndicator, you are a fiduciary for your investors. They are your boss, and your goal is to maximize their returns, not yours.

It was so much easier in the beginning for us to focus on our needs, and what was best for the property. Some months, we deferred the cash flow to utilize for repairs. That may not fly too well with investors. The complexity of a syndication, with the legal documents, the capital raise, the investor relations, was also a huge hurdle for us in the beginning. That being said, we have had countless Jake & Gino students syndicate their first deal with the guidance of our Wheelbarrow Profits Academy and our coaches. Please do not underestimate the hard work that goes into executing the steps throughout a syndication.

In this part of the cycle, Internal Rates of Return have diminished, and it is becoming more challenging to find deals that will generate an appropriate return for investors. It doesn’t mean that they aren’t out there, they just aren’t as prevalent.

One of the biggest cons for myself and Jake is the nature of the syndication model. Remember, our goal is to buy these assets for the long term, generate cash flow, and take advantage of the tax benefits. One of the biggest ways a syndicator gets paid is on the back end. What does that mean. They generate the majority of their profits when they sell, and split the proceeds with the investors. Sometimes, we take months and months to find an amazing deal. We do not want to kill our golden goose by selling. You may be forced to sell prematurely in a syndicated deal if you have achieved your returns for your investors.

This leads me to my last con. When we buy a deal by ourselves, there is no sharing of the profits. They are all ours! Our mantra has been to build us as much equity for ourselves as possible. We live by the saying “Transactions pay the bills. Equity makes you rich”. With a syndication, your limited partners get paid first, and they receive the majority of the profits.

Also read:

As you reflect back upon the words you have just read, my hope is that you become crystal clear with what your goals are, and what you are trying to accomplish long term. To some of you, syndication is a no brainer. And to others, syndication may not be the right fit for your business model. If you want to learn more about syndication, visit our YouTube Page.

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What is Multifamily Real Estate Syndication

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When Jake & I began our investing career, we only knew of one way to buy real estate. Buy it by yourself! We had never heard of syndication, and to be fair, over ten years ago, the economy and the real estate market were a bit different. Those were the days of 1% GDP growth, low rents, a difficult environment to raise capital for investments, and deals that languished on LoopNet for months and months. Oh, do I miss those days.

Seriously though, the strategy of syndication received a huge jolt from the JOBS Act (Jumpstart Our Business Startup Act) of 2012. The intention of this act was to allow funding of businesses in the U.S. by easing some of the security’s regulations. This is the impact of the JOBS Act from Investopedia:

It lowers reporting and disclosure requirements for companies with less than $1 billion in revenue and allows the advertising of securities offerings. It also allows greater access to crowdfunding and greatly expands the number of companies that can offer stock without going through SEC registration.

You can see the effect it has had on syndication, and multifamily in general. An explosion has taken place over the past decade, which has allowed the average investor to partake in the gains in multifamily.

Before we go any further, let me define to you what a syndication is. Let me turn to Investopedia again, as they have the most succinct and accurate definition:

A syndicate is a temporary alliance of businesses that joins together to manage a large transaction, which would be difficult, or impossible, to effect individually. Syndication makes it easy for companies to pool their resources and share risks.

In effect, you are pooling your money and your investor’s money to be able to invest in bigger deals than they could afford on their own. It is a fantastic way for an investor with limited capital to invest in larger deals.

Watch the video version: “What is A Syndication”

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You can also look to the Howey test on the legal definition of what is a syndication in the eyes of the SEC (Securities and Exchange Commission). The Howey Test refers to a U.S. Supreme Court case to determine if the transaction qualifies as an investment contract, and if it does, then it is considered a security and subject to the rules of the Securities Act of 1934. In this case, the Howey Company sold tracts of citrus grove to investors, who leased the land bank to the company. Howey was in charge of the groves, taking the role of what we consider the sponsor. The company did not register with the SEC, and the court ruled that this transaction qualified as an investment contract. More importantly, the Supreme Court created criteria to determine what is an investment contract:

An investment of money
In a common enterprise
With the expectation of a profit
To be derived from others

(Thanks again Investopedia)

If you are partnering with others, taking their capital, and performing all the work while the partners are passive, be careful. It appears that you are creating a syndication and need to register with the SEC. The only way to be sure is to schedule a call with an attorney who specializes in securities law. At Jake & Gino, we use the services of Kim Lisa Taylor. Always seek the guidance of licensed professionals when dealing with law and taxes.

