I promise that for as long as this blog has my stamp on it to never, ever, under any circumstances to promote multifamily “no money down” deals. Except for today.
While I say “no money down is not dead” it is on life support. I submit that most “no cash in” multifamily deals should not have been done in the first place, primarily for reasons of inexperience on the buyers part. That said, there are a few instances where no cash deals have their place.
Multifamily “no money down” deals are hard work. Really hard work. Once purchased, based on the high level of leverage they are even harder work.
So why would anyone want to do a nothing down deal?
There are two extremes where zero down can work:
1. To get in the game. Many people are interested in knowing how to buy apartment complexes with no cash. It’s a big draw for a novice to buy an asset with no cash. Some people want in the game so bad they will agree to any terms for the sake of controlling the deal. NO! As the saying goes, pride often goes before a fall. Getting in the game is a worthy pursuit, but don’t shoot yourself in the foot as you leave the starting blocks with your first deal.
As I have said in other post- know your exit strategy before buying. Consider also; what makes you so special that this deal is being offered to you? What’s the upside potential if rents remain flat for an extended period? What is the Debt Service Coverage (DSC) on closing day? Is this sustainable?
Individuals wanting to acquire and manage multifamily assets need to know there are multiple pieces to making a high leverage deal work. Buying a one or two million dollar deal with high leverage not only requires skill on the acquisitions piece, but also in operations.
Being able to buy the deal is not the same as being able to manage the deal. And whereas management expertise can be picked up along the way on a cute little duplex, the same cannot be said for a 100 unit multifamily deal. No one opens a restaurant and then starts searching for a cook. Management is still a key aspect- even more so with tight margins based on high leverage.
As a straight passive investor in a high leverage deal there is even more risk. Perhaps you’ve put up your balance sheet for a piece of ownership. Unless you are going into the deal with a very experienced operator- run! Experienced operator often excludes most family members, those you’ve only met online and third cousins, twice removed. And anyone that you would not trust with the actual cash (this is the real crux of the matter). If you wouldn’t invest cash in the deal, you probably shouldn’t be putting up your balance sheet as a passive investor.
While so much of this post may seem discouraging, the point is really to be prepared and know the risk. Have a plan of action from day one. Have a back up plan and an exit strategy…. All prior to closing.
In Part II we will discuss why experienced owners may consider adding a “nothing down deal” to their existing portfolio.
Click Link for Part II: http://bit.ly/N0-Money-Down-Part-II
About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com