How To Buy Right & Avoid Pitfalls
This is the third instalment in our multi-part series on how to invest in multifamily apartment buildings in the US. We’ve already walked you through 5 crucial criteria for researching and choosing the right market in the first article. Then, in the second we covered how to build your team and important relationships for your investment.
In this article, we are going to walk you through how to buy and execute right. We’ll take a closer look at the dos, don’ts and pitfalls to avoid when buying a multifamily apartment building.
First Things First: Establish your Buying Criteria and Rules
Remember investing in multifamily housing is fundamentally different than purchasing a single-family home. This is a huge investment, and you’ll probably need the right set of financing to meet your multifamily real estate investing.
Buying multifamily apartment buildings takes several steps, and often it all starts by establishing an actionable set of buying criteria and rules.
Criteria #1 Type: Under-performing Properties
On our part, we identify under-performing properties. These are apartment buildings that offer opportunities to add value. More often than not, these properties are owned by Mom and Pop owners, tired landlords that have mismanaged the property and have no systems in place.
These mismanaged properties provide opportunities to add value and get high Returns On your Investment.
Criteria #2 Vacancy Rate: Semi Vacant
If a property is semi or partially vacant, yet situated in an emerging or well-performing market, this presents huge potential to add value and turn a profit. Perhaps the properties are only vacant because they need repairs, maintenance or sprucing up.
Criteria #3 Needs Renovations
These are a gem for multifamily investors. Apartment buildings that need a few (or more repairs) mean that you can buy them and make the renovations using your team members (handymen, general contract, subcontractors, etc.). This way, you will make the property attractive to potential tenants, pushing up the market value.
Criteria #4 Under Rented Properties
Properties with rents well below market rent offer great opportunity. These are often owned by out of state owners that don’t keep up with market rent, or Mom & Pop owners that have owned the property for many years. We prefer under rented properties with a minimum 10% rental upside.
Criteria #5 Preferred Number of Bedrooms: 2
At MFI Holding, we prefer the mix of units to be a majority of 2-bedrooms. These types of units are appealing for a wider range of tenants that tend to stay longer. In saying that, in some locations, like down town or urban core, a higher unit mix of 1 bedrooms could be suitable.
Criteria #6 Age: 1960s or Later
Another key criteria we use are buildings that were built in the 1960s or after. It means they will be buildings that were built with most of the current building codes and structure rules in mind. They are most likely to pass inspection and won’t lead to several violations. All of these benefits mean that you’ll spend less on getting the building up to scratch.
Criteria #7 Utilities: Separate
We also prefer properties where utilities are separated. Why? This is crucial because the tenants will pay their utilities directly, saving you the hassle of having to deal with utility companies, disconnections, and whatnot. In fact, this will also take some pressure off your property manager.
Criteria #8 Added Amenities: Washer & Dryer Hookups
We prefer apartments that have Washer and Dryer Hookups. This amenity is always sought after by tenants and the added convenience reflects in higher rents.
Avoiding The Pitfalls What to Avoid:
This one is a no-brainer. After all, you don’t want a property where the interest you are paying on financing and other property management/maintenance costs exceed the rent/income you earn from tenants. Because, who would want to run at a loss?
Any structural problem translates into hefty repair bills that can potentially run into the hundreds of thousands of dollars. That’s a big buyer beware. Make sure you take your time with Due Diligence to try and prevent any hidden costs. Besides, structural problems mean that you’ll always need permits from local governments and building authorities.
If the employer relocates or goes under, there is a high possibility that all of the property investments will go down the drain with the company. That’s why you should avoid single-employer towns or markets like the plague.
Properties that have been, or are currently, gas stations, dry cleaners, golf courses, or former landfills will almost certainly have unresolved environmental issues. These can be costly and complicated to remediate.
100% Vacant Properties
Such properties are a telltale sign of a bad market, poor location, and other bad-for-investment indicators.
Oversupply of Apartments
Too many apartments will translate into low absorption. You’ll end up with many unoccupied apartments, needing to do concessions and lots of costs to deal with.
Low Socioeconomic Neighborhoods
The so-called “War zones” are out of bounce for any smart investor.
(a) Market Research
Know your market intimately. Odds are that you want to connect with an experienced Realtor, property manager and lender who knows the ins and outs of the market. Verify your market research data and seek to establish the typical yearly running cost per unit in the market. This is a very important point which will assist you with deal underwriting.
(b) Build the right Team
Have property and project management team in place
(c) Do Full Due Diligence
You must do thorough financial, physical and legal due diligence
(d) Base your Offer on Real Numbers
Always base an offer on actual historical financial numbers, not a broker’s marketing pro-forma.
(e) Secure Market-Relevant Loans
Shop for the best suitable financing for your big purchase. This is important if you want to prevent negative gearing and ensure your road to profitability is smooth and hassle-free.
(f) Plan for Success
Establish a re-positioning and management plan
Top 10 Ways to Identify an Under-performing Property
1. Family run business
2. High recurring expenses
3. Lack of marketing
4. High Vacancy Rates
5. Deferred Maintenance
6. Rents Below Market Rate
7. Apartments being utilized to store maintenance supplies
8. Lack of additional income generators
9. Lack of services
10. Lack of systems (proper accounting, tenant applications, etc)
Zeroing in on the Right Seller
Look for a motivated seller, or someone wanting to sell their property quickly for one or more of the following reasons:
- Divorced Out-of-town owner
- Family dispute
- Burned out landlord
- Property inherited
- Tax Problems
- Bad health
- New opportunity
- Bought at a high price but the property has declined in value, & they need to sell Need to attempt a 1031 exchange.
We hope that these tips will help you breeze through the whole process.