When locating private monies for your multi unit deals, there are the four key elements of being successful: Predisposed investors, control, low risk and high return. However, there is another element to making your hunt for finding investors successful. This fifth component is called the strategy of pre-eminence.
Think of the strategy of pre-eminence as you would The Golden Rule: “Do unto others as you would have them do unto you.” It is really that simple. You take a pre-eminent position and treat every client as you would like to be treated. This means that you have a vested interest in what type of deal they are looking for.
This strategy begins with being sure to refer to your investors as “clients” as opposed to “customers”. Client denotes someone you are going to look after in the long run while customer denotes a one-time transaction. Client is a long-term relationship.
Your private money sources are your clients for your multi unit deals. You are creating investment products for them. They expect to receive benefit from that. Because you want to have a long-term relationship with them, you treat them as a client.
Think of it this way: you are a customer at the chain jewelry store. You are just a nameless face among thousands there. No one there has a vested interest in finding out what your needs are and what they can do for you. However, if you go to your local jeweler, they will treat you as a client. They will get to know you on a personal basis and work for your repeat business.
This means that you look after them; you think like they would. You try to put yourself in your client’s shoes and look out for his or her best interest. Honesty is always the best policy. If you fudge on giving the details of a multifamily property to your potential investor, not only do you risk losing them but you risk destroying your reputation that you have built thus far.
Remember, referrals are the backbone of your multi unit business. You cannot build up your list of credible and trustworthy references if you develop a reputation for not being an honest person to deal with.
Your ability to establish a relationship of trust, reliability and integrity is the foundation for a relationship that will be mutually beneficial in the long run. The strategy of pre-eminence opens the door for you to garner stellar word-of-mouth referrals from your clients.
You want to invest in multi family properties, but with all the apartment buildings in your city, you could spend all your time looking at them, analyzing them, and comparing them without ever getting anywhere. You need a simple, effective way to analyze multi family buildings to save you time and help you make judicious decisions. The following three guidelines are all you need to rule out unprofitable deals and narrow in on the best.
1. Cap Rate. Cap Rate is an abbreviation for capitalization rate. It’s the return on investment on a percentage basis if you paid all cash. The formula for Cap Rate is NOI (Net Operating Income, which is simply your revenue minus your expenses) divided by the purchase price. Here’s an example: You have a multi family property with a NOI of $50,000 per year. You paid $500,000 for the property, so the property has a Cap Rate of 10%. It’s wise to look for properties that have a Cap Rate of at least 10%.
2. Price Per Door. The price per door is simple to calculate. Just divide the price of the property by the number of units. As a general rule, if the price per door is less than $25,000, it will probably have an acceptable Cap Rate and cash flow. The price per door also tells you the class of property you’re dealing with and whether or not it’s a deal for you. However, it isn’t wise to look only at the price per door without analyzing the other two guidelines. You may miss out on some key information that could help you make a good decision about that multi family property.
3. Unit Mix. The unit mix is the percentage of units that are one bedroom, two bedroom, and three bedroom. A property that has more two bedrooms than one bedrooms will have higher rent or higher revenue per door. Between a property that is 80% one bedrooms and another that is 80% two bedrooms, the multi family property with more two-bedroom units will have higher revenues and most likely a higher Cap Rate. Some people say they like to have more two-bedroom units than three-bedroom units because the three-bedrooms attract children. One bedroom units bring single people or couples. Two bedrooms are typically for roommates and small families.
Once you have collected the above information, you’ll be able to cut to the heart of the deal and weed out multi family properties that don’t meet your needs.
Lead Generation is at the heart and soul of any business and it is no different with multifamily investing. Are you at a loss as to how to track down sellers of multifamily properties? There are five solid resources for finding motivated sellers. These five sources are direct mail, brokers, www.loopnet.com, bird dogs and other venues.
Of these five resources, direct mail is the most effective technique. This simple technique involves mailing letters to owners of multifamily properties in your target area and asking them if they would be interested in selling.
