There are various reasons why an owner of a multifamily property is looking to sell their property. You can use the seller’s motivational factor to assist you in approaching them. The motivating factor in selling a property can also enable you in locating sellers.
There are various public records that you can access and databanks at your disposal if you know what it is that you are looking for. Here is a list of some motivating factors and how you can transform that information into potential leads.
Divorce can be a motivating factor to sell. You can access divorce filings by contacting your local county clerk’s office.
Poor property management is also a big factor in a multifamily property owner wishing to sell. If you can find out which management company is running poorly operated properties, then you can find out who the owners are and contact the owners directly.
The death of a multifamily property owner is also a reason to sell. You can check to see what estates are in probate court and get your contact information there. Often in estate scenarios, you run into a bunch of family members who know nothing about managing property and they are looking for a buyer to take away that burden.
Multifamily properties that violate city code violations can be a great indicator of someone who would like to unload their headache. You can access city code violators by contacting your local city code enforcement office. There may be a fee to purchase the list.
A history of fire code violations can prompt property owners into selling as well. The owner may wish to get out from under the necessity of updating the facilities to meet fire code requirements. You can check with the city fire marshal to find out how to access that information.
Along this same line, you can also check out properties that are currently under some type of litigation. The owner of a property that is under a cloud of legal hassles is likely going to be extremely motivated to sell.
Owners who have become delinquent in paying the property taxes on their multifamily property may be looking for a buyer. Your county clerk’s office will have record of properties that have delinquent property taxes.
The factors that motivate a multifamily property owner to sell can be diverse and will definitely vary from person to person. It is not necessary to dwell on the “why” behind an owner’s deciding to sell as it is to make the most of that information. The reasons behind selling can both give you access to sellers and give you leverage in approaching them.
Here is one student’s Aha Moment from Lance’s recent Live Event:
“It was when I realized yesterday that it, that it is at least theoretically possible and others have done it to one deal with my J – O – B.”
You need to know how to “cap out” a property or create value in a property. If you are going to wholesale properties, you need to understand this concept because it improves your ability to package your deals for sale to another buyer. Understanding Market Cap Rates is vital to increasing value in multifamily properties.
The better you can communicate what could be done to a property and how to make money with a property, the higher the assignment fee you can get when you sell that property.
It will have much more impact if you can say, “I have a 50 unit apartment building that is currently at a 9 cap that could easily be at 11.2 cap if you do these things” instead of saying, “I have a 50 unit property, do you want to buy it?”
The more educated, empowered and knowledgeable you sound, the more value you bring to the deal whether you are going to hold it or flip it. In order to do this, you need to understand the Market Cap Rate. This is the cap rate that most properties are trading on a retail basis. The Market Cap Rate can vary from city to city.
As more demand increases in the market, the Market Cap Rate goes down because people are getting more excited about the appreciation. The demand is driving the price.
How does knowing the market cap rate help you? It helps you in terms of determining the value of your property or selling your property. You know that Cap is the NOI divided by the price so you can turn that around and say that the price equals the NOI divided by the Market Cap.
So if your NOI is $27,000 and your Market Cap is 8.5%, then the value of your property would be $317,000. If you paid 220,000 for the property, your equity would be $97,000 ($317,000 – $220,000).
The way you create value in apartments is by raising NOI. Knowing what the market cap rate is allows you to immediately assess the value. If you want to know how much your property will be worth if you do some improvements, just divide it by your Market Cap Rate.
When you are analyzing a property, you want to buy at a high cap rate but you want to sell or refinance at a market cap rate. An appraiser will look at the market cap rate to assess the value of your property. If you just bought a property, you will want to wait twelve months before you refinance.
The more knowledge you acquire regarding your market and the property, the more you are able to accurately assess the property and in turn, create more value. The Market Cap Rate is just one tool you can use to create value.
Beverly DeLong, a student of my Multifamily Success homestudy course, was recently interviewed about her training, the deals she has put together and what my course has taught her and how it has changed her life.
Listen as Beverly shares her enthusiasm for the program and her amazing success in implementing the skills she has been taught.
