Foreign.

You're listening to the Master Passive Income Podcast Network.

Hey guys, Charles Seaman here with Erica McNew and we're hosting the Master Passive Income Multifamily podcast.

And if you want a commercial real estate success guide, you can text the word freedom to 33777.

So today we're going to be talking about a really interesting topic.

We know that a lot of our listeners started out as single family investors.

Many of them still invest in single family.

So we're going to talk about some of the key differences between investing in single family and investing in multifamily and why you might want to make the jump if you haven't done so already.

Welcome to the Master Passive Income Multifamily Podcast where we guide you to invest in commercial real estate with a special.

Focus on raising money from others to buy bigger and better deals.

And now here are your hosts, Charles seaman and Erica McCarthy.

News.

These myths will hold you back and become limiting beliefs if you don't debunk them.

So we're here to help you get through the limiting beliefs so that you know that you can do it as well.

Let's start with myth number one.

Multifamily investing is only for the wealthy.

Erica, do you have any insight on that?

I do not think so at all.

So you have a variety of different type of loans out there.

Some of my favorite loan products are the FHA for 3.5% down where you can buy up to a 4 Plex, live in one unit, rent out the other three and then another one of my favorite loan products is a VA loan for our veterans va.

Many people don't know this, but you can actually purchase up to a 4 unit with your VA loan.

So that not only do you have an owner occupied unit in your primary, but you already have income from three other units.

So the FHA and the va.

The VA is obviously no money down.

So it's a huge bonus product for our, for our veterans that I don't see enough people take advantage of.

I really love that one.

And then obviously to be able to purchase a fourplex with three and a half, three percent down, that's pretty significant.

You don't need to be wealthy.

You do need to have some savings.

So keep in mind that's definitely a great strategy if you're looking to go out there and do a house hack, which is obviously a very popular strategy in recent years.

You know, using loan products like that, like the VA loans, if you're a veteran, you know, different FHA programs, those can Be great resources.

And if you buy a four plex, you know, if you have three units that are occupied and paying rent, that means you're essentially living for free each month.

So you don't have a housing course.

And that, that saves for most people a lot of money that goes back into their pocket they can use for something else.

Absolutely, yeah.

And it allows people that have been diligent with their savings, you know, and diligent with their credit, that allows them an opportunity.

Say it's not a fourplex, say it's just a duplex.

That cash flow from that additional unit, it could cover half your mortgage on the property or more.

So, I mean, that's really significant to have that type of debt pay down on what is basically your primary residence.

So a lot of different ways.

It doesn't.

Doesn't mean that you have to be wealthy to get in.

Okay, so let's go on to myth number two.

Erica.

So we got needing prior real estate experience to invest in multifamily.

What's the reality you find here?

I actually find that you don't need experience.

You do, you do need to find people that have experience.

That's the key there.

So if you are somebody that doesn't have experience, but you want to invest in multifamily, for instance, you're somebody that can find opportunities.

You are able to find the property off market, you're able to negotiate with the seller directly.

You have an opportunity.

You have none of the money.

You have no experience at all.

But you know, you found something.

It's a beautiful.

That part of why I encourage these networking events so much is because by the time you've gone out there and found an opportunity, should you have created the right network around you of people that do have the experience to get the deal done, that can be your outlet.

In for no money, down for no money.

In.

You can get in on a really decent sized project just by being the one that found the opportunity.

That doesn't require any experience and it doesn't require any money.

Awesome.

So I definitely agree with a lot of those points.

You know, you need to have the right team around you in anything, right?

So if you gotta be successful, you gotta figure out who you need on the team with you.

And one of the things that's gonna be key there is understanding what you're good at.

You have to know what you bring to the table, what makes you unique, why people wanna work with you.

And then you need to go out.

There and find people that can fill those gaps for You.

So if you have the ability to go out there and source deals like Eric is saying, but you need somebody to go out there and oversee management, somebody to oversee construction or somebody to sign on a loan.

You have to find those right partners to fill the gaps.

Absolutely.

Myth number three, managing multifamily properties is overwhelming.

What do you think there, Erica?

If you hire the property management company?

No, it is not.

And that's another part of having the right relationships.

Again, one of my favorite books is Millionaire Real Estate Investor.

It really goes through in detail for multiple chapters on how to build the right work network.

