Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.

So, hey, welcome back to Accelerated Investor and I am here by myself again with you coming to you in another solo cast and today I want to talk to you about the multifamily and commercial transition. If you are currently a single-family investor, maybe doing flips in rental properties and you want to get into multifamily, the question is, is well how do I do that? Like how do I go buy an 8 unit or a 24 unit or a 48 unit and move up? And you know, I’ve not only done it myself but I’ve seen multiple other investors, friends of mine, guys in my market like Doug Shelton and Steve Morris, Tim Brotts, Jack Petrick, all these different guys that I’ve had on my podcast that I’ve lent money to that I’ve invested with. I’ve seen them transition from single-family rentals and building a single-family portfolio to multifamily.

So let’s talk about some of the issues and problems with single-family that kind of forced them and forced me into multifamily and commercial. And also some of the reasons why, you know, we love getting into multifamily and love getting into larger commercial deals. So a couple of things to think about. First of all, with single-family rental properties, there’s a couple inherent problems with that. Not only is are they awesome, not only are they great for cashflow and you can build up a huge portfolio and millions and millions of dollars in a big balance sheet. It’s awesome, awesome, awesome. However, there’s also some scale issues with owning that many single family properties, okay. So one is financing. Financing scale is tough to do. So we all know that Fannie Mae and Freddie Mac will fund up to 10 single-family rentals or duplexes, one to four units on your personal credit, okay.

We broker and land longterm permanent financing for single-family rental properties. But in generally, we like to land about a million to $2 million per borrower. So you can get, you know, 10 loans on your credit for through Fannie and Freddie and then 10 loans on your wife’s credit through Fannie and Freddie. Then maybe another and a couple million dollars through a lender like us. Or maybe you’d go to another company that does longterm loans. Eventually every lender is only going to have a certain appetite to have so many single-family rental properties. And so financing is not as easy to scale. Secondly, there’s a tremendous amount of competition for inexpensive rental properties. It doesn’t matter if you’re in Charlotte, Cleveland, Detroit, if you’re in St Louis, Texas, Dallas, Orlando, New Jersey. It doesn’t matter everybody, every investor from, you know, a hundred years ago till now, everybody likes to buy the cheap rental property that they can buy for $50,000 grand, $150,000 grand and just rent it out.

Who doesn’t want to do that, right? So competition is fierce. People are savages looking for single-family and one to four unit residential properties because the barrier to entry is so small anybody can do it, anybody can jump in and do it. You don’t have to have a lot of money. You don’t have to have a lot of credit. You don’t have to have a lot of connections. Most people can do it on their own personal credit. Matter of fact, about 78% of all of the rental properties in the United States, according to Adam Data Solutions, are owned by people who are mom and pops who own just one or two units. 78% according to Adam Data Solutions are owned by mom and pops that own just one or two units. So roughly 80% of all the buyers out there are people who just want to own one or two rental properties, right?

So cheap deals are becoming more and more and more tough to find, right? Prices are going up. They’re not cashflowing as well. Tremendous amount of competition. That’s a big deal, okay. Number three, private lenders. Private lenders love to fond small purchases. $50,000, $100,000 thousand $150,000 again, maybe you pay 10% interest or 12% interest or 8% interest. However, private lenders really don’t want to fond longterm rentals forever. They want to fund a deal, maybe get in it for six months to a year, maybe two years max, and then they want to be refinanced out of that property so they can go do another deal. They don’t want to be stuck in a single-family rental or a small multifamily property forever. So again, tough to do. And so for the guys that we’re lending to, like Chris Walsh, Brian LaPorte, and some of the, you know, Dante Sanders, some of these guys that we funded a lot of deals for, you know, they eventually move up into small balance commercial.

When I say small balance, what I mean is maybe half a million dollars to $5 million deals, okay. So last month we funded I think 10 small balance commercial deals between a half a million to $5 million bucks, and they’re all 8 units and 7 units and 12 units and 19 units and 24 unit deals, okay. We’ve been funded 89 unit last month, which was about a $2.7 million fond and another $600,000 of private investor down payment money. So 89 units. And you know, it’s natural for people to want to move up in a small balance commercial, okay.

What’s great is, is now there is more funding opportunities, more private money and private investor capital that’s looking to fund those small balance commercial deals. But again, as I talked about in previous podcasts, the number one risk is contractor risk and monthly payment risk. Meaning if there’s not enough renters occupying the property and not producing enough income, then the risk is can you quickly produce enough income by turning over the units and then getting those units leased up in order to pay the monthly mortgage payment.

So you’ve got to have enough in reserves to fund that stuff. And so for those of you that are thinking like, I have a 100 units, I’ve got 50 units that I want to transition into multifamily. The first question is, is why aren’t you doing that now, okay? The reason why you’re probably not doing is probably scared a little bit. You’re just not quite sure what to do. You’re not quite sure how to do it. So you’re just sticking with single-family, right? So the way to do that is to, first of all to understand multifamily properties, right?

Again, it goes back to education, books, tapes, podcasts, going to some mastermind groups, workshops, webinars, seminars, mentoring, do all that. Listen to this podcast, all right? Jump into some of the multifamily trainings that we’re doing. Secondly, you’ve got to learn about finance. You got to connect yourself with really three different types of money, okay? You’ve got to connect yourself with one, you’ve got to connect yourself with true private investors, their mom and pops that want to invest their capital into a deal and they want to be a private investor or a private lender, a true, you know, not institutional at all. That’s one bucket.