Who are the parties involved in a syndication? A syndication consists of a sponsor and investors (limited partners). The sponsor is the party that has the experience, puts together the deal, manages the deal, and signs on the debt. They typically put up between 10-20% of the equity. It may seem a bit unfair that they put up so little capital and receive a sizable portion of the equity, but remember. They are the ones who are managing the deal, and assuming most of the risk. The syndication is generally set up as an LLC and the limited partner owns an interest in the LLC.

The sponsor typically gets paid an acquisition fee, a percent based on the total price of the deal (typically between 1-3% of the deal). For example, if the deal is purchased for $5,000,000, and the syndicator charges a 3% fee, then the acquisition fee would total $150,000. Not a bad pay day!! In another article, I will dive deeper into other ways sponsors get paid.

The investors are referred to as limited partners, and their risk is limited to the investment they make in the deal. They are normally passive, meaning that they invest in the deal and rely on the sponsor for managing the deal.

Some of you may be saying the limited partner is not getting compensated enough. I want to introduce a term to you that has changed my paradigm on this statement. I always thought the fees and structure always favored the sponsor. Not anymore!

ROE= Return on Effort

I agree that the syndicator gets compensated generously, but there is a ton of value to an investor who doesn’t have the time or expertise or capital to invest in their own deals. The limited partner has very little effort in this deal once it’s funded, and can focus his efforts elsewhere, while receiving mailbox money.

Three other terms that are extremely important that I would like to touch on are the preferred return, internal rate of return, and the sponsor promote.

Preferred Return:

With a preferred return, the limited partner is entitled to a certain return, before the sponsor begins to receive compensation. This preferred return is also referred to as a return hurdle. Preferred returns have been averaging between 6-10% the past few years. What this means is that the limited partner receives all of the preferred return before profits are split with the sponsor. For example, if the preferred return is 8%, and the deal produced a 9% return for the quarter, the limited partner receives 8 of the 9% of the profit, and then the remaining profit is split up as per the agreement that was signed amongst the two parties.

Sponsor Promote:

Once the preferred return is met, profits start to get split between the limited partners and the sponsors. The piece that goes to the sponsors is called the sponsor promote. The sponsor promote is based on a couple of factors, including the experience of the sponsor, their track record, and what the market is bearing.

Our deals have been structured as a 70/30 split, 70% of the profits going to the limited partners and the remaining 30% going to the sponsor. For example, if our “pref” rate was 8%, then the limited partners would receive the 8%, and the remaining 4% would be split 70/30 between the limited partners and the sponsor.

Many deals are created with what is called a waterfall structure, where the sponsor receives a larger return based on the performance of the asset. As the IRR (we’re about to get to IRR) increases, the sponsor’s returns increase. You may be saying “Why complicate things?” This is an excellent way for the limited partners to incentivize the sponsor to perform on the deal. Win-win for both sides! The limited partners get paid more, but so do the sponsors.

Internal Rate of Return (IRR):

IRR, simply put, is the annual rate of growth an investment is expected to generate, and combines profit and time into one formula. The key is that it takes into effect the time value of money. We could write an article dedicated solely to IRR, and would barely scratch the surface. It is what the vast majority of limited partners will ask when pondering whether to invest in your deal or not. Internal Rates of Return in the low 20% were common back a few years ago, but as cap rates have continued to compress (go down) and pricing has accelerated, most sponsors are now targeting around a 12-15% IRR.

In the next article, we are going to dive into the pros and cons of syndication. We are also going to focus on your goals as an investor and if syndication is the appropriate strategy for what you are trying to accomplish.

It is important to understand that syndication is only one of many strategies when investing in multifamily, and the more “tools” (strategies) you have in your toolbox, the more likely it is that you will find a way to close your next deal.

To become an investor with Jake & Gino, click HERE to sign up to receive more information.

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Want to Protect Yourself On a Master Lease Offer? Do Your Due Diligence.