The most important person on your team is going to be your property manager.

I can vouch personally as a real estate broker for 10 years now that I do not have the same scope of knowledge as a property manager on the rental rates of a certain property, whether or not it can rent or will rent.

Those are all things that you get from a property manager.

So that relationship in particular is critical to ensuring that you don't take on a full time job, but rather are passively investing in real estate.

Yes, very true.

One thing I would say, you know, kind of further touching on Erica's point.

You know, I always say the broker is the expert on anything sale related.

That's what they do.

They have expertise there, they know the market, they know what's happening.

The property manager is going to be the expert on rental items.

You know, they, they know what a property can rent for.

They know which areas you might not want to be in because maybe they're rougher areas.

Now again, different people want different things.

So if that's your thing, you can, you can do that.

You just got to make sure you're prepared to handle it.

You know, you got to find somebody who specializes in the type of property you're looking at.

If you're going out and you're buying a 300 a class apartment building, you're not going to be using a property manager who manages 5 and 10 unit C class properties because that's not going to be the right fit.

So you need somebody with experience and expertise to again, fill in the gaps that you might not have.

And that's going to go a long way both with getting approval from the lender to get a loan for the property and also to actually operate the property successfully.

So find who the right people and the right companies are that you need to be working with.

Ask other investors.

You can do this at networking events.

And you could also just do simple Google searches and figure out who are the people that you need to know on their side.

I completely agree.

And I will add to that that it's funny that sometimes I will actually help my investors find their buy box based on their work network.

So for instance, like I met a regional property manager for a company that does a large property management company out of, it's all in southeastern mostly Florida yesterday.

And he, I could tell hearing him on the phone, I'm like, this is somebody I want to work with.

And I turned around, was like, hi, how are you?

And got his information.

Turns out he was not one of the companies that my partner had interviewed for his larger assets in Florida.

So I've connected them now.

But one of my first questions is like, what will you manage and what will you not manage?

Right?

Because some, the thing is a lot of people think, okay, I'm going to go smaller, I'm going to purchase a 30 unit instead of 100 unit, for instance.

I'm going to smaller because it's one of my first times doing it.

And I encourage that.

That can be a really great strategy for many reasons.

And are you going to be able to get the right property manager that you actually want for this to be a passive investment on a 30 unit or will it require that you have more units?

And so also like, those relationships will somehow sometimes kind of amend the buy box, if you will.

So it's knowing who you're going to be working with ahead of time, being proactive in those relationships, that's part of why it's so important.

Oh, 100%, I agree.

Got to find that right fit.

Just keep that in mind.

Okay, so let's go on to the next myth myth number four.

Only big cities are good for multifamily investing.

So when we say big cities, that's, that's a pretty broad term.

But think of like a primary market like a New York or Los Angeles or Dallas.

You know, big markets like that that are really like the main economic hubs of the country.

Do you agree, Erica, that you need to be in one of those markets to be doing multifamily investing?

I agree.

You're absolutely.

For especially like you get into larger multifamily assets.

Part of when I went to start into multifamily last year in March, I, you know, first thing I did was looked at all of our inventory and got to know our inventory at a high level.

And I quickly realized why so many people love Charlotte, North Carolina.

We have a absurd amount of 100 plus store apartment complexes that you can purchase.

And not all markets are like that.

So we're very fortunate to be in a market like Charlotte.

However, when it comes to like, even like the single family resident opportunities that you'll have, those tertiary markets are insane sometimes.

So like I drove through Mississippi, going to Austin, Texas three times in 2022, and I stopped by Vicksburg, Mississippi in particular.

Houses were $80,000 a piece, renting at almost fourteen hundred dollars a month.

So that's, you don't find those type of cap rates in Charlotte, North Carolina right now.

So the tertiary markets, secondary markets are amazing opportunities, but depending on what product type you're buying for sure.

Yeah.

And that's really important.

You have to know the market and know what you're looking for.

So different markets are going to bring different things.

Right.

So can you invest in a primary market and be successful?

Absolutely.

Most times those markets are going to have more competition.

That means they're going to have higher prices, lower cap rates.

The benefits in markets like that is that even when cycles change, usually they don't get hit as hard as some smaller markets.

But it also means that you may have, you know, a lot more competition and you need to have a bigger checkbook if you're going to go out there and do deals there.

