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.
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.
Once you have a property manager in place to manage your multifamily property, you need to be able to track his or her performance. There are four reports that are essential to tracking a property manager’s performance. The information from these four reports will help you to evaluate the job that your manager is doing and alert you to whether changes need to be made.
The first report you need is the Profit and Loss statement. This is a standard report of income from the previous month and expenses so you can see your NOI. You should be sure that is in your hands no later than the 10th of each month.
The second thing you need to review is the check register. You want to see what checks were written from the previous month. If you can see where the checks are going, you can get a better idea of the cash flow and see who is getting paid what.
You also get an idea of whom the vendors are and you can question things that you do not recognize. The check register can also alert to you any other problems with the property. For instance, if you see an increase in the number of checks written to the plumber, you need to determine what the reason for that is.
An occupancy and traffic report can help you analyze where your tenants are coming from and what marketing campaigns are most effective. This report can alert you to which units are empty, rent ready and which ones are not. The worst thing to have happen is to have vacancies that are not rent ready and someone shows up who is ready to move in that weekend.
You can create the occupancy and traffic report in an Excel spreadsheet. Your onsite manager then fills it out on a daily basis. Each row is a day of the month and each column includes number of calls, number of showings, number of applications sent out, leases signed, follow ups, referrals, leads from ad sheets, leads from signage, leads from walk-ins, and leads from merchant coupons.
By looking at this report, you can see the relative amount of activity. If you are getting activity but not converting, then you need to find out why. That tells you that you need to re-evaluate your process.
The fourth report is the maintenance, or work order, report. When a tenant calls in with a maintenance problem there should be a work order to complete and a progression of steps. A work order summary log should include all of this information. The maintenance work order log lets you know that your tenants are being taken care of.
Whoever is managing your property needs to have a work order log. You want to see how long it takes for a work request to be filled. You do not want the turn around time to be a week. Customer service must be a priority with your tenants.
These four reports help you to monitor the overall health of your multifamily property. Good property management is the backbone of retaining tenants and keeping your property managers accountable is crucial to your multifamily property being a money-maker for you.
You have learned how to create a real estate business. But at the same time, you want to create your net worth. The steps to getting this done are a 5-step process. Not only can you apply this process to your business, but you can apply it to your personal life.
The five steps to Getting it Done are:
1. Define what role you will play
2. Establish your vision
3. Create your storyboard
4. Create your plan
5. Create your performance dashboard
Defining your role: The roles that you can play in your business are that of bird dog, wholesaler, rehab and retail properties or rentals (income) properties. The more focused you get in defining the role you wish to have, the more effective you will be. Do not try to do everything or you will get distracted and bogged down by stretching yourself too thin.
Establish your vision: Your vision is your reason “why”; why you are creating your real estate business. Make this a “three-year” vision. Ask yourself where you want to live, what do you want to do and what do you want to have over the next three years. This timeframe is long enough to keep you focused and energized.
Create your storyboard: This is a physical representation of what you want your vision to be. Your mind thinks in pictures so keep this board in front of you everyday. Cut pictures of your “dream” items out of magazines. Post pictures of properties that you have closed on.
Create your plan: What is the sequence of steps to get you to your three-year vision? What are the milestones along the way? Create a storyboard that steps out your plans all along the way. Define the action steps that must be taken in order to reach each milestone.
Create your performance dashboard: This will be your daily and weekly “scorecard” of how you are doing in accomplishing your goals. You will be able to see what goals you haven’t met each day and each week. This is a great way to actually “see” where you are on your path to financial freedom.
Once you put this five step process into place, you will be able to “see” the big picture and more effectively work your business. As you progress and begin to achieve goals that you have set for yourself, you will begin to realize your dream of financial freedom.