3 capital needs in multifamily investments
You have seen the milk ad, “Got Milk?”
In the arena of apartment investing, let’s talk about a similar need, “Got Capital?”
Three years ago, we found an apartment complex with a lot of potential. But we didn’t have the $8+ million to purchase it.
CAPITAL WAS NEEDED TO PURCHASE THE PROPERTY
We needed capital if we wanted to be able to own and operate this complex.
Fortunately, we found a source of capital, a lender. They were willing to lend about $6 million at reasonable terms.
Even with that big loan, we still needed additional capital if we were to purchase this complex.
The bank loan was a big help, but we needed even more capital. The bank was not willing to lend the whole amount for the purchase.
Have you ever been in this position? Did you need funds, or need capital to make a deal work?
I talk with single-family investors every week who are hoping they can get the money they need to flip a house when they find it. They will need money for the purchase, renovations, and holding costs on the property. They need capital.
When my wife and I wanted to purchase our first home in Virginia decades ago, we didn’t have enough money to pay cash. We had enough for a down payment but needed the balance to be able to close and buy that first house.
The apartment complex purchase that I noted in the first sentence required a “down payment” for us to be able to secure the bank loan and close. The amount of the “down payment” was about $2 million.
We prepared a six-page Deal Package that described the property and the community where it was located. It also noted the current and projected income and expenses for the property, and shared the potential returns on investment for those who might choose to join us in owning this complex.
We were looking for the capital that was needed to purchase a property.
With the guidance of an excellent SEC attorney, we spoke with people we had known through the years. We made sure they understood the deal. We were able to put together a group of investors to join us in pulling together the “down payment”.
This capital from these other people made it possible for us to purchase the property and begin operating it.
CAPITAL WAS ALSO NEEDED FOR IMPROVING THE PROPERTY
As it is with single-family house purchases, sometimes additional capital is needed beyond the purchase of a property.
We thought the complex we had purchased would benefit from some improvements to the apartments. Our research in the local market told us if we improved the interiors of the apartments we could receive higher rents on the improved units.
We were able to secure around $500 thousand from the bank for these improvements. This was kind of like a construction loan on a single-family home. We planned out the renovations that made sense. We upgraded the cabinets in the kitchens and baths and the floors throughout many of the units. We added better light fixtures and plumbing fixtures and gave the units a fresh coat of paint.
And we were able to increase the rents on these renovated units. The increased income added to the overall value of the property.
As with single-family properties, we were careful to not over renovate. The idea is to add value but only as much as the market will bear.
ONGOING CAPITAL IS NEEDED AS WELL
Just as with the homes in which we live, additional capital is needed from time to time. I recently put a new roof on our home. Fortunately, I had anticipated this additional capital requirement and had saved for it.
We do the same with our apartment complex. We anticipate when the roofs on our buildings will likely need to be replaced. We note when air conditioning units might need to be replaced. We anticipate additional renovations to some of the units.
The best plan is to set aside funds each month for future capital needs and build this into the operating plan for an apartment complex. This way, when the capital needs hit, the money has already been set aside.
Another approach is to anticipate the increased value of the property over time and refinance the property every so often to secure loans for the needed capital.
The first approach, setting aside funds for capital reserves is harder, but often can be much better. Run the numbers and see which is the best approach.
If you “got capital” you can do business in the apartment space.
Those of us who are involved in multifamily investments realize the critical nature of securing capital. Perhaps there are some operators who have the net worth to purchase outright for cash.
Often it is wiser to leverage the purchase of a property with “other people’s money” and gain the benefits of low-interest rates on a well-operating property. The danger, of course, is overleveraging.
We were able to secure bank financing on this deal for the purchase, private money investments for the down payment, and additional bank financing for the capital improvements to the property. Without this capital, we would not have been able to purchase and operate this complex.
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Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.
Or you can choose to loan money, get in with a clear return, and get out earlier.
Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.