We asked Jimal Gilbert, Jake Parker, Marco Cesario, Aaron Sklar and Noah Birk to share their best advice for first-time apartment investors. According to our brokers, here’s what you need to consider before making your first multifamily investment:

 

It is nothing like buying a house

“Buying an apartment is different from buying a house in the sense that banks will focus more on the asset or the financial stability of the property when you are buying an apartment building versus the financial stability of the borrower.” – Jimal Gilbert

 

“Buying a house is almost entirely based on emotion whereas buying an apartment building is based on financial goals or more specifically about how much income the property will produce over time. A home buyer would look at a scuff on the wall and want a credit but that minor of an issue in an apartment building is common and easily fixed without much thought.” – Jake Parker

 

Learn the lingo

“Financially speaking, an investor needs to understand what certain terms mean and the following are  just as a few you should get familiar with: Gross Scheduled Income, Vacancy & Credit Loss, Fixed and Variable Expenses, Net Operating Income, Cap Rate (Capitalization Rate), and Cash-on-Cash return.” – Marco Cesario

 

Understand how deals are underwritten

“There are many metrics that go into evaluating the apartment investment from the simplest of price per unit and price per square foot to GRM, also known as gross rent multiplier, which is the price divided by the gross rent, or cap rate which is the gross income minus expenses, then divided by the price.” – Jake Parker

 

Know where to look for properties

“There are multiple ways of finding apartment buildings for sale. One source is Loopnet, an online platform for commercial real estate listings. It’s also a good idea to get in touch with a local brokerage like Kiser Group. Get on their email broadcast list and look at the inventory on their website. If you know what area you would like to invest in, find out which broker focuses in that area and get in touch.” – Jake Parker

 

Build a network to work with you on your investment 

“It’s best to have someone you trust to help with every step of the buying process. A broker will not only help you find a building, but also make introductions to local attorneys to help draft a contract when you find a property, a lender when you are under contract, a contractor if you need a quote on a potential rehab, as well as a management company if you decide to use one. Having a rolodex of help to get through the process makes it much easier to complete a transaction.” – Jake Parker

 

“I recommend Interviewing 2-3 lenders or mortgage brokers before you decide who you want to work with. It’s not only who will give you the best terms, which is still important, but it’s about how they will work with you and how it will benefit you as an investor as you build a relationship with the bank for the long term. Also, I recommend finding an accountant who is familiar with investment properties to help you understand what your write-offs are and how to report your expenses when it comes time to file your taxes.” – Marco Cesario

 

Make yourself an attractive buyer

“Sellers may or may not receive multiple offers on their property. While pricing is usually the more desirable part of a contract to a Seller, the terms and the financial wherewithal of the buyer are just as important, too. The Seller will want to make sure a Buyer is a ready, willing and able to close buyer. With that said, it is very important to have your financial and credit worthiness predetermined/pre-qualified with your lender before you go shopping (sort of speak). Chances are, a Seller will want to see either Proof of Funds (POF) or a letter from the institution. So, be prepared to offer these documents when they are asked. Furthermore, I would even recommend submitting them with your offer… be proactive.” – Marco Cesario 

 

Write a business plan that matches your investment goals to an acquisition strategy

“This process will help you understand what your short term and long term goals are with the investment. You will need to determine what your yield expectations will be and/or how long you want to hold onto the property. Generally speaking, if you are seeking higher returns, then it tends to be a high risk i.e. more management requirements or more turn-over, etc. The “higher return” also could mean that an investor’s goal is only on a “Cash Flow” basis, where the “Cash on Cash” returns will be very important to them. On the other hand, an investor’s goal will be to hold onto the property long-term and is expecting the property to appreciate over time. In this scenario, the returns tend to be lower, but there is less of a management risk.” – Marco Cesario 

 

“There are a lot of factors that go into being successful after a multifamily purchase. Value-add deals have higher potential returns because there are more variable risk factors to consider. If you can limit your potential downside by limiting costly (often unexpected) physical repairs and management issues, your investment returns become more predictable. As such, I typically advise first time buyers to look for something a little more “turn-key”. Once they get the hands on experience of owning a “turn-key” apartment building, they will hopefully have developed relationships and tools that improve the probability of success if they decide to pursue a “value-add” deal next.” – Noah Birk

 

“If you have a set it and forget it mentality of not wanting to worry about the property, a stabilized turn-key investment would be best. If you want to be more hands on and add value through renovations by adding bedrooms, updating kitchens or baths, then you should look for a value-add deal.” – Jake Parker

 

Determine if you will self-manage the apartment building or hire a property manager

“If I were a first time investor in apartment buildings, I would not hire a property management company for my first deal. I think the experience you gain from directly managing people (tenants) as well as managing operations and expenses  is invaluable to the savvy investor looking to scale his portfolio.” – Jimal Gilbert

 

“I always encourage people to hire a property manager.  Even in the event you’re local and want to really learn the industry with boots on the ground, it’s best to follow your manager around and learn the trades from an experienced party.  Learn what to do, and even more importantly, learn what ‘not’ to do.  Oftentimes, small and minute issues can become large problems when not handled properly.  In many circumstances, ‘learning mistakes’ are avoidable when handled properly by a seasoned and professional property manager.” – Aaron Sklar

 

“This also comes down to how involved you want to be. There are a lot of headaches that can come with managing a multifamily investment yourself including weekend calls about plumbing issues or complaints of a neighbor and anything in between. A management company takes care of all that but at a cost. Make sure to assess the pros, cons and costs of each to see what is best for you.” – Jake Parker

 

“You have to evaluate what you are able to manage within your means and within your threshold. If you plan on self-managing, great. If not, then interview at 2-3 property managers and understand what they charge, and what they expect of you as an owner.” – Marco Cesario 

 

Find a mentor

Find someone who has a track record investing in apartments and learn everything you can from them first, and see if they will help you get into your first deal. That time tested experience of a seasoned investor goes a long way in avoiding common pitfalls of first time investors like over leveraging or over exposing yourself on your first deal. This partner or mentor will also have relationships with brokers, banks, etc. that you can use to your advantage.” – Jimal Gilbert

 

Kiser Group is Chicagoland’s leading multifamily brokerage firm. As the leader in our space, we provide multifamily expertise to help our clients maximize value in their Chicagoland real estate investments. Get to know our brokers here: https://kisergroup.com/about-us/.

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