Are you afraid to take the plunge into owning multifamily properties because you believe that multifamily property deals require knowledge of complex math formulas? Put your fears to rest! All that is required is simple math. If you have a basic understanding of Net Operating Income and Cap Rates, then you are armed with all of the math that you need to work with multifamily properties.
The first formula that you need to be aware of and understand is the Net Operating Income. The NOI is nothing more than your revenue minus your expenses. Net operating income is on an annual basis. Expenses include everything for running that property but it does not include the mortgage payment, which is otherwise known as your debt service.
Your expenses for a multifamily property would include property management, taxes, property insurance, maintenance and repairs, and utilities. Revenue for the property would include rents and any other income producing vehicles you may have on the property such as vending machines or late fees.
Here is an example of how to determine your NOI:
Let us say there is a ten-unit apartment building and the rent is $500 per apartment. The building is 90% occupied and the expenses are $27,000 per year. Your revenue will be the following:
10 units x $500 x 90% occupancy x 12 months = $54,000 per year
So now that you have determined the revenue, you need to deduct the expense to reach what your NOI is.
$54,000 – $27,000 = $27,000 per year.
This figure does not include the mortgage.
Cap Rate is an abbreviation for the capitalization rate. This is the return on investment on a percentage basis if you paid all cash. The formula for Cap Rate is NOI divided by the purchase price. The Cap Rate is the equalizer and will tell you how good a property performs.
From the example above, we know that we have an NOI of $27,000. The seller says that he will take $220,000 for the property. So if you divide the NOI by the purchase price, you will come up with a Cap Rate of 12.2%
The golden rule in assessing multifamily properties is to look for properties that have a 10% or higher Cap Rate. So based on that rule, you know that apartment deal is a good one.
You do want to take into consideration the amount of repairs that need to be done to a property when looking at the Cap Rate. Many times when you are looking at distressed properties, the occupancy is down and the Cap Rate may be less than 10% but you realize that with a little elbow grease you would be able to raise the Cap Rate up above 10%. You can use this to your advantage when negotiating with the seller.
So there you have it. Two simple formulas can put you in the driver’s seat of putting together a great multifamily deal. The NOI and Cap Rate are at the heart of assessing whether a multifamily deal is worth pursuing.
In these tough economic times, people are looking for sound investment opportunities. People desire investments that are low risk but yield great returns. Such opportunities are hard to come by. Owning multifamily properties offers you the best of both worlds. Here are 10 advantages of owning multifamily properties.
1. You can outsource your property management to professionals. This allows you to go on vacation.
2. You can buy with none of your own cash. It is easier to get financing on apartments than on single family homes. The more you borrow the less they look at the borrower’s credit. You can raise private money to cover any cash requirements.
3. Apartments are made to cash flow even with nothing down which means that there is one roof with maybe twenty apartments under it as opposed to one house with one roof. Houses are made to be bought and sold to homeowners. You can convert them to rental properties but apartments are designed to be income-producing properties.
4. You receive better leverage of your time and effort. It is much easier to maintain a 10 unit apartment building than it is to maintain 10 single family houses.
5. The value of income properties is based on the income. It is a function of the net operating income and you can create value by raising the rents and cutting the expenses. You will then know how to invest your money and your time.
6. Less competition. There are fewer people out doing multifamily deals than single family deals because they lack specialized knowledge and they lack mindset.
7. There is less risk. You have less risk from the standpoint that you have multiple tenants and multiple revenue streams. An apartment is a business. If you have a house and you lose your tenant than you are feeding the 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 borrowing two million dollars and above, it becomes non-recourse financing and this means the asset is the sole security for the loan. There is no one personally guaranteeing the loan.
9. Condo conversion. You can buy apartment buildings and convert them into condominiums. It is a different strategy because you are putting all of your cash forward and then pulling out. It is 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 who cannot qualify for houses and foreclosures are up. This means that the demand for rentals is going up.
Buying multifamily properties allows you to have low risk and great return for your investment. If you are looking for an investment vehicle, multifamily property investing is a great way to go.