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The following is adapted from Creative Cash.

When you use creative and seller financing (CSF), which is a non-traditional or creative way of buying land or property, there’s a higher level of risk involved for you. This makes conducting accurate due diligence (DD) on a property and seller just as important as analyzing the financial data.

You’ll want to do your DD as if you were buying the property and paying all cash. After all, if you were about to spend that much of your hard-earned money, then I imagine you’d want to know what you were buying, right? The DD for a Master Lease Offer (MLO) deal is no different.

I’m going to show you how to conduct DD on all items from the seller to the existing mortgage on the property. Your DD into the MLO is a crucial part of the deal if you don’t want to be left with an expensive mistake.

Once the Offer Is Accepted

Once the offer is accepted, then the real DD starts. My suggestion is to do as much “free” DD as possible before you start spending money. What is “free” will be different for each deal, so start by making a list of DD items to be accomplished, ranging from the least to the most expensive.

In some cases, walking the property and looking at the condition of the area may be the cheapest step to start with, but if the property is in another market or state, then that may need to be placed further down the list. Keep in mind you want to spend as little money as possible until the offer process is much further along and the deal is more likely to close.

Record the Contract

The MLO contract must be filed with the court system at the time of your signing. This is called recording the document. You will add the MLO contract to the title documents in the legal system. The point in doing this is to “cloud” the title.

By recording the document, anyone who pulls the title to this property will find your MLO contract. This prevents the seller from selling the property without you knowing it.

When the next buyer/attorney researches the property’s deed, they’ll find the contract and it will prevent the sale. If the document is not recorded, it will not be found. This is an extremely important part of the MLO process and protects your interest in the deal. This is yet another reason to have a local attorney involved in every step of an MLO deal.

Loan Review

Before you sign the MLO contract or give any option money, have the seller disclose all the loan documents as part of your DD work. A seller cannot give interest in a property they don’t have.

When you review the loan documents, look at the time frame for the loan. If a seller has a loan for 2 years, they can’t give you a master lease for 4 years. This would be giving you interest in a deal they don’t have.

Loans do renew but not always. Don’t let the seller give you a time frame for your MLO that extends past the terms of the loan.

If the bank doesn’t renew the loan, then the seller must refinance elsewhere. If they don’t, the property will go into foreclosure, which overrides your MLO contract and you will lose the deal. You also need to look at the term of the loan and make sure it gives you a long enough time period to do what you need to accomplish, such as working on renovations.

Also, look at the terms, such as the monthly payment and escrow accounts. Make sure the numbers you originally analyzed are the real numbers. Defeasance for prepayment penalties is something else to keep in mind when looking at loan documents.

Some loans have prepayment penalties if the loan is paid off early. If you plan to exercise your option to purchase and pay off an existing loan as an exit strategy, this may be an important factor. A prepayment penalty has to be paid from the owner’s profits, or it could raise the cost/price of the deal. This is something to negotiate into the option price if the penalty exists.

When You Shouldn’t Do a Master Lease Option

Here are some situations you may encounter in the DD process that are major red flags and that indicate you should not do an MLO deal:

A property won’t ever cash flow. Some properties will never make money simply because the seller paid too much. Don’t assume someone else’s problem unless the work will be profitable.

The property is too big for you. Don’t do a deal that puts you on a property that is far above your level of experience

The seller doesn’t have a clear title. Don’t do an MLO with a seller who cannot show you a clear title. They may not have the right to enter into the MLO with you.

The terms of the existing loan are too short. Don’t do an MLO if the underlying loan term doesn’t give you enough time to complete your exit strategy.

You can’t identify a clear-cut exit strategy. Don’t go into a deal when you don’t have a great plan to get out of it. Identify your exit strategy early in the analysis process.

Anyone who has experience in multi-family real estate will tell you that most of the work in this business consists of finding good deals. If you add creative and seller financing (CSF) to the mix, a non-traditional type of financing, it becomes even more complex.

Position Yourself for Success

Begin your DD with the seller. Why are they selling? What is their plan B if they don’t accept your offer? How can your offer solve their problems? If cash is the only reason a seller is willing to sell, CSF probably won’t work. Look for distressed owners.

