Walk Before You Crawl
"Run when you can, walk if you have to, crawl if you must; just never give up." - Dean Karnazes
Over the weekend, my 9-month old finally began crawling, much to our delight. After watching him rock back and forth on all fours for weeks, he finally mustered up the confidence to spring into motion when he saw a shiny new toy he just had to play with. As I watched him scuttle across the floor, I thought back to my oldest child who never crawled on all fours, deciding instead to scoot with one leg extended, before just standing up and walking.
We’ve all heard people say “crawl before you walk” or “walk before you run,” which usually implies figuring out the basics of how to do something and building up the skills before progressing to the next step. While this makes sense, the two phrases should not be interchangeable.
Crawling can get you from Point A to Point B, but it really doesn’t help you learn to walk. Well, the medical world would disagree, stating that crawling helps you develop gross motor skills, cognitive development and muscles that will help you when you’re ready to walk. However, being able to stand, lift yourself up and not being afraid to fall down play pivotal roles in learning to walk as well. The progression from crawling to walking is a right of passage for babies, but as an investor crawling is not a prerequisite to move into larger deals.
Often I speak to aspiring investors interested in buying apartments who were steered down the path of single-family rentals. While this may seem like a logical progression, the reality is there is a significant difference in the acquisition and management of the two types of assets. As such, the skills, cognition and actions for apartment investing differ from single-family homes.
To be fair, some of the skills from buying single-families will certainly help you purchase larger properties. At a high-level the process is pretty much the same. Find a property to buy, go through the inspection and due diligence, close on the property and place a tenant and then manage it. However, the actual details of these steps are a bit more differentiated and can trip up an investor who is solely using single-family homes as their frame of reference.
Let’s take a look at some of the differences within the acquisition process. A single-family home can be found in a number of different ways due to their sheer quantity. Some of the more popular tactics include tapping into agents, Zillow, Craigslist, family/neighbors/friends, networking, and walking or driving around a neighborhood. On the other hand, multifamily deals are typically discovered through commercial brokers, networking, and searching public records for direct mail and cold calling.
Financing for a single-family home is pretty straightforward as well. You can pretty much go to any bank or credit union and tell them you want to buy a house and if you meet their criteria, they’ll give you a 30-year loan (note: this gets more complex after reaching 4 loans). Compare this to financing for an apartment building (5+ units) where they have a higher underwriting standard and will require you to submit a business/operational plan for the property and typically offer a 5-year loan, amortized over 25 years.
No matter the size of the property, you’ll need to determine whether or not you will outsource property management. Self-managing will help you gauge the needs of the property and character of the tenants. Hiring a property manager allows you to just manage and direct them as opposed to dealing with tenant problems that arise. Most renters for single-families are looking to stay for more than one year, while multifamily renters tend to change over frequently. Also, many single-family expenses are paid directly by the renter, while apartment owners cover many of these expenses so monitoring these costs is paramount. Controlling repairs, turnover costs and expenses is the key to driving profitability with apartments.
If your goal is to purchase an apartment building, buying single-family homes will help you build confidence, like my son rocking on all fours before finally deciding to crawl. But it won’t properly prepare you to buy and manage apartments.
An alternative starting place would be with a small (2-4 unit) multifamily property. If you have flexibility in your living situation, strongly consider being an owner-occupant to take advantage of favorable financing options, which are more similar to a single-family home than an apartment building. In addition, 2-4 units are treated similar to single-family homes for lending, valuation and tax purposes. And if you live in it, someone else is covering the bulk, if not all, of the mortgage.
Another option is to partner with others while you build up your skills and knowledge. Many investors would welcome a partner to help add resources to control an investment. With that said, don’t just blindly trust someone because you met them once at a meetup. Get to know them. Take them to coffee. Talk to them about their approach. How they handle situations. What their vision is for their business. Give it a few months to really get a good feel for the potential partner. Ensure that you go into it with a plan for the worse, detailing how the partnership is dissolved in case things don’t work out.
There are various paths to move into large apartments, so don’t feel like you need to crawl before you walk, especially if you find yourself staring at a shiny opportunity. No matter how your path begins, the key is to ensure you invest the necessary time to develop the skills, cognition and action that will cultivate success. Taking those first steps will be more challenging than crawling, but also more rewarding. Accept that falling is apart of learning anything; just make sure you get back up.