MB513: Why Multifamily Is the Fastest Path to Financial Freedom - With Michael Blank

0:00Hey, deal makers. Welcome to the show where it's all about financial freedom with real estate. Let's do this. So back when I was flipping houses, I hit a wall and maybe you can relate. I had like three major problems. I couldn't scale past 12 flips a year. And that was a lot. Most people can handle one flip out of time, takes six months, make $50,000, two flips a year, 100K. Cool. I was doing a lot more than that, and that was pretty cool. But it was anything but passive. It was basically another full-time job and one that I really couldn't figure out how to scale meaningfully without working a lot harder. And the profits were actually a little bit inconsistent. Mostly wins and a few losses and then some like break evens. And then you had to deal with the 2008 recession as well, which complicates things. So I was making money for the most part, but it was a lot of work. And I really wasn't building freedom like the, you know, what Robert Q. Socky talks about in the purple book, it was kind of like an entrepreneurial hamster wheel, you know, and I couldn't get myself out of it because I stopped working the hamster wheel,

1:01the money would stop flowing. Now, fast forward today, control my partners and I and Nighthawk equity control $300 million in real estate. And now that generates passive income. And now I can live life more on my terms. And really what changed? Well, number one, obviously, I stopped flipping. And I really started to scale not with single family houses, but with multi-family. So in this episode, I'm going to share it with you the exact moment I made that pivot and why it was a single best decision I ever made as investor. But I'm also really going to talk to you about why multi-family is the best way to become financially free with real estate, really the easiest way to scale with real estate because you have to scale real estate, but you actually become financially free. So let's get into it. So like I said, the biggest problem I had with my real estate investing is how do I scale this stuff? We talked about the flips. I had a few rentals as well. I did a mental exercise with with rentals. I was like, okay, if I can, if maybe I stop flipping and maybe I start accumulating a rental portfolio. But if you do the math, okay, if I can get each rental

2:01property to generate $200 per month in income. And that's kind of a big if, right? Because it's kind of like phantom income. Because if you know that if there's some kind of major repair happens or your tenant moves out, that $200 per month could easily be gone. So typically it's more like a break even venture. But let's say it's given a benefit of doubt. I get $200 per month for a rental. And if I want to cover $10,000 in living expenses, I would need 50 of them. That's a lot of houses, 50 transactions. Somehow you're going to get a figure out of financing, which is also not easy because lenders limit the funding for residential properties. And then someone's got to manage a whole thing. And a lot of people who have single-family rentals because it's difficult to outsource to, you know, you have kind of part-time realtor who you're very hit or miss results. And they'll charge like 10% of the income. So that's why a lot of landlords manage their own rentals. So and also there was a good amount of risk that I ran into. Everything related to overestimating the ARV or renovation costs higher or they take longer. There are a lot of

3:06variables. And let's not forget about the market. And then, yeah, the market in 2008 was awful for a lot of people as well. Now, there are, there were three ways in my mind to kind of fix these problems. Number one is just work harder, do more deals, right? So buy, flip more houses or buy more rentals, which didn't really appeal to me at one point. And the third thing that was the only solution that that seemed to make sense to me was to start getting into multi-family. Though I didn't understand until I accidentally got it into it. It was in 2011, I got a 12-year-end washing DC from one of my wholesalers. And I had taken, I quit my job in 2005, became a full-time entrepreneur, got into the restaurant business. But on the side, I was learning how money worked. And one of the things I did in 2006 is take a commercial real estate investing, like a seminar. And so I dusted it off for this particular 12-unit and kind of took a crack at it. It was a complete nightmare for many different reasons. But I bought it in the district, which was very pro-tenant. I had a professional tenant in there who wasn't paying rent, couldn't get them out.