The wonderful thing about this technique is that you can employ its use in other cities. If you are going on vacation, you can find all of the people in that city who own apartment complexes in your hometown and then send them a letter asking if they are dissatisfied with their multifamily property and let them know that you would like to buy it. Let them know when you will be in their city and when you would be able to meet them.
The second resource for finding motivated sellers is brokers. Probably the easiest method of finding brokers is through www.loopnet.com. You can get very specific about the type of property that you are looking for. You can enter a zip code with a price range and it will give you a list of all those properties that meet your criteria that are on the market.
When you are looking at the properties, some of them will have brokers. You can get the broker’s name and call him. Do not email the broker. If you are not going to even bother to pick up the phone to call then how serious are you? You should call the broker and say, “I saw your listing on www.loopnet.com. Can you tell me about it?”
After the broker tells you about it, then you say “that’s not exactly what I’m looking for. Let me tell you what I’m interested in.” Now you can tell him precisely what you are looking for. The more precise and the more knowledge you convey, the more confidence you will build in that broker that you are a serious buyer.
Loopnet.com is also a resource for finding motivated sellers. Once you find a multifamily property on Loopnet.com, you can call the seller up and negotiate. You can ask for the financials and see what is missing. If anything, Loopnet.com is a great place for you to “practice” negotiating with sellers.
The fourth resource for finding motivated sellers is the bird dog. The bird dog is someone who is out hunting deals. Their goal is to find something that looks like a deal and then they hand it to you to do the work. Bird dogs are informal brokers who scour the market for deals and then match the deals to buyers.
The fifth resource, “other”, is basically a catchall for all other types of resources in finding multifamily deals. A few of these resources are estate attorneys, Laundromat service operators, plumbers, property inspectors and insurance agents.
These five resources offer you great opportunities for attracting and getting in touch with sellers. If you utilize these resources you will have multitudes of potential sellers at your disposal.
When you sit down and examine the advantage of owning multifamily properties, you will be amazed at the multitude of benefits. While other avenues of income generation offer some attractive incentives, owning multifamily properties brings many great things to the table. Let us explore these advantages:
1. You can outsource your property management to professionals. You don’t have to be bothered by tenants and toilets. Even if you have smaller properties, you can hire property managers. Leave the headaches to them and go on vacation! The property doesn’t own you; you own the property.
2. You can buy with NONE of your own cash. You can raise private money to cover any cash requirements. You will find that it’s easier to get financing on apartments and that the MORE you borrow the LESS they look at the borrower’s credit. In some instances, they don’t even look at the borrower’s credit but at the borrower’s assets instead.
3. Apartments are made to cash flow even with nothing down. This means that instead of there being one house with one roof generating only one source of income, you have one roof with possibly multiple apartments under it creating multiple income streams. You have economy to scale. Apartments are designed to be income-producing properties.
4. Better leverage of your time and effort. Think about it. What would you rather do? Look for ten houses or a ten-unit apartment building? On the flip side, wouldn’t you rather sell a ten-unit apartment than sell ten houses? Of course! You have more leverage of your time.
5. The value of income properties is based on income. This is a function of Net Operating Income (NOI) and you can create value by raising the rents and cutting the expenses. This is a very predictable process. You can determine how much the property is worth based on how much you raise the rents.
6. Less competition. There are less people out doing multifamily deals than single family deals because they lack mindset and they lack specialized knowledge. They have limited themselves by the mindset that says they must graduate from single-family homes to multifamily properties.
7. There is less risk. With multiple tenants you have multiple revenue streams. If you lose one client, it’s not the end of your business. On the other hand, if you are relying on a house as your sole source of income and you lose that tenant, you are still pouring money into that house. There is mitigated risk through apartments.
8. Non-recourse financing. The more money you borrow, the easier it is to borrow. When you get to loans of two million dollars and above, it becomes non-recourse financing which means the asset is the sole security for the loan. No one is personally guaranteeing the loan.
9. Condo conversion. This has been very big in some parts of the country such as Denver and Tampa. As an example, you would take a fiveplex, convert it into condos, and then sell the individual units. It is a different strategy because you’re putting all your cash forward and then pulling out. It’s not a long-term hold strategy.
