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May, 2023

The question most often asked in real estate is how do I get started. I’ve shared several options for people with funds and without funds, using examples of successful investors. They all require getting yourself out there and talking with people. It is not like investing in stocks where you sit at your computer and read all about the company or timing your trades or taking the advice from the pros.

Your real estate investing journey will simply fail if you aren’t talking with others. This is your first priority. Figure out how to meet people in the business and to talk to them. Here are a few ideas.

Go to meetup.com and search for real estate investing. Specifically multifamily real estate investing but multifamily is not the only asset class worth investing in. Single family homes, storage units, and mobile home parks are all good too. Other commercial classes like office buildings, industrial warehouses, and retail strip malls are not good starting investments but they are worth learning about.

Find conferences for multifamily, weekend trips. They cost a few hundred dollars to for a ticket plus your plane trip and hotel. Well worth it. Try RE Mentor, Brad Sumrok, Rod Khleif, Best Ever, Deal Maker Live, Jake and Gino, and there are a bunch more. They’re all good for networking and education.

Then follow up with the people you meet. Call them on the phone, don’t just email them. When I call someone I meet (if I met you at a conference, I’m pretty sure I have called you!) and get them on the phone, they have almost 100% been glad to talk. They don’t always have time to talk but real estate investors are not people who are upset at getting an unplanned phone call. Schedule the call if you can but just call if you can’t.

Below I’ll go into detail about one recommended way of getting started but here are a few to consider.

1.       Join a team who is already experienced at acquiring real estate. Identify your strengths and offer them to the team. Don’t expect much in compensation but look at it as your graduate school education. Be the accounting liaison, the asset management researcher, the report maker, the underwriter, the sounding board, whatever you’re good at.

2.       Find opportunities for seller-financed deals on smaller multifamily properties. Look up owners of small multifamily properties and call them. Don’t ask them if they want to sell, tell them you are interested in getting started in real estate investing and heard they have been successful. Get to know them, a few of them, in smaller towns, and one day one of them will want to sell and you’ll get first shot at it.

3.       Take out a home equity line of credit. First read Rich Dad Poor Dad to help you understand the benefits of good leverage. No one wants to take unreasonable risks with debt but this book helps you see how to use equity in your house that is not currently doing anything for you.

4.       Wholesaling could be an option. Hunt for neglected properties and tired owners. Not just single family homes but multifamily too. It’s easier to find smaller multifamily because there’s probably just a single owner, one person to negotiate with, and you can learn who they are and reach them easier. Then get it under contract and use your network to find a buyer.

Birmingham, Alabama – I like to write about up and coming cities. Birmingham is looking like a city that is past its prime – down, but out? Let’s see.

First, the negatives.

Population declined about 22% over the last 20 years. Any decline is cause for taking a hard pass on the market but this is significant. Good data is not more recent than 2021 so don’t assume they tell the whole story.

Jobs growth, however, was strong averaging over 2.5% post-pandemic, up until six months ago when year-over-year growth each month has been closer to 1%. Still growth though.

When you look at average rents of $1,100 a month and average household income of $36,000, a ratio of 36%, affordability becomes an issue.

Crime rates in Birmingham are also a concern. City-data says the index over the last twenty years has been about 3X the national average, and still rising. This often reflects weak leadership, a general malaise regarding opportunities in the city, and a mistrust of law enforcement. Wherever you own property you want to know that citizens report crimes, police respond, and the laws are enforced. Many municipalities have chosen new directions regarding law enforcement and crime rates reflect where these changes have succeeded and where they have failed. These are important indicators when choosing a market to invest in.

Birmingham’s industrial base has shifted in recent years from iron and steel to health care, finance, and to a growing degree, technology. Medical and finance companies tend to have a higher proportion of service-related personnel, people who are hard workers, trainable, and have a predisposition for helping people, but not necessarily with advanced education. They are a very desirable renter base and that is reflected in rent growth over the last 12 months in Birmingham of 6%.

But lets dig a little deeper into tech. Which city has had the most tech investments in the U.S.? San Francisco of course. Then New York, Boston, and Palo Alto. But which are the fastest growing startup cities? As measured by the increases in startup funds year-over-year, start with Kirkland, Washington (which is near me, and is the home to a big Google campus), but coming in at number four is Birmingham, Alabama. Not just for one well-funded company either, but a strong collection of Software as a Service and data collection firms helped Birmingham earn this leadership position.

These are momentum-generating events. Success brings more success, and Birmingham may be on track. Keep a closer eye on all the traditional metrics we use to decide to invest in a market. All of those negatives may give way to more positives before long.