4:07I had the wrong property manager. I made all kinds of mistakes. But after 18 long, arduous months acquired it down. And then the property actually started sending me mailbox money. And that's when the true aha moment went off and the light bulb went off for me that I was like, oh my gosh, I should do more of this in less of that. Now, again, I probably could have figured out years before someone actually told me these things, hey mailbox money, you know, and not $200 a month, but more like $1,000 a year or so a month. And maybe I would have skipped a single family house investing thing entirely. And so my conclusion now is obviously looking back on it, that multi-family really is the best vehicle for creating wealth with real estate, but also quitting your job. And what we found is that people who may have done years or years of single-family house investing scratched your head and go, what can I do? And then again, a multi-family in literally within one to two years, they quit their job. It's always like that. And it's several reasons why

5:07this is the case. Multi-family is more scalable than any other strategy. It's more passive than any other strategy. And it's also the least risky of any strategy. So let me break these things down because what I want to do here in this video is I want to give you enough information where you can basically put a filter on this and compare what I'm saying to you with whatever strategy you're currently doing or whatever you want to or consider doing. So let's get into each of these here separately. So more scalable. Let's talk about scalability. We already talked about how more scalable or not so scalable flips and rentals are. And with multi-family numbers are simply bigger. So why are they bigger? Well obviously it's a maybe multi-million dollar deal, but you have to understand the profit centers of a multi-family deal. And this is called a syndication. Syndication is a fancy word for basically a group of people getting together. One group does

6:07all the work and the other group puts up all the money. That's what a syndication is at the simplest and now the group could live without the other because the people that do all the work don't have the money and the people with all the money aren't prepared or can do the actual work. So syndications are really a match made in heaven. So we put them together as a multi-family syndication. So you have to understand the different profit centers. If you're going to be a general partner, like if you were to, for example, work with us, that would be the role that we ask you or teach you to play. So I'm going to talk about the general partnership here and we'll leave the limited partners offered. But I want to show you why this such a powerful and scalable vehicle to build wealth and quit your job. Different profit centers. Okay. So number one, with a syndication you have something called an acquisition fee. And you may have not heard that before. Maybe you have because it's not obviously you don't have it in a single family house investing. It's typically 3% of the purchase price. So let's assume for a minute that you're doing a $4 million deal, that's $120,000. Now you're probably going to need some help to close a $4 million deal, you're probably going to have a partner. But be that as it may. You're closing a $4 million deal.

7:09And let's say you're splitting a $100,000 acquisition fee with a partner. Let's say your burn rate is $10,000 per month. So now that gives each of you a six month runway. And if you have another 60,000, let's say saved up or whatever. Now you have a 12 month runway. And so a lot of people are able to quit their W2 job after their first deal. And maybe it's a bigger deal. Maybe you don't have a partner at all. And you get to keep the entire $120,000. That really that acquisition fee is really the trigger for a lot of people to be able to quit their job. And maybe it's not the first deal. But it's certainly is probably a second deal. And I mean, it's very rare. People go beyond three, three deals. And that typically one can do and one to two years. And this really makes us a very, very powerful vehicle for for quitting, quitting your job. Because that doesn't exist with any kind of single family house and strategy, right? With rentals, you don't get paid when you buy flips. You don't get paid when you buy short term rentals. You don't get paid when you buy pads for the same thing. There's really no strategy. But it's on syndication that pays you when you buy. Now, it also pays you during the deal. And of course, at the end, and we'll talk

8:13about that here next. So that $4 million to do pays you $120,000 acquisition fee. But it also pays you an average of $100,000 per year over five years. So it's typically when one holds a multifamily syndication. And at that point, you either refinance out or maybe sooner or sell it. So it generates $100,000 because you have fees. Okay. You as a general partner can charge fees as all disclosed through the investors. They're happy to pay it because you're doing all the work. So on a $4 million deal, you get about $12,000 per year and asset management fees. You're also you're getting your share of cash flow because as a general partner, you get sweat equity in the deal. So let's say in a particular deal, you get 30% for doing all the work. And the LPs, the limited partners put up all the money and they get let's say 70 or could be 80, 20 doesn't matter. You get some kind of sweat equity in the deal. And so your share and the $4 million does about $40,000 per year, typically about $200,000 over five years. Profit at the end is projected to be about $200,000