Have an attorney clear the title before executing a CSF contract. You need to make sure the seller has the right to commit to the offer.

You also need to do a full inspection on any property if you are getting a CSF. Act as if you are paying cash or getting a loan.

With these tips you’ll be better positioned to make your MLO a success. Now is not the time to cut corners. When you do your DD, you’ll protect yourself and your interests.

For more advice on doing your due diligence, you can find Creative Cash on Amazon.

What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company. With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.

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How to Find Good Multi-family Real Estate Deals

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The following is adapted from Creative Cash by Bill Ham (author), Gino Barbaro (contributor), Jake Stenziano (contributor).

Anyone who has experience in multi-family real estate will tell you that most of the work in this business consists of finding good deals. If you add creative and seller financing (CSF) to the mix, a non-traditional type of financing, it becomes even more complex.

That’s because you likely won’t find public-facing listings for the best deals. So, where do you find these deals? In my fifteen years of experience, I’ve found a number of sources that are reliable for good deals. It’s not easy, but using the right tools will help you find good multi-family real estate deals and maximize the efficacy of that work.

So, if you’ve been struggling with where to look, take heart! I’m going to share those tools and several strategies here to help you find deals and increase your deal flow.

Direct to Owner

Contacting owners directly works well with smaller assets and becomes less effective as you move toward larger assets (100+ units). Direct mail campaigns work great for single-family homes and have a decline in response rate (closer to 0 percent) as you move to larger assets.

I have sent thousands of letters and postcards in my career. Here are some tips for two types of direct contact techniques: mail campaigns and contacting owners directly.

Mail Campaigns

Automate these if you can. Get a list of names and addresses and outsource the mailing.

Choose a specific market. Don’t waste time and money randomly blanketing an area with mailings. Set mail campaigns to run in the background of your business. This should not take up more than 5-10 percent of your time or resources.

Also Read:

Contacting Owners Directly

Get a list of contact information for owners of buildings in your area. Call or contact them and simply state you are interested in buying their property. Building rapport with a potential seller is important, but once you have an owner on the phone, get to the point:

How much are you willing to pay? That’s all the seller will care about.

Before you call, look at comparable sales in the market and use an average capitalization rate (cap rate) for similar assets. Know what your numbers are before you reach out to sellers.

Be willing and able to give a reasonable price on the first call. You don’t want to call someone and throw out a low-ball offer. You aren’t making a full offer here; you’re simply letting the seller know what you’re willing to pay for an asset like theirs.

Networking

Good old-fashioned networking can be a great source for creative deals. I highly suggest you get involved in your local real estate clubs and meeting groups if you aren’t already. If there aren’t any good groups in your area, start one.

Most of these groups hold a “haves and wants” meeting where people can discuss deals they have for sale and what they are looking for. This arena is a great place to find potential sellers who may have deals they’re willing to finance for you.

When networking for creative or seller financed (CSF) deals, you must be more strategic than simply waiting for someone to stand in front of the group and offer you CSF. You need to listen for problems that could be opportunities for you. Listen for people complaining about a property they have. Listen for clues that indicate they are “burned out” with an investment property.

They may not be done with the real estate business in general, but they may have a headache property they’d like some help with. This could be an opportunity for you to get started. I suggest listening to people in your everyday life the same way. Listen for people complaining about rental properties they own. Burned-out landlords tend to be vocal about it!

An important note to remember: don’t start a conversation with an agent or seller by asking for CSF. Again, it’s okay if you don’t have money, but that’s not how to get a new prospective agent or seller to take you seriously. You need to let them know their distressed asset is a problem and that you can provide a solution.

From the Other Side of Sourcing

I have personally financed other people on distressed assets I didn’t want to deal with anymore.

I owned a 4-unit building in a high-crime neighborhood, which I had purchased when I was new to the real estate business. It finally cash flowed, but it required a lot of management attention.

As my portfolio grew beyond hundreds of units including large apartment complexes, it was no longer good use of my time to deal with this asset. I could have my managers deal with it, but that would have kept them from managing more profitable and productive properties. My larger complexes made much more than the small 4-unit building.

