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.
Everyone needs to have goals. When it comes down to your goals, not only is it important to write them down, but you need to be able to visualize them as well. A vision board can assist you in keeping your goals in front of you.
Once you set your goals for the year, you need to cut out images or download images from the internet and put them on a board. You can collect pictures out of a magazine or even take your own pictures. Perhaps you have a dream home as a goal. Take a picture of that dream home and include it on your Vision Board.
Your Vision Board does not have to be anything fancy. A simple poster board that you buy at your local store will do the job just fine. Whatever you decide to use, you need it to be something that you can capture your images on. You will be continually referring to it to remind yourself of what it is that you are working towards.
You need to plant your goals in your subconscious so that these goals manifest themselves and become reality in your mind. You are going to keep on planning on how to reach your goals and your subconscious cannot tell the difference between what is real and what is not real. What is in your subconscious will then allow your thoughts, feelings and actions to get results.
The Vision Board is not the only thing that you have to do. There is action required on your part, but the vision board will allow you to implant on your subconscious those things we need so that your subconscious will not be a hindrance to your achieving those goals. The Vision Board allows you to take action.
Say for instance that you want to own a Ferrari. Go down to the Ferrari dealer, sit in a Ferrari, and have someone take a picture of you in it and put that on your vision board. The more you can personalize a goal and make it almost tangible, the more you are going to make that goal a reality in your subconscious.
Goals are what motivate and inspire us to accomplish what we desire. Our senses play an important role in helping implant things in our subconscious. A Vision Board helps to harness the visual aspect of our goals and encourages us to press forward and achieve those goals.
Let’s do some more myth busting. (Keep in mind that the more prevalent these myths are, the less competition there is).
Besides not needing big cash – or any cash – to be an apartment entrepreneur, you can do it on a part-time basis. Just like I did when I was starting out.
In fact, multifamily is much easier than single family.
You might be saying, “Whoaaaaa. How can that be?” Let me explain.
Finding, qualifying and analyzing apartment deals is all about the numbers, the financials. These deals are based primarily – if not exclusively – on the financial performance. Hence, we can evaluate these deals without first having to see them.
Let me say that again.
Because the apartment value is driven by the financial performance, you can evaluate apartment deals without first having to see them.
Yes, you will ultimately look at and inspect these properties but this is NOT a business where the first thing you do is drive across town to check out the color of the carpet and the comps of the neighboring houses.
Evaluating and buying apartments is more akin to buying businesses than buying houses. And if you were buying a business, and a Seller called you, your first reaction would not be to drive across town to look at the lobby. Your first response would be to request a copy of the Profit and Loss Statement.
Well, the same holds true for apartments. Hence, you can evaluate the financial particulars of apartment deals from your home or office – and on a part-time basis. You don’t have to be chained to your car.
You need a calculator, a PC, a phone and 6th grade math skills. (More on that later.)
And with less competition than houses, you don’t have to be worried that the Seller is simply calling every “We Buy Houses” ad in the Sunday classifieds. Finally, you don’t have to slug it out house by house – praying that someone else hasn’t gotten to the house before you have.
This is apartment entrepreneurship – where you are evaluating, buying, flipping and holding apartment businesses.
KEY TAKEAWAY: You can do apartments on a part-time basis. You are evaluating apartment businesses.
Jon Perry, a student of my Multifamily Apprentice Group, was recently interviewed about closing on a 42 unit apartment building. As a favor to you and me, Jon agreed to share the details of closing his first big ticket deal with everyone.
Listen as Jon shares how he found, funded and closed this bank REO in today’s Perfect Storm of Opportunity.
Perhaps you are hesitant to get involved in Multifamily Property deals because you think that you have to own the property. You do not have to own the property. The important thing to keep in mind is to have control and access of the property. Let’s take a look at an example of how this can be done in the paragraphs below:
There is a property that has low occupancy and is need of $50,000 of moderate rehabilitation. The rent needs to be increased but it cannot be increased until some cosmetic work is done. The owner is out-of-state and is not really in touch with what is going on.
So you have an opportunity. Yes, it needs $50,000 of capital and you could come in and buy this property. Because they property has been allowed to deteriorate, it is worth less than what the owner owes on it.