It is probably pretty safe to say that everyone is looking to create wealth. Real estate investing is an excellent venue through which you can create massive wealth. There are four components in real estate investing that you need to accomplish this goal. These components are specialized knowledge, marketing, systems and mindset.
Specialized knowledge encompasses all of the techniques needed to acquire multifamily properties. In addition, it is also the knowledge that you need to operate multifamily properties, analyze multifamily properties and most importantly, how to find multifamily properties.
Marketing in real estate involves three different areas that you need to be aware of. Marketing means marketing to find deals, marketing to find private money and marketing to find tenants for your property. Of course, you can use a property manager to find tenants for your property, but you still need to be cognizant of the fact that this is an area that requires marketing.
Marketing is extremely important in real estate. If you are not attending to your marketing, then you do not have a business. If your phone is not ringing, then all you have is a hobby and not a business.
Systems are what you will put in place so that you will ultimately have other people working at your business for you. You want to have systems in place where others are doing your marketing, property management and bookkeeping. You do not truly have a business unless there are documented systems.
Your definitive goal is have your business serve you. A business is an asset that throws off income forever without you and your direct involvement.
Mindset is the fourth and probably the most critical component of real estate investing. None of the items above can happen unless you take action. Taking action comes down to having the right mindset, and overcoming the limiting beliefs that your subconscious places upon you.
You cannot separate mindset from your real estate investing because you ARE the business and your mindset will determine the direction your business takes. The strength of your business is a function of the strength of your mindset.
Creating wealth through real estate investments is very real and it is up to you to take the initiative and take the necessary steps. You can use parts of these four components, or you can use individual components and make money, even good money, but if you want to have wealth, you will need to have all four components in place.
Jim Craig, a member of my multifamily apprentice group, was recently interviewed about apartments, the economy, and how he’s creating success in today’s market.
Jim stresses the importance of mindset and how mindset can overcome today’s economic conditions.
No goal is too high or dream too big when dealing with multifamily investing.
Hear one student’s dream of quitting his day job:
“My brother and I, we can quit our J-O-B’s if we can get a 200 unit apartment project!”
Once you have made the decision to start doing multifamily property deals, you might find the whole process a little intimidating. It does not need to be. It is simply a matter of following your MAPS. MAPS stand for Mindset Accountability Practice and Showing Up.
Your mindset can be your greatest asset or your greatest liability when it comes to putting together multifamily deals. The linguistics you use are the most powerful lever you have on your mind. For instance, if you think of yourself as a survivor, you are mentally relying on adversity to be successful.
You can be a problem solver that thrives in spite of any challenge that comes along. A problem solver is more empowering than the image of a survivor who is battling for existence.
Accountability will help to motivate you to accomplish the goals that you have set forth for yourself no matter how big or small they might be. You need to decide what you are going to do and then tell someone of your next plan or step. A commitment has then been made to someone and then when they have asked you if you have done what you committed to or not, you will be embarrassed to tell them no. Pride and the fear of failure will keep you focused on your goals.
Practicing on how you will present your multifamily deals to potential investors will help you to overcome your fear of speaking to them. Visualize a successful conversation where the investor wants to do the deal. As you visual your call, try to experience the feeling of a successful call. What will it would it sound like, feel like and smell like? Try to incorporate all of your senses.
Imagine a successful call and get it into your subconscious. Your subconscious does not know the difference between what is real and what is not real. Once you have it tucked away in your subconscious, it will manifest and create the positive things before you do the call. This will help drive you to make that call. Fear can be a constructive and productive thing.
Showing Up is 80% of your success. You may not have it all figured out by you are going to show up anyway. You can make plans of course, but keep in mind that some of the best laid plans go out the window once the ball starts rolling. Just show up.
Once you show up, everything else will change. That is how things go in real estate. If you do not show up for the multifamily deal, then someone else will and you get what is left behind. Just remember that good things come to those who wait but only those things left behind by those who hustle!
So do not let the prospect of putting together your first multifamily deal overwhelm and intimidate you. Use your Mindest Accountability Practice and Showing Up to encourage and empower you. Your road to financial freedom has just begun!
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