The way I solved my own real estate problem was by offering a master lease to a local church. This church used these units for a battered women’s shelter. The church was paying my mortgage, covering the monthly expenses, and managing the property. I was no longer creating cash flow from the property, but I still received the tax benefits of owning it and didn’t have to waste time and money dealing with it.

That church could have been an investor like you. If I had found another investor looking for a break, I would have financed that property to them in the same manner.

To reiterate, there are plenty of sellers who have problems or properties they don’t want to deal with. If you find these kinds of deals, you get to collect the cash flow. But it’s up to you to find sellers who are willing to help you help them.

Build a Reputation as a Problem Solver

Building a reputation as a problem solver in your market can bring you more CSF deals than anything else, but this will take some time. You need to close some deals and solve a few problems first. It’s not good enough to tell people about what you can do; you have to show them. Once you’ve done about three to five deals, make sure you get the credit you deserve.

This is when you go back to your networking. Start making more appearances at your real estate clubs. Offer to get up in front of the class and discuss the deals you’ve done and how you did them. You’ll instantly be elevated to “expert” status. People will talk about you and how you did those deals. Word will eventually get around to sellers and agents, and they will start calling.

At one point, I had an agent bring me a large commercial apartment complex and suggested I make an offer of a master lease with an option to purchase. He knew my reputation for solving problems with creative financing. As a result, I took control of a $5 million asset with only $25,000, all because I had solved problems for other sellers in my market.

Think you can’t afford to invest in multifamily real estate?

Now, you can! Discover the best-kept secrets of the 2 creative, effective financing strategies other investors don’t want you to know about: Seller Financing & Master Lease Options. Your trainers Bill Ham & Jake & Gino have utilized these two strategies to acquire over $20,000,000 in real estate!

In fact, Bill used these strategies to buy his first 400 units without ever stepping into a bank or qualifying for a loan. Learn more in the MasterClass:

Now You Know Where to Look

Finding deals is the hardest part of the real estate business. If finding deals were easy, you wouldn’t be reading this. My hope is that sharing some of my favorite deal sources—along with the mindset it takes to increase your deal flow—will give you a newfound sense of direction and momentum. Because once you get rolling, other people will start to take notice.

For me, it all starts with mindset. You might find good deals here and there, but things really take off once you develop the kind of reputation I talked about. To do that, you need to take on a problem solver mindset. It’s an essential long-term strategy for finding good deals.

For more advice on increasing your deal flow, you can find Creative Cash on Amazon.

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The Three Characteristics That Every Investor Looks For A Successful Investment & Why Multifamily Nails All Three

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Consumers nowadays have the option to invest their hard earned money in countless investments, ranging from crypto, to real estate, to stocks and bonds and commodities, and what may seem like a great investment to the novice investor, may in fact be a speculative selection. How do you choose which is the best vehicle for your money?

What I am going to discuss in this article is what characterizes a quality investment, and how multi family real estate passes the test with flying colors.

The three characteristics that every investor should be focused on are:

Leverage
Liquidity
Control

Now obviously, there are numerous characteristics, but these three traits are, in my opinion, what sets apart a superior investment from a mediocre one. Let’s dive into the three traits and how multifamily possesses them all.

1.Leverage

Leverage is the rocket fuel to creating massive wealth. There are very few investments where you can invest as little as $150,000 in capital and control a $1,000,000 asset. Try asking your financial advisor to extend you this type of leverage. I guarantee the next thing you’ll hear is a click on the other end and your phone line going dead.

You receive all of the benefits, even though you may have only 10-20% of capital invested for the entire investment:

Cash flow

Tax benefits
Appreciation
Economies of scale
Principal pay down.

Why would a lender require a small down payment to acquire real estate? Simply put, the buyer is acquiring a revenue stream that covers the expenses of the property and throws off excess cash flow. The bank feels safe and protected with real estate. Real estate is one of the very few assets that enjoys this massive opportunity.

This is an added bonus with the current economic climate that we are entering. The government is printing money like drunken sailors, and this increase in the money supply is referred to as inflation. Inflation ultimately leads to an increase in prices, and an erosion of the value of the dollar. Inflation allows borrowers to pay lenders back with money that is worth less than it was when it was originally borrowed, which benefits borrowers tremendously.