What you want to do is gain control of this property. You are not going to buy it; you are not going to own it; you are going to get control of it. This is done by putting in place a five-year triple-net master lease which stipulates that you are the master tenant.
As the master tenant, you get to operate the property. You can make all of the repairs and you run the property. You sublet it to the tenants that you choose and it is for five years so you can turn the property around.
At the same time as when you put in the lease, you are going to put an option in place to buy the property. Let us say that your option to buy was for $1 million. What you do to rehab the property is going to make the property worth more than $1 million and if it is worth $1.3 million that means your option is now worth $300,000.
You are going to reposition the property which means you are going to rehab it, raise the rents and raise the occupancy. You are going to raise the income and increase the value to $1.3 million. You then have the choice of buying the $1.3 million property for $1 million and have $300,000 in equity.
Only at that point in time would you own the property. The rest of the time you just control it. You own nothing other than your option but you control everything. You are the master tenant and you have the option.
The multifamily property arena has many opportunities for many different types of players. Working with multifamily property deals is not limited to owning the property. The “Own Nothing, Control Everything” strategy can allow you to take advantage of the great investment opportunities available to you in multifamily properties.
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.
Property management is considered to be a necessary evil by many multifamily property owners. As the owner, you do not want to be in the property management business. It will cost you some of your NOI to hire property managers but your time is much better utilized in finding deals than in managing properties. Here are some guidelines to assist you in finding good property managers.
Your aspiration should be that of the position of the asset manager of the property. You want to add value to your property and implementing a good property manager is crucial in attaining your goal of adding value. Part of your role as asset manager will be to properly manage your property managers.
The first step you need to take is finding a property manager. You can start by driving by properties that look well-managed and then talk to the manager of that property. Referrals, brokers and colleagues that own apartment buildings are also all good places to start when looking for property managers.
Now that you have some candidates, you want to get someone who is experienced with the type of multifamily property that you have. You need to look for someone with depth and who has a system in place. You’re not looking for the Lone Ranger; you want someone who has a back-up for when he or she is on vacation or out for any other reason.
Next, you need some good, solid questions and tips to get the answers you need. Here are thirteen to get you started:
1. How long have you managed properties in this area? What area of the city or what class?
2. Are you a certified property manager? What training have you had?
3. Can I see a property that you currently manage?
4. Do you have references (ask for at least 3)?
5. What is the compensation model? How do you want to get paid?
6. Ask to see a sample management contract – a proposed contract?
7. How often are your management contracts renewable?
8. Check them against the Chamber of Commerce and the Better Business Bureau and check with the real estate commission for any complaints.
9. Ask if they have any Class C experience. It’s different managing a Class C property compared to a Class A property.
10. Do you have any Section 8 experience?
11. Have they managed a property this size? Just because they’ve managed fourplexes doesn’t mean they are ready to manage a 50 or 100 unit property.
12. Request sample management reports. You want to see a report from property management software and not something done by hand. That’s a red flag that they have no systems in place.
13. What are the marketing methods for leasing this property? This is the most important question. You want to see how their thought process works. You want a property manager that markets for the tenants.
Good property management is at the heart of a money-making property. It is imperative that you put the effort into hiring effective property managers to allow you to assume your role of asset manager. The questions and tips above will put you in the driver’s seat and assist you in hiring a good property manager.
During the due diligence period of the contract on a multifamily property, you are doing a financial inspection and a physical inspection. Some lenders require an environmental inspection as well. During this important phase of the contract, you will need to request and inspect the rent roll of the property, copies of all current leases and the inventory of personal property. There are some important items to keep in mind during the due diligence phase.
The due diligence period is also known as the feasibility period. In this section of the contract, you state the length of time that you need for due diligence. You may have a statement such as the following, “buyer may terminate this contract for any reason within 45 days after the effective date by providing seller written notice to terminate”. You can ask for anything but 45 days is typical. If you have a dilapidated property, you can ask for more time.
It is very important that you have a coach or an attorney when completing your contract and going through each of the due diligence items. You also want to hire an inspector to inspect the property and flag any items that need attention as a part of the physical inspection.
You may stipulate in the contract that the seller has 10 days to provide you with rent roll, leases and inventory. These items are necessary for the financial inspection of the property. You want to check out the financial statements as well.