So being in secondary or tertiary markets, you know, you know, one thing a lot of people don't realize is how few primary markets there are really in the country.

There's maybe six or seven.

They're the biggest markets in the country.

Even markets like Charlotte, technically a secondary markets.

And there's still a lot of economic growth and a lot of economic diversity and vibrancy that, that keep people coming to these markets and then you get into tertiary markets.

I mean, I know a lot of people right now and even over the last year or two that have really been focusing on tertiary markets because there's just less competition and there's good and bad sides to everything.

Right.

So you have to figure out what you want.

If you want a built in buyer pool, then you go invest in a big market with more competition.

If you want a deal that's going to produce a little bit more cash flow, you're probably better off in a tertiary market because you're getting that cash flow from having less competition and less, you know, less price on those deals.

But the downside is if you eventually go to sell that property in the future, you're still going to have less, less competition.

So in the same, the same way it works you as a buyer, you may work against you as a seller.

So just Keep that in mind.

Something to be aware of.

Yeah, definitely agree.

Okay, so myth number five, multifamily is too risky for new investors.

What do you think there are.

I love multifamily because of scale.

So in my opinion, you have to be careful of vacancy rates.

That's what's going to like crush your cash flow equation.

So I think that multifamily allows you to mitigate your risk on vacancy.

You know, like you have a single family, you have trouble getting somebody in there for two, three months.

That's two, three months of you carrying a mortgage payment on that property without any cash flow coming in.

And that can be extremely detrimental on your annual operating expense, so.

Or on your annual P L.

So I think that even just a duplex, you know, you have vacancy on one side at least you have half the mortgage still being covered or more so I think that, that, that ability to scale.

And then also if you think about capital expenditures, you're going to have the roof, they see the windows structural.

You're going to have those things on every property that you have to look at.

And I love the idea of like, okay, I've, I've had to put on a new roof, but it covered all of the units.

Right.

All at the same time, versus like a portfolio, even of single family residences.

I put the roof on one, it cost X amount and it only covered one property and one tenant.

So that I think doing things at scale, if anything, it helps mitigate your risk.

Totally.

I agree with that.

Let's, let's dive into myth number six.

And this will be one of Erica's favorites.

The best deals are listed on the mls.

So I actually, I have, as funny as this is, I agree that some of the best deals are actually listed on mls, so, so I've done a lot of distressed properties.

Right.

I've done tax foreclosures.

I've dealt with a lot of title issues.

I've dealt with a lot when it comes to off market properties.

And what I have found is, especially when you're getting into multifamily, what you will find is residential agents that have commercial multifamily properties listed in MLS that should not have those properties and should not be the agent on those properties because they don't know what they're doing.

And typically if I find something like that, it ends up being highly negotiable.

And so I actually, I have a partner in Florida that even acquired as the general partner a $17 million multifamily asset.

120 doors that was nowhere except on MLS.

So I think that a lot of investors go off market, off market.

And yes, I agree going to a broker like myself is critical because I have the relationships in place already that allow me to have a flow of off market properties in any area.

And that is extremely valuable.

And at the same time, keep in mind that some of those properties are going to come with us pulling teeth to get documents out of the seller.

Some of those properties will come with title issues that they did not disclose upfront.

Right.

So some of those off market versus on market, like I find great deals in both categories, honestly.

So it's funny you mentioned that.

I've actually done a pretty even mix of on market and off market as well.

And I don't, you know, I'm not a believer that a deal has to be off market to make sense, but I think there are certain advantages to both in my experience.

What I've always found is that a deal that's off market usually has more hair on it and that's usually the reason it's not being brought to market.

And if you want to deal with more hair, then that's a good thing because those can be more attractive deals.

But that means you're probably going to have more heavy lifting, you're probably going to have a little more, a little more work on the front end.

But because of that, sometimes you get a cheaper price and a greater opportunity.

You know, if something's being marketed, you know, the way I kind of look at it is most times it's, it's already pretty.

You don't need a makeover.

It's something that, you know, it's, I mean, yes, you may still need some improvements, you may need some value add, opportunity, but it's not the ugly duckling of the bunch.

The off market ones can be more the ugly ducking, but also the opportunity.

So keep that in mind.

There's pros and cons to both.

