When I tell people I do real estate investing, the first thing they ask is “do you flip houses?” Which makes sense because for most people “real estate” is the same thing as “single family homes.”

I always answer: “No, I’m a manufacturer.”

This usually results in a puzzled look and they say “you manufacture homes?”

And I say: “No, I manufacture deals!”

Apartment Investing 101

To most people, property is something you purchase and own. This makes sense for residential real estate being purchased as a primary residence. But for commercial real estate, a better approach is to think less about the property and more about the deal: an asset that is manufactured. The diagram below provides a simplistic explanation of how the “raw materials” of a deal come together.

Deal equation diagramAs with most simple diagrams, the devil is in the details. Let’s break this down.


Obviously a deal is impossible without an underlying property or properties. How does one go about finding a property? There is no Zillow-style service for commercial real estate, so here are some steps you can take:

1. Learn about the various markets and submarkets. The Milken Institute’s Best-Performing Cities List is a good place to start, but it’s only a start. Once you narrow down a list, you need to call local economic development agencies to get a sense of whether the economy is trending up or down.
Key skills: analytical thinking, cold calling

2. Next, you need to network with brokers and property managers in the area in order to better understand neighborhoods and also to let them know he is an interested buyer. This is usually accomplished via phone calls and sometimes email, but be aware that most brokers will not respond unless you can prove credibility such as proof of funds, investment criteria and a track record. Even then most successful brokers will favor their existing investor base over newcomers.
Key skills: cold calling, networking, persistence

3. Once brokers start sending you properties, you must analyze them to determine how much to offer or whether to even make an offer. Expect to look at a lot of properties before finding once that matches your criteria.
Key skills: analysis, speed of execution

4. Note that oftentimes sellers don’t provide full financials and other disclosures, so you have to badger them to provide more information as well as ask appropriate questions about the financials (for example, is the property underinsured, thus inflating net income?).
Key skills: patience, persistence, financial knowledge

5. Once you have decided on a purchase price, you send a Letter of Intent laying out the terms of your purchase, including timeframes, debt, types of due diligence and so on.
Key skills: attention to detail, confidence in your offer, negotiation

6. Oftentimes the seller will reject your offer. Depending on the circumstances you can try to negotiate, but in most cases it’s better to move on. You should plan on sending at least two Letters of Intent per week. Four Leaf Equity sends an average of eight offers per week and over 12 months have only gotten two deals to the closing table.
Key skills: unemotional decision making, persistence

7. If the seller accepts your offer, the next step is to negotiate the full contract. Once signed, the seller typically requires 1% earnest money deposited within in three days. In other words, for a $5 million purchase you will deposit $50,000 in earnest money.
Key skills and needs: negotiation, knowledge of due diligence, capital for earnest money, real estate attorney

Revised Equation

As you can see above, there is a great deal of work that goes into finding a property, and the skill sets range from sales to finance to law. It is very difficult for one or even two people to do all of this.

This is why we say multifamily is a team sport. Those who try to do it all themselves usually flounder, and that’s very dispiriting when chasing the dream of passive cash flow. The diagram below provides a more realistic view of the process.

Revised deal equation diagram

Due Diligence

Once the deal is under contract, the real work begins. A typical due diligence checklist will have 80 or more items on it. For each item, you need to make sure the seller provides all necessary information and be willing to exit the contract if due diligence finds “gotchas” that make the deal unprofitable. Additionally, you need working capital to cover the cost of inspections, travel, and attorneys.
Key skills and needs: knowledge of due diligence, ability to manage many details, persistence, negotiation, working capital, real estate attorney

Debt and Equity

The process of raising debt and equity commences simultaneously with due diligence. There is an enormous amount of paperwork involved, and it’s not uncommon to spend $20,000 on legal fees alone. Furthermore, while real estate securitization is a well-trodden path serviced by thousands of attorneys, the structure of a deal can vary widely. Examples of the kind of decisions that need to be made are:

  • Are the investors going to have a straight equity ownership? I.e. do they get a set percentage of income and equity on sale?
  • Will the investors be offered a preferred return regardless of how the asset performs?
  • If so, is there an additional split of return on equity above and beyond the preferred return?
  • In addition to the down payment, how much equity will be needed for closing costs, capital expenditures and reserves?
  • What risks and potential conflicts of interests need to be disclosed to investors?

On the debt side, lenders require a strong resume and one or more sponsors to put their names on the loan. The documentation is substantial and usually handled over email. Whoever is managing the loan process can expect to spend many, many hours gathering documents, getting signatures and emailing them to one or more counterparts at the lender.

Key skills and needs: attention to detail, workflow management, networking skills (to find sponsors), working capital, securities attorney, high net worth

💡 Aside: while some say tech is a young person’s game, real estate is definitely an old person’s. This is due in part to the net worth requirements, but it shows in other ways. Notably, the industry is not particularly tech savvy. While consumer facing sites like Zillow would have you believe otherwise, the truth is that the backoffice interfaces for most real estate transactions are 10 years behind modern startups. They do not use Slack, Trello, agile practices or “design thinking.” Email, Excel and PowerPoint are fundamental tools of the trade.

Raising Equity Capital

Of course, the legal aspects of raising capital are just a starting point. You must also create a pitch deck that explains why the deal is an attractive investment. Then you need to send it to existing investors or find new investors through networking. This means going to meetups, hosting meetups, hosting webinars and generally doing everything possible to get as many eyes on the deal as possible — all while taking care not to violate securities laws.

Occasionally a deal is so good, and the promoter’s network is so strong, that a single investor may provide the entire equity. But the vast majority of deals are pieced together in chunks of $50,000 to $100,000.


In recent years crowdfunding has become a viable option for many promoters. By aggregating a network of investors, crowdfunding platforms can provide a fast method to raise capital.

However… in order to maintain a good reputation with their investors, as a rule these platforms have strict criteria when deciding whom to allow on their marketplaces. Most will only feature deals by promoters with $50 million in assets currently under management. This means newer and smaller promoters are shut out of the crowdfunding marketplace.

The Full Apartment Investing Equation

In light of what we’ve discussed above, let’s try another version of the deal equation.

The full real estate deal equation diagram

You might notice that the green boxes represent money, and the pink boxes represent people. As you can see, the “people” part is just as important as the “money” part of a deal.

Most deals fail for lack of people, not lack of money.

After the Deal

Once a deal is closed, there is still a lot to be done. You need to provide oversight to the property manager. If construction is necessary, someone needs to manage that. Good bookkeeping is essential to keeping investors happy. Regular distributions need to be made to investors, along with communications about results. While not as frantic as the process of raising capital, it’s still a substantial amount of work — doubly so if you have more than a few investors.

And in the meantime, you probably would like to be doing more deals. The cycle repeats so you can add more assets to your portfolio.

The Bottom Line

Apartment investing requires a lot of different skills. It’s very difficult to do it alone, so build a team and recruit advisors to help you through the process.

If you want to go fast, go alone. If you want to go far, go together.