10. The sub prime lender bust. With sub prime mortgage lenders falling out of the market, there are people cannot qualify for home loans. These people have to live somewhere so the demand for rentals is skyrocketing.
As you can see, the advantages to owning multifamily properties are solid and sound. With so many venues to consider when trying to find something to generate passive income for yourself, you just can’t overlook the tremendous value created by multifamily properties.
Are you still looking for inventive ways to get your multifamily property deal done? The venues that you can utilize to get your deal done are numerous. Below are ten more possibilities for you to consider.
1. Triple New Lease Option – This is where you lease the property from the seller and you pay rent but you have an option to but as well and sublet. This is the “lease-option” for the property.
2. 401k Loan – If you have your own 401k money or you know someone who does, you can actually borrow against it for funds. Be careful because if it is your 401k money and you leave your job or get laid off, then the money is immediately due. Once you leave the company you cannot borrow against it.
3. HELOC – Home Equity Line of Credit. If you have dead equity, pull it out. A line of credit means you can access it whenever you want to.
4. Home Equity Loan – You will get a lump sum amount and you pay it back over time.
5. Credit Card Loans – A word of caution: you need to be very judicious with this. This is more for short-term loans, especially if you get a low APR offer. Understand that the minimum payment will be 2% of the outstanding balance. This could be touch from a cash flow perspective because you are paying basically 24% of the balance due over the course of a year. It can be a great short-term play.
6. Unsecured Lines of Credit Personally – you can go to the bank and get an unsecured line of credit personally or you may know someone who has an unsecured line of credit or who can get one and become your money partner.
7. Unsecured Lines of Credit for Business – This is another direction for you if you have been established for a couple of years. You can do this with your business or with someone else’s business that can become your money partner.
8. Private Lender – someone with cash that will be a private lender.
9. Private Equity Partner – equity partner who will put cash into your deal.
10. Subject To – as you do it with houses, you can do this with any property. They all have “due on sale” clauses that you need to be aware of.
As you can see, the potential private money sources are plentiful. You do not have to rely upon all of the “old” standards. With an abundance of sources, your ability to successfully put together your multifamily property deal is almost limitless.
Have you ever pondered what it takes to create wealth? In order to get on your path to financial freedom, you need to understand what it takes to get there. In any real estate or business venture or even in our personal lives, there are three things that need to occur simultaneously to create wealth for us. Those three things are Active Income, Passive Income and Enhancing our net worth and increasing our asset base.
Active income is where you exchange your time and energy for income. You are active and working at it. If you do not work at it, you do not get paid. Another term for this would be working income. Your current job would be considered active income.
Your active income will not make you rich unless you are building something that will generate passive income. It does not matter if it is a high paying active income job; the bottom line is if you do not show up and do the job, you will not get paid. Some examples of active income in real estate are property managers, home appraisers, real estate agents and contractors.
Passive income is income that is generated by assets or other people where you are not actively participating. Apartments are a good example of passive income. You either invest your money into it and make it a passive vehicle for you or you invest your time and energy one time to create it and the asset pays you forever. Passive income examples for real estate are rental properties, equity participation and private money lending.
Passive income is really the path to financial freedom. The basic definition of financial freedom is when your passive income is more than adequate to pay for your desired lifestyle. To create your financial freedom plan, you must figure out how much you require per month to pay for your desired lifestyle and what investment vehicles you are going to use to get there.
Enhancing our net worth and increasing our asset base is the third step in creating wealth. First, we need to define net worth and asset. Net worth is simply the difference between your assets and your liabilities. Assets are anything that delivers monthly income. They are yet another means of producing passive income. Everything comes back to passive income when it comes to securing your financial freedom.
Once you come to the realization that passive, not active, income is the key to your financial freedom, then you have taken the very first step toward creating wealth for yourself.
