Are you trying to figure out a way to raise the rent on your multifamily property? You can raise rents through a process called repositioning. Whenever you buy a property and make improvements or repairs or convert a property from a Class D to a Class C or a Class C to a Class B, you are repositioning. There are three ways you can reposition your multifamily property.
1. Cosmetic: You are likely to hear some vernacular in the industry like “putting lipstick on a pig”. This refers to things like painting or landscaping and anything else that is non-structural in nature.
2. Complete Rehab and facelift: This option is more involved. You can put in all new appliances and new carpet on the vacant units and completely rehab it so some of the stuff looks new. The rehab does not necessarily change the class that the property is in. For instance, if you have a Class C property that was built in the 60′s, it will still be a Class C after you rehab it.
3. Put new management in place: If you buy a distressed property that has a 70% occupancy rate and has an existing manger, the first thing you want to do is fire the manager because he probably has bad habits. If you are serious about what you are doing, you want to put new guidelines in place. Clean house and replace the property manager because that is the first step to raising rents and increasing the occupancy.
There might be a contract in place with the property manager but most have a 30- or 60- day out clause for both parties so you would have to give notice. Management contracts are usually pretty flexible.
The first thing you want to do when repositioning is to remove the bad tenants because they are dragging down your property. Other tenants in the complex know who the bad tenants are. You want to get rid of the bad tenants so you can create a family-friendly environment. You want your tenants to feel safe and secure.
Even if the bad tenant is paying his rent on time, you still want to remove him because he is bringing down the rest of the property.
Repositioning offers you a way to raise the rent on your multifamily property. You can either go “all out” and completely rehab the property or go with the less intensive changes of cosmetic improvements or management restructuring. Be sure to carefully evaluate which option is best suited for your needs.
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.
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.
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