Bottom line: Multifamily real estate allows the investor to control more assets with less of his or her own capital, which will lead to an explosion of wealth when those assets appreciate.

Just be careful! Leverage also works in the other direction as well. If you lose money with an investment, those losses will be amplified with leverage.

Liquidity:

Initially, real estate falters on the second criteria. But, as you will see, if you have the patience, real estate offers a unique way to access liquidity from your investment. So how do we tap into the equity of our property? The strategy is called cash-out refinancing, and it is one of the main reasons why we have been able to scale our portfolio quickly and with little to no capital of our own.

A cash-out refinance is when the bank pays off your old mortgage and issues you a new one, based on the current value of the property. We have been able to refinance over $11,000,000 from our portfolio, and “roll” the proceeds into the next investment. We call it our Refi & Roll strategy.

Another huge benefit is that the loan proceeds are not taxable. You are taking out a new loan with a larger balance and you must pay it back (with interest) over time. So there’s no income tax to worry about when you refinance the property. As my old man used to say,

It’s not what you make. It’s what your keep.

It may take a bit of time to access your liquidity, but the tax benefits make it worth the wait! Once you cash out your initial investment, you are in effect playing with house money. You have no more if your own money left in the deal. In addition, we have been able to cash out more than our initial investment on all of our cash-out refis. And the best part is that we still control a cash flowing asset that will continue to pay us.

Control

At Jake & Gino, our motto is that we create multifamily entrepreneurs. And what do most entrepreneurs crave? Control! Multifamily gives the investor control in so many different facets, such as:

Increasing rents
Decreasing expenses
Creating and executing the business plan. (Try walking in on the board of Apple and asking them if you can take over their operations. You are at the whim of management when you invest in publicly traded companies).
Selling
Refinancing

You are the decision maker, and have control over the performance of your asset. Multifamily real estate offers the owner an economy of scale that crushes investing in single-family homes. We love the fact that we have larger buildings with more tenants under one roof, versus having multiple single family homes scattered about, which increases the management and expense burden.

If we have a vacancy in one of our complexes, chances are that the rest of the tenants can pay the mortgage. We are limiting our down side risk by having more tenants. A vacancy in a single-family home equals no rent that month, and guess who’s on the hook for the payment?

You can run your apartment complex like a business and scale up operations by hiring full time employees. My true success came when I stopped unclogging toilets and hiring full time maintenance to handle day-to-day operations. I was able to focus on managing the asset and buying more property.

Another amazing benefit that can’t be overlooked is the tremendous tax benefits. The government, in their infinite wisdom, realized there was no way they could provide adequate affordable housing. The solution was to provide huge incentives to real estate owners to step in and get the job done. Depreciation is an enormous tax benefit to real estate investing, especially when it is coupled with a cost segregation study.

Depreciation is basically a non-cash expense that allows owners to take a deduction on the income collected, thus lowering your tax obligation. I love the idea that my asset is appreciating while I get to depreciate it for tax purposes.

The government also allows owners to employ cost segregation studies, whereby the owner identifies personal property assets that are grouped with real property assets, and separates out personal assets for tax reporting purposes.

What does this mean? You are accelerating depreciation on many items from 27.5 or 39 years and reclassifying them to a shorter time period, as short as five, seven or fifteen years. You are writing off a larger portion of your depreciation expense and realizing more losses quicker.

Listen to Rich Dad’s advisor Tom Wheelwright discuss the enormous tax benefits associated with investing in real estate.

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Let me recap why multifamily is a superior investment when compared to other asset classes:

Leverage
Liquidity
Control

In addition, these traits add to the attraction of real estate:

Scalability
Economies of scale
Amazing tax benefits

At Jake & Gino we say there are three basic human needs:

Food
Clothing
Apartments

Not only is multifamily an amazing investment, it is also a basic human need. We still haven’t found a way to buy it on the Internet, like you can buy an appliance on the Internet. People need a place to live, and demographics are showing that renting is becoming a much more attractive solution for millennials and baby boomers.

I would love to hear what metrics you look for in an investment. Please leave me a comment down below.

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