There are many challenges in multifamily investing, but depending on the type of investor you plan to be there are larger challenges that typically keep investors from getting their first deal done.  Seth Godin wrote a book called "the dip" that articulates how to view these large challenges. 

Excerpts from Seth Godin’s book:

·        The Dip is the long slog between starting and mastery.    

·        Organic chemistry is the dip for pre-med students.

·        The dip creates scarcity and scarcity creates value. 

·        Biggest mistake in school is being well rounded is the key to success. How often do you look for someone who is good at things you don’t need them to do? We reward the exceptional.

·        Successful people lean into the dip, they push harder, and are rewarded by the marketplace as being the best in the world.

·        While starting is thrilling, it is not until you get through the dip that your effort pays off. If you are not able to get through the dip, you must quit.

Now that you know what the Dip is, let’s see how it applies to the 3 ways of investing in multifamily (Independent Rental Owner, Lead Investor, and Limited Partner). This article will look at the biggest dip for each type of investor and how to overcome them. 

Independent Rental Owner- Independent rental owners are individuals with strong balance sheets looking to own their own properties without partners.

The Dip: Creating the Balance Sheet

Saving enough money with your "day job” so that you have enough money on your own for the down payment and qualifying for the loan (net worth and post-close liquidity). Assuming you want to buy a deal that can be managed with full-time leasing and maintenance you typically need 75-100 units minimum. If you want to buy 100 Class C units in DFW today, your purchase price will be approximately $5,000,000 ($50K/unit). This would mean you would need $1MM for the down payment and approximately $400K in post-closing liquidity along with a $4MM net worth.

Overcoming the dip:

Most of the independent rental owners I work with started and sold companies, own multiple businesses, or are highly paid professionals such as doctors, lawyers, or corporate executives. Some independent rental owners started as a lead investor or passive investor and created enough capital through investing in real estate that allowed them to transition to an Independent Rental Owner. The benefit of moving into Independent Rental Owner from lead or passive investor is: you make all decisions, you answer to no limited partners, you can utilize a 1031 exchange, and your beneficiaries inherit the property at a stepped up basis.     

Lead Investor- Lead Investors put deals together by leveraging other people’s money and 3rd party property management to buy larger multifamily properties.

The Dip: Finding deals and Raising Equity

In order to get multifamily deals under contract, the listing brokers must know you personally and know that you can close. The first deal is the hardest one to get done because you have no track record. After you have the deal under contract, you have to raise equity for the down payment. While raising equity the past few years has been relatively easy, this was a real challenge in 2008-2012,   

Overcoming the dip:

In every market, there are 20% of the brokers than sell 80% of the deals. You must begin to build relationships with these listing brokers and start to make offers. It is a numbers game: You underwrite 100 properties, go tour 20, make offers on 10, and you get one. After that deal closes you do it again. 

Equity comes from relationships. You can join real estate investing clubs, you can raise money from friends and family, you can raise money from private equity companies. Every group has its pros and cons, but it all starts with building trust and connection between 2 parties. If you want to be a lead investor, you need to start building your investor database and add to it every week.

Limited Partner (Passive Investor) - Limited partners can achieve truly passive income at a slightly lower return with diversification across multiple properties, general partners and markets.

The Dip: Learning how to underwrite multifamily and finding general partners that you trust

Most people go to school to learn how to become a doctor, lawyer, or accountant. Many people do not know how to underwrite a commercial real estate property, thus the first step in becoming a limited partner is understanding the fundamentals (NOI, Cap Rate, LTV, etc.). Once you become educated, it is time to go find general partners who you trust and are accepting limited partner investments. Most general partners will only work with accredited investors ($1,000,000 net worth excluding your personal residence or $200K annual income individually or $300K annual income jointly). This creates another dip as only a small percentage of the population is accredited.

Overcoming the dip:

You must get educated in multifamily real estate either through a mentorship program or educational classes. There are many great educational investment groups that will teach you the fundamentals, join one and start learning from experienced professionals.

If you have an existing network in commercial real estate, you can go direct to general partners who are syndicating transactions and get on their list for future deals. Typically these general partners want you to be an accredited investor. If you do not have these connections, you will have to join an investment club where lead investors are putting transactions together. Typically the lead investors in investment clubs will have a limited numbers of non-accredited investor positions in their syndication in order to abide by SEC regulations. 

No matter which investor you are looking to become, there are dips involved in all of them. The reason that real estate investors push through the dips in these respective roles is to earn larger returns and have more control than investing in a REIT or the S&P 500.