Sometimes you want the nice clean property.

One of the, one of the things that I actually look for now is maybe a little different than what I did in the past.

I like properties that, that are pretty, that don't need a ton of work, they're safer, there's less risk.

So because of that there's a reason to look at those deals.

But it's all in perspective and depending on what fits your criteria.

And I will add to that and gosh, brokers would shoot me for saying this, but when another agent is involved, they have a duty to disclose material facts.

And if something is found on that property that was not properly disclosed of, or if we close on that deal and something goes wrong that should not have gone wrong.

Agents carry errors and omissions insurance.

And I always tell my investors, like, no, we don't want to have to pull on somebody's EO insurance, but if there's no broker involved on the other side and the seller is the one that has just misrepresented a bunch of things that weren't discovered until after closing, your recourse is to sue the seller.

And that's not going to be as fruitful for you, I promise, as being able to pull on an agent's EO insurance.

So that kind of, you know, insurance and thinking through those things, I think is also important.

It just makes for, like you said, a much cleaner, smoother process many times.

Yep.

Keep in mind, guys, I know we have different listeners that are looking for different deals on, you know, on the show here.

The MLS is really more for the residential market.

So when we're using that acronym, you know, you will find smaller multifamily properties there.

If you're looking for a duplex, you're looking for a four plex.

Yeah, the MLS can definitely be a resource.

Once you go into the commercial side, you don't really have an MLS per se, but the equivalent is just the.

The on market.

Lazy.

Yep.

And that's also why it's important to secure a great broker.

I look for properties on mls, costar, crexi, Loop Net.

I look for properties on other sites that I actually have AI scraping websites of different commercial development firms.

So, like, I look for properties through a variety of different sources because like you said, there isn't really a commercial mls.

So especially as you get into commercial multifamily, securing the right work team, including a great broker to help you secure options of properties is really important.

Okay, so then we have number seven.

You have to be hands on with every aspect of the investment.

You know, as somebody who's a control freak, I tend to be pretty hands on with most things, but you don't need to be.

And there's probably more effective ways to do it.

I'll let Erica talk about some of those because she's a little more, you know, tech savvy than I am and she probably delegates better than I do.

So, Erica, what do you find effective that people can use in this, in.

This area for being a little bit more hands off with your assets?

Right.

So, so how do we dispel the myth that you need to be hands on I just do it by choice.

I think that also goes back to your property manager.

Your property manager, the ones that you're interviewing, they should have the correct technology systems in place to make sure that it's a smooth process for your tenants and that you're mitigating the risk.

How they qualify those tenants is extremely important.

I think this, yeah, it really goes back to your work network.

Those are the people that are going to make this easiest for you.

Also including your contractor and your handyman.

There's going to be capital expenditures and repairs on every property.

And so having the right contractor and handyman to mitigate that, and especially if you're doing value add on multifamily.

So if you have a contractor coming in and doing value add and doing like interior construction on each unit, you definitely want to make sure you have the right people at that point.

Because going over on expenses, when you do it at stake scale, that's where you know it can mess up your entire cash flow equation.

So I think that your work network is really, really important to making sure the asset remains hands off totally.

And another way to do it, if you want to invest passively now, this would require having some money, but you could also be a passive investor in a syndication deal.

So if you do that, you know, it's a pretty hands off approach, but it does require some capital.

So it depends on which approach you look.

Yep, myth number eight, this is probably a pretty easy one to dispel.

Multifamily properties don't appreciate as much as single family.

What do you think about that, Erica?

So I agree actually that multifamily doesn't appreciate at the same rate as single family.

However, multifamily, based on the age of the building, the land value becomes significant enough that for instance, here in Charlotte area, like in south Charlotte, we're about to tear down.

It's like a almost 200 unit complex that was built in 1980s and it's going to be torn down to build new multifamily because the land value has appreciated that much.

So I do think that while like year over year, multifamily might not appreciate on the same trajectory as single family, you still have the appreciation of land values that the multifamily is sitting on.

And many times what you'll find is after a certain amount of time it does make sense to tear that down and many times build more multifamily.

So that's what I'm seeing in Charlotte right now.

You know, I'm actually going to look at it From a different perspective.

So with multifamily, you may not get the same ROI or percentage return that you would with single family.

It's rare that you will actually.