Remember also that the time to invest in a market is before everyone is reporting on all of the positive attributes of a market.

Benefits of Starting Small
One of the best ways to get started in multifamily real estate is to start small. Buy a property with two, three, four units, something in that range. If it suits your lifestyle, move into one of the units.

First the advantages of doing this, then some ways of accomplishing it.

When you have a small property, mistakes are inexpensive. Did you skip the background check on new tenants? One or two bad tenants slip in and you have to deal with them, potentially for a long time. But not five or ten, which could disrupt a lot of other tenants. Or did you get a variable rate loan and now interest rates are increasing? Your cash flow might disappear but you’ll most likely survive it. On a bigger property you might have unhappy investors or, worse, you might have to give the property back to the lender, wiping out all of your equity. Or even worse than that, you might have to dig into your own pocket to keep paying the debt service. That’s brutal and potentially life changing.

Do you know how to advertise for tenants, to interview them, what to ask, what you’re not allowed to ask? Do you know how to post notices of non-payment, how to enforce them? It doesn’t take long to learn these. When do you give the tenant a break and not jump right to an eviction notice? When you buy a bigger property, you’ll probably have a property manager but you should still have a strong preference for how these issues get handled. Depending on promises to pay can cost you big money.

Also related to the learning opportunities, how do you find contractors and keep the good ones, how do you determine that the sub-market is getting better or getting worse? You have to take the risk, do your best with your research, buy the property, and you learn first-hand what you didn’t learn in any prior training. What you learn about markets for a three-unit property applies to any size property.

One of the biggest benefits of starting small can be beginning to accumulate capital, and not paying taxes on the gain. Ever. You own your first property for a few years, your cash flow is probably negligible, but your equity has grown. That equity could be 50% or more of the value of the property. You do a 1031 exchange into a larger property, put 20-25% down, and now your equity starts growing faster and you get some decent cash flow from it. You do a 1031 again, and keep doing them. Then grow old and die with it. Your heirs get it at a stepped up basis, which means no tax was owed. This isn’t accounting advice, though, so confirm these details with your CPA.

You can get into your first multifamily with cash down out of your own pocket. That’s the traditional way, and if you have the cash, that is a straightforward and low-risk path to multifamily ownership.

Be thinking of lower cost areas not too far from where you live. You will want contractors and handymen to do your maintenance and repairs but you’ll still need to go to the property once in a while.

Find the properties in your sub-market which fit your criteria – say, 3-6 units. You can contact a local title company for a list of those properties. Then find the owners through county tax records or several other methods. If you’d like to learn more about finding owners, connect with local wholesaling/fix-and-flip meetup groups. Wholesalers are pros at this. Then contact the owners directly about buying their property.

Your goal is a conversation with the owner, where you can talk about them, their investment, your background, your interest in buying their property, and negotiate a deal where the seller gets paid over time, gets a small down payment, and you cash them out after 2-3 years, or longer. You might have several different offers prepared with varying levels of down payment, interest rate, and loan term. Many owners don’t want to cash out the whole property and then have to find another investment to get income from. You offer them a few percentage points on a loan and they might love that.

Even more creative is to call multiple owners in a small town and talk about yourself as a learner who has become interested in this particular market and would like to learn from more experienced investors like this person. Meet them for coffee or lunch, ask how they got started, why they chose this property, advice they’d give a person like you, all kinds of questions except don’t ask if they’d be willing to sell it. Do this for as many different owners in that market as you can, over a period of months or even years. From these friendships you will be one of the first to hear from them when they’re ready to sell. Then you’re in prime position to negotiate a good purchase from them.

Consider also taking money out of your home through a home equity line of credit. Sure, rates are high today but they’ll come down and when they do, open that line. Sounds high risk? If you are taking a prudent approach to purchasing an income-producing multifamily property, you will more than cover the cost of your debt service, and you will have appreciation on top of that.

Head trash is confused, outdated, ingrained predispositions that you’ve always had that are incorrect and harmful. You learned it over your lifetime and had it reinforced by family and friends. Mainly by people who don’t have a mindset for thinking outside the box. We all have head trash about money, and mortgage payments are at the top of the list.

You don’t need a paid-off mortgage, you need to understand good debt and bad debt. Read Robert Kiyosaki’s “Rick Dad Poor Dad”, the book that finally got many of us off the fence for real estate investing.

All paths to small multifamily ownership require you to reach out and engage with others. It is not a desk job, it’s not passive ownership, and it isn’t for everyone. But it can be the start you need to set you on the path to financial freedom.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.

May, 2023

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