An “all bills paid” property means that there is one bill for the entire property and you are paying the electric bill instead of the tenants. As a result, you charge more for rent. You will discover that many properties, especially Class C, will be “all bills paid” properties. You need to weigh the pros and cons of offering all bills paid with your properties.
Typically, you will be faced with deciding whether it is beneficial to switch from all bills paid to individual meters for each unit. Most people are not looking at going from individual meters to all bills paid.
All bills paid properties are usually easier to rent because the potential tenant does not have to come up with a credit check and it is more convenient to have the electric bill included in the rent. The tenants are writing one check to you instead of two separate checks. Another advantage is that if you had a tenant not paying on time, you could have the electricity shut off.
You could convert an all bills paid property to individual meters but it is capital intensive. The tenant will have to get his account set up with the utility company.
The argument against all bills paid properties is that utility prices have been going up and if something is “free” to a tenant, they will not be very judicial with the use of their utilities. The disadvantage is that you can lose money based on usage. You could overcome this by adding a clause to your tenant’s contract that says if the utility bill exceeds a certain amount that you reserve the right to bill back the tenant.
An option would be to leave it as a single meter for the property and put a monitor on the individual units to measure the usage. You can outsource that to a company who will monitor the usage every month.
There is a service that you can pay with a capital cost of $500 per unit. They will put in a measuring device to determine how much electricity is used. For a small fee, the company will measure the usage remotely and bill it back for the electricity used. This is much more cost-effective than putting in electrical boxes for each unit. The cost for actually converting a single unit is more than $500 because you are putting in a new meter box.
If you do offer the all bill paid to your tenants, ultimately, you are still responsible for the electric bill. You are the electricity “provider” so if you are flexible with that, you can charge more rent for the convenience of that service. All bills paid properties have their advantages and disadvantages and it is important to weigh all of your options when considering making a switch.
When you are trying to figure out how to get your multifamily deals done, there are techniques that you can use to do so. Any one of these techniques can be used individually or in a combination. They can be applied by rehabbers, wholesalers or buy and hold entrepreneurs.
1. First Mortgage: you go to a lender to get a first mortgage.
2. First Mortgage Paper Cash Out: you can get a seller to carry back a first mortgage and if he wants cash instead of payments, then you can sell the note. You can do this for private investors as well. A seller might want to be cashed out.
3. Second Mortgage: you can get a seller to carry back a second mortgage or you can get someone else to finance the second mortgage for you.
4. Second Mortgage Paper Cash Out: the seller is carrying back the second mortgage and there are people who will buy the second. You are simply keeping the first in place. There will be a heavier discount but there are people who will buy second lien positions and you can cash out the seller that way.
5. Blanket Mortgage: you’re getting a seller to carry back a second but they want extra collateral. You allow their mortgage to blanket over another piece of property that you own.
6. Blanket Over Other Collateral: you want the seller to carry back the second mortgage but the seller wants more collateral. So, say you have a boat or a car or something else to offer as collateral. You can offer that piece of collateral and make that part of the lien.
7. Deferred Down Payment: This is a way to get an interest free loan. You buy the property and either assume that the seller has first mortgage or you get a new first mortgage. You then give a down payment 12 months from now. This is another way of rephrasing a second. Calling this a Deferred Down Payment implies that there is no interest being charged.
8. Barter: trading something for something. This is getting in the creative arena. Let’s say you have talent as a bookkeeper and you want to buy the property, you could barter your services against the down payment on that property. You could provide 12 months of bookkeeping services and if you need the seller to carry back $20,000, then you provide $25,000 of bookkeeping services. You then have the seller carry back a note on the property.
9. Barter Assets: instead of putting a mortgage, for example, on your boat, you give it to the seller as consideration for a down payment on the property.
10. Turn Around Joint Venture: You could approach landlords of distressed properties that may be out of state. The landlords are amenable to terms that you can agree on so you agree to a joint venture. You come in and turn the property around and they give you half ownership in the equity that they have. This is a great way to get in a deal with no cash.
Your ability to put together multifamily deals is only limited by your imagination. Think creatively. There are plenty of other options available to you.
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SECURE AND CONFIDENTIAL