A student at Lance Edwards’ Live Event has an Aha Moment regarding extra equity built into the deal:
“When you showed that how that equity is built into someone that is coming in as an investor because I’m thinking “Okay, they’re giving me 20%” so they’re looking at me like “Wow, man, I’m giving you, I’m leveraging the hell out of this property for you.” And I’m sitting here and if I take it back, I’m 100% leveraged but they’re not. Man, how did you do that…extra equity built into the deal…yea, that was just wild.”
Once you decide to begin a direct mail campaign to a targeted list of owners of multifamily properties, you need to have a specific message that you want to deliver. How do you get responses to your letters? Here are some tips to not only get your letter opened but read and responded to.
First, it is important to hand address the envelopes. You may want to do the first letters you send out yourself, but you are the marketing manager of your business and not the marketing assistant. You need to hire someone, possibly a high-school student, to address the envelopes for you.
You can hire someone to hand address the envelope, fold and stuff the envelopes for $.75 a letter. That price even includes the ink, paper, the envelope and the stamp. So if you have 1000 letters to send out, you will end up spending $750. That’s a cheap way to market your product.
Your first goal is to make your letter personal. That begins with the handwritten address. Your return address can be a label. You should have a street address with no name for the return address. Do not use a PO Box. Theme stamps also add a nice personal touch.
It is not necessary to add your name to the return address. You have created interest because the address is handwritten and so you increase the odds that your letter will be opened. Also, do not use “windowed” envelopes because that looks like a business envelope.
Once you have gotten the recipient to open your letter, you need them to actually read it. You should use colored paper for your letterhead. Two good choices are Goldenrod or Gray. Goldenrod has been tested and proven to generate a better response. Statistically, yellow is a “selling” color.
The top of your letter needs to have a headline. The headline needs to grab their attention and draw them into the letter. The body of the letter needs to explain that you are interested in buying their property. It should contain a phone number where they can reach you directly.
You should use your personal name on the letter. Do not use a company logo. Your response rate will plummet if you use a company logo. People are not interested in dealing with companies. They want to deal with individuals. Again, personalization is the key.
The letter does need to be signed and you can have the person that you hired to address and stuff the envelopes sign the letters as well. It needs to be in blue ink so the recipient can see that it was written and not printed. Also be sure to include a P.S. at the end of your letter.
The important thing to remember with a direct mail campaign is to have a system in place. Do not send out so many letters that you are swamped with calls but instead send out smaller numbers so you have time to analyze and respond to the inquiries you receive.
A successful direct mail marketing campaign will generate a response rate of anywhere from 2 – 5%. As with any marketing campaign, you need to analyze what works for you and what doesn’t. By using the tips described above, you are well-equipped to begin an effective direct mail campaign to target multifamily property owners.
Increasing the revenue of your multifamily property does not always mean that you have to add an amenity or a service. Finding additional revenue can be as simple as increasing the rent or increasing the collections.
If you are looking at raising revenues on your multifamily property, there is a very simple formula that you can utilize to help you catalog your different methods of raising revenue.
Your formula for revenues is:
Rent rate x occupancy percentage x collection percentage + other income
This formula gives you your actual revenue. In order to determine your rent rate, you need to take the rent you charge and multiply it by the number of units in the building.
This is also known as your scheduled rent or your theoretical rent.
If you had 100% occupancy and all of your tenants were paying as scheduled, then that is your gross scheduled rent. You need to take this into consideration when you are looking at raising actual revenues.
In raising the revenues, you can raise the rent just as they are sometime by government subsidized rent programs. There are many government subsidized rent programs such as Section 8 housing. Other programs include housing for battered women, people with HIV and the homeless. Some programs pay more than others but it is a way to raise your rents.
You can also raise your rents through repositioning. When you buy a property and make improvements and repairs, you are repositioning. If you convert a Class D property into a Class C property, you are repositioning. This is a way to get more rent as well as increase the occupancy.
If you opt not to raise rent, then you can increase the collections on your existing tenants. Many people overlook this option and go straight to eviction of non-paying tenants. Try to work out a payment plan with the tenant. It is much better to have a payment plan than to evict them and have to go through the process of finding another tenant.
Eviction is a drawn out process. You can always start an eviction process and then stop it whenever you want to. Starting the eviction process can let a tenant know that you are serious about collecting payment. If you are able to come to terms on a payment plan, you can then terminate the eviction process.
So when you are evaluating your revenues and considering various ways to increase revenues with your multifamily property, be sure that you do not overlook the basics of raising rent or increasing collections. These are two simple yet cost-effective ways you can generate more revenue with your multifamily property.