The second bucket is the small balance commercial lender. That would be someone like Freeland Lending, like my company that can step in and fund a 10 unit or a 25 unit or an 89 unit that’s really focused on that half a million to $5 million market. And then the third bucket is your large commercial lender for deals. really over $5 million bucks. Those non-recourse loans, those big commercial loans that you either need a bridge loan or longterm 30 year amortization funding. That’s the third bucket is your big commercial lender like Marcus and Millichap. We often partner up with one of our buddies, Chris Litzer from Marcus and Millichap who funds a lot of large commercial loans. So the second piece really is around financing, right? First of all is get your education. Secondly, it revolves around finding third is deal structuring, right? Deal structuring. So if you’re going to move into multifamily, when you talk about deal structuring, the question becomes, is everything in the multifamily commercial world depends on net operating income?

So if you’re looking at transition into commercial, you’re looking at to transition into multifamily, you’ve got to understand that every building is appraised differently. It’s not based on you at all. It’s not based on the building at all. It’s 100% based off of net operating income and NOI and whatever the NOI is, multiply that times your tap rate capitalization rate. And that’s going to produce value. You’re actually going to divide it by the cap rate to get your value. So if you take a deal, for example, let me grab my calculator here and let’s just say real quick, you have $100,000 of net operating income and divide that by an eight cap. Your building is worth $1.25 million. So again, grab your calculator. $100,000 divided by an eight cap, 1.2 5 million. Or if you have $300,000 of net operating income and divide that by a six and a half cap puts your building worth $4.6 million, okay.

It’s all about the end value. It’s no different than single-family properties. What is your purchase price, what’s your renovation budget and your capital improvements, and then what ultimately is your stabilized value or your after repaired value. If you want to talk in the residential space after repaired value of commercial, stabilized value based on a cap rate, then you can back into it and say, well, can I buy it for X? Can I improve it for Y it’s going to be worth Z. It’s really no different than single-family, but instead of based off of comps on the street, it’s based off of net operating income and your lender is going to tell you what is the cap rate for that property, for that area and you know what is it ultimately going to be worth based off the cap rates in that market for that type of asset in that particular type of area.

Is it low crime? Is it high crime, is it middle? What is it, okay? So how do you evaluate deals and deal structuring is a big part of that. So are you going to come in and a stabilized building maybe recruit 20% to 25% of your down payment from private investors and if it’s already a stable building, it’s already cash flowing, it doesn’t need a lot of capital improvements, then you might give up 60% to 70% to 80% of the deal to your limited partners and your passive investors to get them a good return. But you’ve just acquired maybe 20%, %30, 40% of a building with no money in it. And frankly, if the building is large enough, it also could be a non-recourse loan where you don’t have any credit in it either. So you in 20%, 30%, 40% of a $5 million building with no credit at risk and none of your own money at risk, pretty good deal, right?

Or is it a deal where you can, you know, maybe be all in for $2 million, it’s going to be worth three and a half million once the improvements are done and it needs more capital improvements, it needs more rehab and cap backs. And at that point you’re in a situation where you’re buying it, you’re using a bridge loan plus private investor money, and eventually over the, maybe the next 18 to 30 months that bridge loan will need to be paid off through a refinance and you can refinance into 30 year amortization funding, right.

So, you know, those are all things to consider when you’re moving into multifamily. You’re moving from residential. Maybe you built a portfolio like Jack Petrick, Tim Brotts, Chris Walsh, Brian LaPorte, Doug Shelton, all these guys that I’ve have partnered with funded deals for guys in my market. They’ve been on our podcasts in the past and they started with maybe one and then two and then 10 and then 40 single-family rentals and then maybe a hundred maybe more.

You know, some of our lenders, some of my buddies own even more and they can transition into multifamily and I would tell you every single one of them have come back to me and said, I wish I would’ve gotten into multifamily sooner. And every single one of them, not a single one of has said to me, you know Josh, ah man, I’m really disappointed I got into multifamily. I’m so upset that I moved from single-family into multifamily. They all have said, I’m so excited I went and finally jumped in and bought my first 12 unit. I bought my first 50 unit. I bought my first hundred unit, whatever it was. I was so excited to do that as long as they evaluated. Now, typically your fall back, and this is the last point that I want to make your fall back, is your commercial lender.

Your commercial lender is going to run their own appraisals. They’re going to run their own rent rolls, they’re going to run their own cap rates, they’re going to run their own operating expenses, and they’re going to evaluate the deal. And if they think it’s a good deal, oftentimes it is. It’s very rare that I have a bank underwriter underwrite the deal or my team at Freeland underwrite the deal and they think it’s an unbelievable deal and I think it’s a crappy deal or vice versa.

Like I think it’s an unbelievable deal and they think it’s a crappy deal that never happens. Usually all of the numbers kind of sync together. We massage the numbers and we say, yeah, based on all the proformas and all the expectations, this is about what we expect from the deal and we end up agreeing on that. So you know when you do a multifamily deal or a larger commercial deal, remember you’re going to have the backup of the commercial lenders underwriting to review that deal and help you do your proformas and your projections for you.

You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.