But when you start making more money is on the actual dollars.

And obviously when you're dealing with the larger property, even if you have a lower rate of return, it equates to more dollars because it's just a bigger property.

So what's the difference with valuations?

Well, single family is driven by comps in the market.

Now, most multifamily investors do look at comps also, but it's not the only driver.

So if you're looking at like a duplex or a triplex, then comps are the only drivers.

Let me be clear on that.

But if you're looking at a 20 or 50 or 100 unit apartment building, then those are driven really by cap rates a lot of times.

And they are driven by comps also, but just as much by income and by cap rates.

One of the things that happens that can give multifamily an advantage or also a disadvantage, but an advantage in this case is that cap rates can change.

So if we look back at the last cycle was a lot of people that invested in multifamily who made a lot of money because cap rates were compressing.

So even if things didn't go 100% as expected with the operation or even the acquisition of the property, not that I'm encouraging that, but even if they didn't, a lot of people still made money because cap rates compressed and they did quite well.

You know, one deal that stands out to me, just to illustrate a really large example, there was a deal I was looking at in 2021.

I was a deal in Charlotte, pretty decent area, nice property, and like a 300 unit apartment complex, the broker that was listing it was aiming to get somewhere around $78 million for the complex.

They actually sold it for like $91 million.

So needless to say, I'm sure that the seller was quite happy with that return because it probably surprised even the broker.

I don't think they expected that that's not going to happen in every deal.

But that's just an example.

And the reason that happens is because one, cap rates compress and two, you have a big buyer pool.

So when you're looking at, you know, smaller multifamily, usually up to 20 units and larger multifamily, let's call it 150 units and above, you're dealing with big buyer pools.

And especially when you get on that larger side, at that point, you start dealing with, you know, a lot of institutional players, and they pay pretty premium prices on things.

So because of that, if you're selling something to them, you can stand to the benefit and be in a pretty good position.

Yeah, that's.

I love that.

Such good perspective.

So number nine, multifamily investments are not as liquid.

What do you think there?

I think real estate in general is not as liquid as maybe some other investments are.

However, the.

There's pros to that where it retains value, in my opinion, better.

I think that in my market, I have.

So I am.

We are so inundated and saturated with investors for multifamily, specifically, that I've joked over the years that, like, it's not real estate is not liquid.

But, gosh, in certain markets and certain times, it definitely seems like it.

So it, you know, a multifamily asset were to pop up right now on market, I'd have no problem getting it closed within the next 60 days, no matter what the size is.

Even so, there's.

Depending on the market, depending on the timing of the market, real estate becomes much more liquid.

And right now, we're still at such a shortage of inventory nationally that I don't see that changing in the near future.

Awesome.

And then we have our last one here.

Multifamily Myth number 10.

Multifamily investing is all about cash flow.

So in my personal experience, multifamily investing is actually more about mitigating taxes.

So when you get to a point that you're investing in the larger multifamily assets, cash flow is king.

Obviously, cash flow is very, very important.

And I think that also important along with cash flow is the potential that you have for rent bump per door that will lead to the value add to get you to the cash flow that you actually really want.

So I think that's really important to look at right now.

But most of my clients are actually purchasing multifamily to mitigate their taxes, do a cost seg study at the beginning of the purchase, and then depreciate the asset and 1031 money into the next one.

Yeah, I think you got that perspective right.

Cash flow is important because it keeps you afloat.

It keeps the bills of the property paid.

It keeps money coming in.

You need that with any business.

If you're running cash flow negative, eventually you got to have a problem.

But most people I know who invest in apartments are usually doing so for the tax benefits.

That's a big one.

And really for appreciation while appreciation should never be the whole cake, it's only the icing on the cake.

It's a big piece of the cake with multi.

And one of the reasons that there is such a big buyer pool is post pandemic.

A lot of buyers who were investing in other commercial real estate asset classes switched over to multifamily because they became very concerned that some of those other asset classes weren't going to form so well.

And as many of them shifted, a lot of them have stayed.

And that's left a bigger buyer pool were multi dealing, which is basically driven values up for the long term.

Yeah, absolutely.

Well, guys, we want to thank you very much for joining us today for this episode, and we appreciate you listening to the Master Passive Income Multifamily Podcast until next time.

Thanks, guys.