9:13as well. So divide that by five. The average again is $40,000. So you add all that together. It's $100,000 per year on average. Obviously, you're not getting the profit until the end. But if you if you add it all together and you divide it by five, it's the average. So this one deal now generates $500,000 in fees, cash loan profits plus $120,000 acquisition fee. That is enormous on a single deal. Now, let me ask you a question. If somehow you can do a $4 million deal, let's say yes, you maybe need some help to do it. And you need a partner to get it done. If you can do it once, could you do it again? Right? And the answer is, well, gosh, if I can do it once, you're probably right. I can probably do it again. Therefore, if you can do one $4 million deal, let's say you can do one $4 million deal per year, right? Because that really changes things, right? That's $620,000 now times five is $3.1 million. That's $50,000 a month. So you see now how the numbers are much bigger. The transaction volume is much lower than any other single family house strategy and the

10:16numbers are much bigger. Now, the thing is about scaling is I can I can scale my house flipping a rental property. I just have to work harder at it. And so one of the advantages of multi-family is it's much more passive. Why is it much more passive? Right? It's because because you have more units, which means you have more revenue. And that makes it that means you can afford an actual professional property manager and company. And that's the thing that I actually literally baked into the business model. It's very unusual for 25 plus units being self-managed because you can afford a property manager. That property manager is a professional management company. That's all they do. And not only can you delegate it to somebody, but they're going to do a better job than you ever can. And the other cool thing is that you can actually, if it doesn't work out, there's probably 10 other property managers in the market. You don't have to train them. They're already trained. You just give them the keys. And so therefore, I can actually, what this means, I can scale faster with less work. This is important, which means I can buy a deal,

11:17hand it over to my property manager by another deal, hand it over, and so on and so forth. So I can scale a lot faster with a lot less work. This is very important. The third criteria is that is risk. You've got to consider risk. Let's talk about single family. Just a demo. Someone talking about single family in 2008, as you know, was a great recession. And a lot of people lost their houses, but a lot of some people lost huge rental portfolios. And so I don't really like the way single family houses performed because it was so subject to something I couldn't control. I don't want to spend five to seven years building up this normal, enormous portfolio. And then something happens outside of my control that wipes it all out. I don't want that. I want a vehicle that gives me runway. And I don't want just five years. I want 10 years. I want 20 years. I want I want to pass it to my children. I want a vehicle that I can, there's a lifetime investment vehicle, right? And single family houses because of 2008, for example, are in more in the riskier category. Also, single family houses, if you have a rental, for example, you have one tenant. So if that one

12:17tenant moves out, you have to pay the mortgage and all the expenses out of your own pocket until you get a new tenant. Now, that's mitigate a little bit by short-term rentals because you have, you have, you know, there's a short-term rental, right? So less there, pad splits or co-living, you have multiple tenants in there as well. So they're a little bit better than a single-family rental that only has one tenant as well. What about short-term rentals? What is the risk with short-term rentals? Short-term rentals, they used to be awesome. And I used to love short-term rentals. You can make $1,000 or $2,000 a month. I know people who did that. I have a good buddy who who who who built up a huge portfolio. About three years ago, he was reporting that incomes were down until they became break even and many of them over half are now in the red and he's desperately trying to sell them. Why? Well, because you're making so much money with real estate, people are poor and have poured in and bought houses and they saturated the market, right? So the risk really is saturation in the market. And which means that the SCR thing had a bit of a runway. Now, you can still make good money, but you have to buy right. You have to buy in the right areas.

13:17You have to really do research to make sure you're not going to be subject to saturation, which can't control, but there's something you can look for in the market. So it's much more, much more difficult. Pad splits, the risk there is legislation because it's so new, for example, right? Saturation could be a thing. It could be a thing with that as well because, again, it's new. It's a way to make more money with real estate, but the biggest risk in my opinion right now is legislation. I mean, you saw it with Airbnb. Now, they've been around for a long while, but like what's nine months ago? New York past legislation that prohibits short-term rentals in the New York City. Can you imagine this? Thousands of people buy a condo and they think they're going to make money with short-term rentals. All of a sudden, the city goes, no, no, we don't like that. Wow, that's awful. And pad splits, it pad splits is where you, by the way, rent it by the room by the week, which is super cool. I really like the idea. Again, it's so new that a lot of cities don't like that. That revolving door, people coming in and out. And so you'll probably see legislation in many, many cities that forbid this use. So if you get into the pad split

