Multifamily Properties: Top Ten Reasons to Buy

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.

Vision Board: Visualize Your Financial Goals

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.

Real Estate Investing: Houses vs. Apartments

There is a saying in real estate that you make your profit when you buy and get your cash when you sell. When deciding whether to invest in houses or apartment buildings, be aware of the differences when it comes to creating value. Investors are looking for a good return on their money. Make sure you keep this goal in mind and don’t get caught up with other aspects of real estate.

One broker said that apartments are real estate and houses are feel estate. The difference is that the value for apartments is based on numbers. The value of single family houses is based on a number of subjective attributes like wallpaper, carpet, paint, location, and many other factors you can’t control.

Apartment values, on the other hand, are based on the numbers and the net operating income. The more net operating income you generate, the more money you can put in your pocket when you refinance or cash out. Multifamily real estate investors have a larger degree of control over the revenue and expenses of their real estate than investors in houses. Apartment investors can estimate the value up front and even predict the value of the property if certain changes are made. For instance, if the owner of an apartment building raises the rent by $10, he can know exactly how much money will be coming in each month.

Single-family investors have to play more of a guessing game. An investor could spend several thousand dollars replacing carpet in the hopes of increasing the value of the home only to discover that the next potential renter hates carpet. The value of upgrades is subjective, and it’s difficult if not impossible to predict what will really add value and attract tenants or buyers.

Clearly, investing in apartment buildings offers a much greater degree of control and security than investing in single-family housing. If you like to be able to predict success based on numbers and follow through to that success, multifamily real estate is right for you.

“Own Nothing, Control Everything” Strategy for Multifamily Properties

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.

4 Essential Reports You Need From Your Multifamily Property Manager

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.

Marketing to Find Tenants for Your Multifamily Property

Tenants are the lifeblood of your properties.  Marketing for tenants falls under your property manager’s job description but you need to be aware of the different ways to market.  Your knowledge of marketing for tenants will enable you to direct your property managers to see how good a job they do in thinking of creative ways to get tenants.  Here are some ideas to get you started.

The first place you can look for marketing ideas is through tenant referrals.  You can offer $150 off rent in three-month increments.  If the tenant that is referred pays rent on time, the tenant that gave you the referral gets $50 off rent.  If the referred tenant is late paying the second month, they don’t get the $50.  They will get it if the third month’s rent is paid on time.

Another source of referrals could be local churches.  Churches can be a great resource of people who are looking for affordable housing.  You could even offer them $50 for each referral that signs a contract.  Not only is that a nice donation, but it generates great word-of-mouth.

Churches can also “adopt” your property.  Churches have discretionary funds that can be used to assist people that are close to ending up on the street.  Tenants can receive assistance when they have fallen behind on payments.

You can run ads in free local ad inserts as well as create bandit signs which are blank signs with handwritten messages on them.  Some possible words for your bandit signs are:  free rent, move-in specials, and under new management.

Banners are also a great way to attract potential tenants to your multifamily property.  10×4 banners are a nice size and you can order those from any number of websites or even find a local printer.  You can have something as simple as “Move in Special” or “Under New Management ” and always be sure and include a phone number.  The key is to catch people’s attention and draw them to your property.

Section 8 office flyers for Section 8 properties are also an effective marketing tool.  You can put move in specials and cash back bonuses.  You can advertise $500 cash back at move-in.  You pay the tenant $250 when you get the check and $250 at the 6-month anniversary as a rebate.

Apartment placement agencies and local shop referrals with gift certificates are two more possible marketing venues.  Beauty shops are one example of a local business that you can issue flyers to.  You can get $25 gift certificates at the beauty shop and not only is that an incentive but it generates business for the shop owner.

Use your creativity when marketing for tenants.  It does not have to be a huge, expensive campaign.  Test various methods and you will soon find the ones that are effective and give you the best results.

Tips for Finding Good Property Managers for Your Multifamily Property

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.

Important Details Regarding the Due Diligence Phase of a Multifamily Property Contract

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 Importance of Drawing Up a Letter of Intent When Completing a Multifamily Property 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.

3 Steps for Contracting and Closing a Multifamily Property Deal

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.