History of FIG: An Inside Look at How We Started and Why FourplexesSep 01, 2020
The history of real estate spans a wide variety of product types and strategies. Most often our first taste of real estate comes when we purchase a traditional single-family home. Typically we buy this home to live in, and after the stress and excitement of first-time homebuying, we can finally call the house our own. This entire process teaches us for the first time how how a conventional loan truly works and we soon learn that this same loan type can be used to purchase a duplex, triplex, and fourplex. These smaller multi-unit buildings are also known as residential multifamily.
When it comes to financing residential multifamily, it's handled similar to a single-family residence. The borrower is still able to get a lower down payment loan (typically no more than 25%) and also has the option of getting an owner-occupied loan where rents from the other units can contribute to the debt-to-income ratios of the borrower.
With each of these products, the borrower is approved for financing based almost completely on their own credit and financials. Outside of the appraisal and the asset's general condition report, not much attention is spent on the property for underwriting. The ease of financing as an individual tends to be the reason why the majority of real estate investors have started in this space (and why some have never left).
Is there a drawback? Unfortunately, yes. Since almost all of these residential multifamily units fall into the same neighborhood or complex, it comes with a dilemma. Each property is individually owned fee simple—issues tend to manifest here as multiple owners act independently as landlords within the same community.
Imagine for a second driving down one of these streets in your own market. This is the “other side of the tracks” kind of neighborhood and current city planners and council members have hated these communities since about 10 years after they started approving them. They were almost exclusively built before 1980 and are very simple architecturally (think brick or siding and a full residential block or more full of duplexes, triplexes, and fourplexes).
Why are they this bad? All of these multifamily buildings are owned by different owners. Some have great pride in their investment—the roof has been repaired or replaced, the lawn is meticulously maintained by a landscaping company, and if they see any fading paint on the white picket fence as they drive by, you can bet money they'll be spending their Saturday with a bucket of white paint taking matters into their own hands! This type of owner doesn't allow trash, broken down cars, bikes, or diapers all over the front lawn. This is the EXCEPTION within the neighborhood, NOT the rule. It takes a ton of work and is almost never the standard seen in a community.
Look at the homes surrounding this one and you'll see just the opposite. Broken gutters, mismatched doors, and bald patches scattered throughout the lawn mixed in with clumps of weeds that rise above your ankles. And it's this part of town that attracts broken down tenants. What does this translate to? Broken down profits. It's within these properties that the name of a slum lord resides.
He or she never meant to get there, but the difficulty of maintenance, and the lack of experience needed to qualify good tenants/evict bad ones never existed. These mistakes gradually devalued each property and their bottom line is swept away into the sea of red accounting losses.
Are you depressed reading this? Or did you find it somewhat comical? I think it depends on which side of this scenario you’ve been on! If you’ve lived in nearly any metro in America, you know exactly what we’re talking about. The incredible financial vehicle that was created for this type of investment property made the barriers of entry so easy--with no “rules of the game”--that values and appreciation of these assets suffered.
What’s also unfortunate is that this type of property (1-4 unit residential) is a comparable-based appraisal approach. This means that if the average of the like-kind properties in your community is far less than yours—than your property will be valued far less than its potential. In real estate, this is called “The Neighborhood Effect”.
Looking back to the landlord painting the white picket fence, with the perfect lawn, and new roof... The value and renter quality of his investment is now almost wholly determined by the neighboring slum property values. Not to mention tenants are inherently attracted to areas NOT just the home. These things are not exclusive to one or the other. Never forget that your rental pool as an investor is often determined by your neighborhood surroundings.
From Dilemma to Solution
The residential multifamily niche has so much potential at its core. This dilemma that we've described above is also where the incredible opportunities of real estate (or capitalism for that matter) take shape in the marketplace. There are several common acronyms for this such as FANAFI and SANFAN. "Find a Need and Fill It" and "See a Need, Fill a Need" respectively.
This is where the Fourplex Investment Group came into fruition.
A need was spotted within multifamily where multiple models intersected and crashed. Our experience across both residential and commercial worlds led us to a solution that finally tapped into the positives that both investment types had to offer.
FIG's Co-founders, Mike Miller and Steven Bond had been working together to sell some new construction homes that Mike had built. The market was tight, scary, and on the verge of something new. In 2008-2010, the new concept of available money for financing was scarce so Mike relied wholly on hard money loans to get through deals.
After selling about 15 homes together, they realized their solid relationship could open up a new door. Mike sat down with Steven in his local RE/MAX office where he was working and asked, “What can we do to build more than any builder, but not compete directly with them?”
Mike followed up by sharing how his first purchase was multifamily and while it was one of the best properties he had ever owned—there were issues with the area. Steven had enough real estate clients to know that most preferred stability over speculation in the market, especially while the 07-08 crash was still fresh in their mind.
Both noted that money on the sidelines was starting to get a little itchy for action. What if they could bring a new inventory of fourplexes to the market but sidestep mismanagement risk by keeping them under the single umbrella of an HOA. This way the two of them could capture one of the best investment vehicles, while holding onto the integrity of a sustainable community, even twenty or thirty years down the road.
Instead of an owner suffering the woes of “The Neighborhood Effect”, EVERY roof would be maintained, EVERY home would have the same blinds, ALL landscaping in the community would look nice, ALL exteriors would be freshly painted, and EVERY owner and tenant would operate by the same set of protective and value-balanced principles.
Our First Project
Mike and Steven moved forward and put some plans together for 9 fourplexes and 8 mixed-use duplexes sitting on about 5 acres in Pleasant Grove, UT.
Within 30 days of launching, their development was completely sold out. Each client was able to obtain their own construction financing for their transactions. Even from the beginning, we learned that in order to offer equity to clients, we would need to remain as lean as possible. This would help investors maximize the upside in their investments.
Investors got a new fourplex, managed by a professional company, with fee-simple capacity to sell and leverage as they wished. The cap rate and cashflow were excellent, without the risk that comes with renting out a single-family residence. In single-family, if your tenant moves out for whatever reason, you're 100% vacant. Cashflow runs dry. While in small residential multifamily (2-4 units), investors would still be able to collect rents even if one tenant moves out. All of this is possible so long as an investor can take on the risk of a construction loan and remain patient as their investment is built and stabilized with rents.
Mike and Steven didn't realize at the time they were building a company. All they were doing was creating a value proposition and bringing it into a market that had a need. Over the next decade, the Fourplex Investment Group would rinse, refine, and repeat—scaling FIG into the model it is today.
Since 2013, FIG has built over 4,000 doors of multifamily units—providing investors with over $500M in cash-flowing properties. We personally invest within the new-build fourplex niche that we've created and take great pride in organizing high-quality and recession-resistant assets for our clients.
Our developments (over 20 of them now) can be found throughout Utah, Idaho, Texas, and Arizona. We are constantly scanning the market and new metros to bring the safest and most rewarding multifamily properties to those looking to make a profit in the real estate industry.