You’ll look at whatever financials they send to you in the context of how you can improve the situation. So you play “what if”. If the occupancy went from 72% to 85% how would I increase my cap rate? If it went to 95% how would it increase my cap rate? How would I run this property today to make it a real winner? You’re doing that by wearing your asset manager goggles.
Brokers will typically have this information ready for you. There may be things they don’t have but you want to ask for everything because this is where you make sure that you understand what you are getting into.
It is becoming more and more common for lenders to require the environmental inspection. Basically, this is where ground samples are taken from around the property. It actually is beneficial because it can protect you in case there are any underlying problems discovered.
The due diligence phase of a contract really allows you to examine every aspect of your multifamily deal. Do not try to take shortcuts and neglect any aspect of the due diligence phase. Your ability to analyze the information from the physical inspection and the financial inspection can greatly assist you in making money on your multifamily deal.
The second step in the three step process of contracting and closing a multifamily deal involves composing a letter of intent for the seller. A letter of intent is a principle of understanding. It is a general agreement of what you plan to do so that you know you will not spend a lot of time on a contract.
A letter of intent that is well-written conveys to the seller that you are a serious buyer. The letter of intent basically lays out the terms that both you and the seller agree upon. Not only does the letter of intent show that you are a serious buyer, but it shows that the seller is serious as well.
You know that you are not wasting your time because the seller is telling you that they can agree to the terms in the letter. A contract takes time and legal fees are involved so the letter of intent helps take the uncertainty out of the deal.
The letter should include the price that you agree upon along with the financing terms. For example, if the property is $1.25 million you would include that and then break it down further. Let’s say you are offering $100,000 cash; assuming the first mortgage at 5.06% and you then would like the seller to take a second mortgage of $360,000.
An inspection period, or due diligence, is included within the letter as well as a finance period to raise your financing. Typically, the due diligence period is 45 days and the financing period is 60 days. If you think you will need more time for financing you can increase that period another 30 days.
You also include the amount of earnest money that you are putting forth. A general rule of thumb regarding earnest money is 1%. So if you are doing a $1 million dollar property, your earnest money will be $10,000.
Be sure and play by the rules on earnest money because the seller will be looking at whether that money will make a difference to your or not. If the 1% is a big deal at the moment, find a partner that will put up the money because you do not want to be looking like a non-serious buyer at this point.
The letter of intent is an important part of the three step process because it signals to the seller that you are a serious buyer. Your whole objective is to get the multifamily property under contract because then you control the deal. An effective letter of intent can expedite the whole contracting process.
So you have found a multifamily property and you would like to close the deal. How do you close it if you want to hold it? Do you know the process that is involved? There is a simple 3 step process to follow to wrap up your multifamily deal. It involves qualifying the deal, due diligence and closing.
Qualify the Deal: This is the first step in closing your deal. It actually has a two part phase: validating the income and expenses and driving by the property. Up until this point, you have just been talking on the phone with the seller and you have not even seen the property. Now you need to validate income and expenses.
You need to look at whatever financials they send you in the context of how you can improve the situation. For instance, if the occupancy went from 72% to 85% how would you increase your cap rate? If it went to 95% how would that increase your cap rate? You need to wear your “money goggles” because you are looking at the property with regard to making money on this deal.
Once you have seen the numbers and it looks like a potential deal, you need to visit the property. Again, you want to make an evaluation as to how you can make money on this deal. What could you do to make it more appealing for leasing? Does it look like a lot of deferred maintenance? Look at the property as the asset manager to determine what needs to be done to generate more NOI.
Due Diligence: Now that you have looked at the property and confirmed that it is indeed a good deal, you want to issue a letter of intent to get the property tied up. The letter of intent is basically a statement that the seller is looking to sell the multifamily property and that you are looking to buy the property and that you agree on the stated terms within the letter. The letter allows for an inspection period which is due diligence. It also allows for a financing period.
Closing: Once you have your letter of intent signed by yourself and the seller, you move right into the contract. You can use any formal contract that you and the seller can agree upon. You will be signing the contract as well as additional legal documents. Money will change hands and you will take the title and you are now the proud owner of a multifamily property!
Once you are aware of the process that needs to be followed when putting together a multifamily deal, it becomes much less intimidating. Again, educate yourself on the process and not only will you be more confident when dealing with the seller but the seller will be assured of your knowledge and ability.