When you are dealing with multifamily properties, it is very important to understand the different classes of properties. The class that a property is assigned can tell you a lot about the property and if it is worth your time and money to invest in. There are four different property classes: A, B, C, and D.
Property Classes are really set by the conditions of the property and where it is located. They are not set by the appraisers. The classes are not something that is formally defined but more of something that is set in the vernacular.
Class A properties, naturally, are the cream of the crop. These apartments are newer and have a higher rent than apartment buildings that are in the other classes. You can actually have a new Class A property in a Class B area. They are classified as Class A because they are new but they have lower rents than other Class A properties because of their location.
Class B properties are multifamily properties that are 10 – 15 years old, well-kept and are in the “middle class” part of town.
Class C properties are in low to moderate income or blue collar neighborhoods. They range in age from 30-40 years so they have usually been through at least one rehab. The average rent for a one bedroom is $400 – $425.
Class D properties are in very bad neighborhoods. These are in high crime neighborhoods; neighborhoods where you do not want to get out of your car. You generally do not want to work with Class D properties.
If you are going to do Class D properties, you need to be in that niche. You are not going to turn around a Class D property without turning around the neighborhood that it is in. Class D properties are suffering from a neighborhood problem and not a property problem.
Class D properties are bought only because they are cash flow machines. You will not get any appreciation on them. They require intense management and heavy security.
Class C and lower Class B multifamily properties are your bread and butter and they do not offer many amenities to tenants. The further you go down from Class A to Class D, the better your cash flow. The premium deal is finding a Class C property in a Class B area that you can reposition.
If you could find a property that is considered a Class D because of its condition but it is in a Class C neighborhood, you would have a great deal. In this case, you can come in and clean up the property by either making a physical change or a security change to it. You can buy it low, make the changes that are needed and then sell it for a great profit.
Your understanding of the property classes enables you to effectively assess the potential value a multifamily property has as an investment for you. You can then more easily decide if it is deal that you would like to pursue or not.
Rich Hadden, a graduate of my Raising Private Money Program, was recently interviewed about his experience with my programs and how I made all of the pieces fit for him to be able to put together his first multifamily deal.
The key ingredient to putting together a multifamily deal lies within your ability to raise private money.
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.
It’s amazing how simple changes can greatly increase your cashflow.
Here is one student’s “Aha Moment” on how a slight rent increase affects cashflow.
“$10 per rent increase and it gave you such an incredible increase in total, you know, cashflow.”
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.
While income producing properties are one of the ideal vehicles for creating wealth, there is yet another principle out there called “leverage and velocity”. Let’s take a closer look at this principle.
The effect of compounding and leverage:
Let’s say we have $20,000 to invest. I put it into some vehicle that pays 10% interest compounded. After 7 years, that $20,000, just through compounding at 10% is $39,000. It’s almost a 2 to 1 return which isn’t too shabby. Many people would be satisfied with this passive income. Let’s take a look at what happens with leverage.
Let’s take that same $20,000 and buy a house with 10% down and buy a $200,000 house with zero cash flow and just enough rent to pay the debt and expenses. It has 5% appreciation. After the same 7 years that 5% appreciation is on the $200,000 so it’s about $10,000 per year and through the compounding, the value of the house is $281,000 and your equity is now worth $101,000 because of the equity. That is a 5 to 1 return on your money through compounding and leverage. That’s a whole lot better!
Effect of Velocity:
Let’s continue with that same $200,000 house with 10% down and 5% appreciation per year. After 2 years, the house has appreciated about $20,000. You can then take that $20,000 after two years and buy another house. You can then refinance this house, pull out the $20,000 and buy another house.
After 2 years, you now have two houses. If you do this every two years then after four years you have 4 houses and continuing that line of thought you would have 8 houses in 7 years. The value of those eight houses is $2.1 million and the equity is $270,000.
That’s a 13 to 1 return through leverage and velocity. Velocity is moving the appreciation every two years. You are going from one house to eight houses and $20,000 to $270,000 in equity from all of the houses. All of the houses combined are giving you more buying power every 2 years.
Think about it. If $20,000 became $270,000 in 7 years through leverage and velocity, then you could take $200,000 and do the same thing and create $2.7 million in seven years. You are just adding a zero to the deal.
Take this same principle and apply it to bigger deals. Buy an apartment. You are moving that much faster and your wealth creation is that much quicker.
Don’t limit yourself and your vision to one kind of deal. Keep your eyes open for opportunities that are ripe for the picking. The ability to create passive income comes in many forms.
SECURE AND CONFIDENTIAL