Made $1.5m profit in markets - Taking This And Starting Multifam Real Estate Shop

Hey everyone,


Made a good chunk of money ($1.5m net after taxes) in the crypto markets and taking that to free myself from the 9-8 (3rd Year associate at REPE fund focusing on multifam). Starting my own RE shop, looking to start with light value add/value add multifam acq deal, sized ~ $5m-$10m. 90/10 equity split so putting up anywhere from ~$150k to ~$300k. Anyone have experience in doing their first deal? Any pointers/anything to look out for? Any standard deal points (ex. 1% acq fee, 2.5% management fee, etc). Going to probably keep the partnership splits pretty simple 8% pref pari passu, then 60lp/40gp. Thank you. Appreciate anyones insight in advance. 

 

Thanks for the reply and input. I've looked at that also but just seems like these smaller deals (2/4/6 units) just don't scale well / what you're actually making from CF (if it is even producing annual yield) is just so small in terms of chunk $$ that it doesn't even seen worth it. Having said that, I think the real benefit of doing a smaller deal like that at first is to get your feet wet and use it as a learning experience so I definitely think there is some merit. 

 

This, you can utilize 1-4 unit leverage ratios that are impossible to get in commercial lending.  Also it reduces risk while you learn how to execute on the business plan.  The most important thing that is overlooked is management.  Learning HOW to properly manage assets is critical to being successful in real estate. 

 

A solid lender would be comfortable with a loan amount equal to 1x Net Worth. Once you get bigger and look for top-tier debt, it will be 2x Net Worth.

Since most people don’t meet this metric, they bring in another guarantor (or two or three) in order to meet the threshold. 

“Bestow pardon for many things; seek pardon for none.”
 

Where geographically are you trying to find deals in? Have you considered other asset classes other than multi-family? You might find better returns in retail shopping centers if you know how to add value. 

 

As everyone knows, multi just so hard to make work right now. Everything is negative lev and sellers haven't budged on price. I mean any deals work at a certain $$ so maybe it's just a function of negoatiating hard to get the price that makes the UW work. But nothing has really jumped off the page as i've been looking

 

In regards to the guarantor, I always thought that lenders require you to have a net worth of at least the loan amount. If you don't meet that requirement, they want a guarantor who does. Verify with a lender but I think most lenders would need this requirement.

 

Well, if 8% was the first hurdle when the 10 yr was at 2%, and now is at 4.25%, then logically you should expect something like a 10% hurdle.

Why someone is investing with someone who has no track record and is in an inherently risky deal at 8% when they could be in a risk free asset that returns half that is the question.

 

fees/splits seem very aggressive for starting out with no track record.  I charge 0% acq fee, 1% asset management fee (on property EGI, not invested capital), and an 80/20 over 8% on the first deals i raised money on.  Totally depends on what investors you find and how quickly/easily you want to raise money though.  I also self manage and pay myself a slightly below market rate PM fee which ends up being about $100/unit/month (3rd party PMs charge less per month but take a full month rent as a leasing commission).

many quality multi loans are going to require net worth equal to loan amount from you or a partner even for non-recourse.

You should strongly consider continuing to work while finding/managing your first deal, especially because it could take a long time to make your first couple purchases.  It would be a shame to quit your job to pursue this and then go 12+ months without closing on anything, and you'll feel pressure to overpay for something to get going and start off building your track record on the wrong foot.  The first couple months from getting a deal under contract to closing and learning the property and executing initial repairs/renovations is pretty hectic, but afterwards it only takes like 2 hours/week to manage a deal and you can easily do it while working full time.

 
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small mixed use property, some units on top of retail.  light physical value-add, lots of mgmt value-add (previous owner was very incompetent and checked out).  Probably underwrote ~60 deals and submitted offers on ~10 over about 12 months before actually getting one under contract, which I got off market from a broker who I kept losing out on deals to but he liked me so sent it over directly hoping to finally get me one (seller cared more about closing ASAP than price).

The apartment interiors were B/C quality and I actually have barely renovated them since there's strong demand for cheaper units with all the new supply being A+ luxury stuff that a lot of locals don't want to pay for.  I'm also near a hospital and frequently rent them on 3-12 month furnished leases for big premiums to travel nurses and residents which few other landlords in the market provide.  Front facade was very ugly and borderline dangerously falling apart with a very crappy retail space that had sat vacant for years.  I completely restored the facade and sourced an excellent tenant who was willing to put a ton of their own TI $ into making the retail space beautiful and inviting.  My thesis was basically that I had strong conviction around achieving great returns from boosting apartment NOI and bringing in retail rent, but even if I fell short I'd still get decent returns and be providing a quasi-philanthropic service to the community by restoring a blighted facade and activating an abandoned retail space (lots of people have reached out to thank me for the work).  Put in 10% of equity myself and raised the rest from a single UHNW individual who bought into the thesis of monetary returns + community improvement.  Rising rates have prevented me from doing any juicy refinancing to hit the pref early, but the ongoing CoC is good.

As far as what I wished I knew, I already knew the high level things from my professional background like underwriting and submitting LOIs, accounting/bookkeeping, LLC mechanics and partnership structures, sourcing debt, understanding taxes etc.. but there are 1000000000000000 little things you simply won't know until you do it (especially if you self-manage), too many to even begin to summarize, but none of them are dealbreakers as long as your initial underwriting isn't already too thin.  I'd definitely start small so all these little surprises come up on <10 units instead of 20+ and overwhelm you.  After the first year or so I had everything humming along pretty passively with no surprises.

 

I would avoid Value add in LA as the existing laws make it damn near impossible unless you hold the projects long term 

Phoenix is going to be a blood bath for a while on the value add side

My advice is save your money and join a new firm where you learn better skill sets and then go off on your own

Buying older value add multi family is a path to no where and very played out  

 

appreciate it. Have really been thinking about just going to work a couple more years in a firm and then starting on my own. market just seems such trash right now to get any cash flowing investments going...could be good time to network brokers and possible capital partners while developing an investment thesis, but just seems like nothing pencils 

 
Rick Kane

I would avoid Value add in LA as the existing laws make it damn near impossible unless you hold the projects long term 

What are you thoughts about development in LA right now? I know of a solid site in an A+ market where I know other developers are cash strapped and can only offer JVs on the land, and it actually makes sense in todays pricing ($95-125k per unit depending on unit sizes/programming). 100% housing, 70-100 units / $50-70M project. Need to scrape the barrel extra hard to find co-GP partners for this but (here comes my projecting) the best time to look is when everyone else is looking away, which is right now… so interested to hear what others think about LA moving forward that actually invest here 

 

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