14:18and you invest in these houses and do a bunch of stuff and all of a sudden the city passes this legislation, all is gone. And so I don't like that as well. Now, multifamily, what I like about it is it's been around a long time. It's been around well for decades and the probability that there's going to be some legislation passed that will prohibit apartments is probably close to zero, right? So from that perspective, I like it as you have a multi-tenant situation. And so if one tenant moves out, it's not a big deal. In fact, a lot of tenants would have to move out for multifamily start losing, losing money as well. I mean, typically the break even is around 65%. So of 100 unit building, 35 units would have to be empty for that property to be a break even. 65% occupancy is a severely distressed multifamily building, like something the wheels had to, all four wheels would have come off and the engine would have dropped out of the car if you know what I mean. Because before it gets seven, once a property gets to like 75%, 70, like you just got to put a different property manager at that place. So it's very, very distressed. The probability that

15:21going down that low is probably not very high. So I like it from that reason as well. I also like it for the outlook. So what is the outlook for multifamily? It's very strong because we have a housing shortage, particularly in the more affordable space, you know, rents under $2,000. This includes rental houses, but we have a housing shortage. So depending on what report you read, we were between three and five million housing units short. And the problem with that is no solution because it's too expensive to build new stuff because of the cost of capital, interest rates are too high. Now on top of that, we have tariffs. That's going to increase the construction cost, but also extend the construction timeline. Maybe there might be supply chain. It's basically what happened in COVID is kind of what happened, right? So all this puts a lot of pressure on developers. And as a result, over the last 18 months, new building permits are down by over 50%. I wouldn't be surprised if it's down by 80% here in a few months. And so no one's

16:21building new stuff. And even by the way, when you build new stuff, it's all going to be class a luxury stuff. It's the only way you can make money. So no one's building class beans class C anymore. You can't be done. So you have essentially a finite housing stock and a growing population. So what's that going to do the rents? Well, it's going to go up. In fact, I predict it's going to go up a lot because of this problem as well. So so what I like about multifamily is that it is more scalable. It is it is more passive, meaning that I can scale something much more rapidly with doing less work because I can actually delegate it to a property manager. And I have less risk. And the reason less risk is important is is that is because I want runway. I want a vehicle I can create wealth with without looking over my shoulder about some kind of recession or some kind of legislation that gets gets past. And this is really why I like multifamily as the ultimate wealth builder much better than any kind of single family house strategy that you may have tried or might consider. Now you might be thinking that isn't multifamily kind of an advanced strategy like

17:24don't need like five or 10 years of single real estate investing experience. And maybe I can save my money that I'm making that and then graduate into apartments. Those are like the two big myths of apartments. People think that need to they need to invest in single family houses. But first and the truth is you don't. And and and it's beyond this particular here episode of the cow in there. But you you you can actually overcome your lack of experience by building a team around you and leveraging their track record. And you don't need your own money. You can learn how to raise money. So if you want to learn more about apartments and how you can overcome this lack of experience and how to raise capital and things that I nature and check out my apartments one on one masterclass because it covers all those things gives you a great introduction into syndications and how to do the things that we just talked about here. How to get experience, how to build your team. Even how to find those deals and how to raise capital. So check that out. The best way the next best step here from the podcast is go to thefreedompodcast.com. It's kind of your next step. So you'll find apartments one on one on that. It's thefreedompodcast.com.

18:26And on that page also if you want to book a call and explore working with us, that's a great way to do that. If you're more of a passive investor. Also go to thefreedompodcast.com. If you want to learn more about real estate syndications and what it takes to invest passively in them. There's also a course, a mini course on that as well that you can find. And again, if you're interested in finding out more or connecting with us about investing in our deals, then then check us out on knightockequity.com. Those links are in thefreedompodcast.com. Sorry, that's the next step. You don't want to confuse you. So the next step whether you want to become a general partner or limited partner is thefreedompodcast.com. So hopefully that'll be provided with some next steps. And then I'll talk to you on the next episode. If you make over $120,000 per year, investing in apartment buildings is the easiest path to financial freedom. But it can be overwhelming if you've never done it before. So check out my free apartments 101 masterclass. Head on over to thefreedompodcast.com. Now during this training, you're going to learn my step-by-step process to purchase your first or maybe even your next apartment building

19:30in as little as six months. So if you want to become financial free through apartment investing, go to thefreedompodcast.com and watch the free apartments 101 training.