You’re feeling enthusiastic. You’re ready to dive in with your multifamily investment plan. That’s great–but don’t overestimate the time, ability, and capital that you have to dedicate to the project!
Many real estate investors invest in one property and then quit. Maybe they bought a bad property and they’re struggling to recover financially. Perhaps they have goals that are too big–and entirely unrealistic–for that first year of activity, then give up when they fail to reach that arbitrary goal within the first year of operation.
Instead, make sure you create a solid 10-year plan to help you really reach your goals. As Bill Gates famously said, “Most people overestimate what they can do in one year and underestimate what they can do in ten years.”
What will a 10-year plan accomplish?
With a 10-year multifamily investment plan, you can raise your odds of reaching your goals and sticking with your real estate investments. For example, a 10-year plan may help you:
- Make sure you have enough capital to quit your day job
- Generate the income you need for retirement
- Create a solid legacy through a portfolio of properties
- And so much more!
What are your 10-year goals? How do you plan to accomplish them? With the right strategies, you can go the extra mile and design a solid plan that will ultimately have incredible benefits.
Method #1: Start small
Don’t feel as though you have to jump into multifamily real estate investing with both feet.
Instead, consider starting with a single-family rental or two, or even flipping a couple of single-family houses to help you build the capital you need for a larger investment. Then, invest in a small multi-unit: a 2-4 unit, for example. Over time, you can purchase a small apartment complex, then move on to a larger rental property.
By working your way up, with solid goals set for every step of the process, you’ll find that you get a better idea of what you can really handle. As you work your way up, you will also build a solid network of individuals who can help you reach your investing goals, from contractors to property managers.
Method #2: Try “house hacking”
Put your life where your money is. Purchase a small multi-unit property and live in one unit while renting out the other ones. Once you get the hang of that, you might buy a larger rental property; or, you might choose to keep the same size property, depending on your management capability and needs.
There are number of excellent tax and financing incentives to living in the property you’re renting out, too. This “house hacking” strategy can transform the way you handle your real estate investments, especially if you’re just getting started.
Method #3: Start a little bigger
Have you dabbled with real estate investing before, giving you a pretty good idea of how you’re going to handle it? Do you have experience in a related field or a mentor to help you get started?
You might choose to dive in with a small apartment building, of around 12-20 units. You’ll manage it yourself, learning the ropes and deepening your understanding of the property management process. In about 5 years, plan to make a 1031 exchange into a larger property and hire third-party managers.
This strategy can allow you to get your feet wet and expand your knowledge while developing a wider multifamily investment plan.
Method #4: Dive in with partners
Do you have friends and family who are interested in investing with you–and, therefore, in supporting you along the way? This often means that you can jump in with a bigger deal: a complex with around 20-50 units. You will find that the team approach is a critical element in this strategy, especially when it comes to property management.
What should your multifamily investment plan include?
With a wide range of methods to choose from, you need a plan to help guide you through the next ten years. Make sure your 10-year multifamily investment plan includes the right elements!
Know what requirements your lender will have of you. Or your team, if you’re borrowing together. You’ll need to meet net worth and liquidity requirements, have a certain level of investing experience, and other key elements to make you a solid risk. Include how you will reach each stage of investment, financially speaking, in your 10-year plan. For a good example of loan requirements view the Freddie Mac multifamily products website and term sheets via this link.
Develop an exit strategy. How are you going to capitalize on your investments? Your plan should include whether you want to sell or refinance your properties to fund new purchases, or if you plan to hold solidly producing and stabilized income properties. You don’t want to sell if a property produces cash flow, appreciates annually and gives you great tax benefits, all while your residents pay down the mortgage. You also, however, want to have a solid plan for how you will move away from real estate investments that aren’t working for you or how you will increase your investment over time.
Have a strategy to work your multifamily investment plan. You’ll need to hone your real estate investing skills, create solid relationships, and build value through appreciating assets and principal paydown. Understand your tax benefits and your cash flow. Smart renovations and operational know-how can also help improve your investment plan–but you must have a solid plan for developing and using those skills.
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