Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
Hi Everyone,
Trying to create a Multifamily Masterclass to help brokers, investors, newbies break into multifamily investing. I want to structure the class based on five or six most recurring answers. Can you answer this question:
What is your #1 question or pain point in multifamily?
Having sellers expecting to benefit from the added value, that you, the buyer will have to perform. I was just given a deal in LA where the broker was promoting the fact that rents could be raised $100 with very little work to the units. Based on the market cap and the the projected NOI we saw that this was the sellers asking price. The seller was going to get the benifit of the added value we would have to add. Needless to say, we were pretty upset with the broker that we had just started a relationship with us.
@Gino Barbaro, could you please elaborate on "Guys buying on I/O are going to get burned"? I saw many syndicated deals underwritten and bought with I/O loans for the first 1-2 years but, frankly, it does not make much of a difference in terms of total return. If someone buys with 2 years I/O and 8 years of regular payments vs 10 years fixed vs 10 years floating rate (with rate cap), how's their risk is significantly different (as in "get burned")?
If they do indeed get burned, will they sell at the amount they owe or even less?
they underwrite the deal with interest only payments hoping to raise rents/lower expenses or raise income some other way. When interest only burns off and principal needs to be paid, they are in trouble if they have not raised the income and or lowered the expenses.
Get a syndication attorney on the show. I know you need to make sure there are no liens, there are proper C.O., title insurance, and go through all existing contracts: laundry, cable, pest, garbage, cell tower, pool, elevator,landscaping, snow removal, to name a few.
they underwrite the deal with interest only payments hoping to raise rents/lower expenses or raise income some other way. When interest only burns off and principal needs to be paid, they are in trouble if they have not raised the income and or lowered the expenses.
Those that I saw could make principal payments with existing income/expenses. DCSR would still be above 1.3 even with the principal added. They choose I/O to increase investor's returns in the first year or two.
Having sellers expecting to benefit from the added value, that you, the buyer will have to perform. I was just given a deal in LA where the broker was promoting the fact that rents could be raised $100 with very little work to the units. Based on the market cap and the the projected NOI we saw that this was the sellers asking price. The seller was going to get the benifit of the added value we would have to add. Needless to say, we were pretty upset with the broker that we had just started a relationship with us.
Bingo!
You know you're in a crazy market, when you are wrangling hard with sellers over how much percentage of the "upside" they deserve..
There's so many groups chasing the "value-add" deals, so that's the reality.
Supply and demand.. trickles down into everything about real estate...
Now too much demand from buyers of value-add for the low supply..
I have a very systematic mindset. It would be ideal to have a "checklist" for every category that gets analyzed in an underwriting (T12, Rent Roll, location, property, etc). Now I understand everyone's criteria is different depending on what they are looking for but even having a template or example would be so helpful. I'm a newbie with this and haven't yet done a deal and struggle with these parameters. I assume underwriting a deal is basically checking off all boxes, or the deal is a no go, but I'm not certain. There is a lot of content out there on how to quickly analyze deals but I haven't seen a lot of breakdown on detailed underwriting.
5 cap off of pro forma NOI ... below market rent from a long term tenant in rent controlled property ... big loss to lease that magically disappeared in year 2 of the pro forma ... LOL :)
Biggest pain point for me is commercial financing terms. Balloons, calls, floating rates, reporting to them annually with your financials and tax returns like you're a child.
I've paid off 2 and will only do private money and/or seller financing on commercial assets from now on.
Gino I agree with at looking at the different trends in data. I also look at the trend in unemployment rate for that city. If the trend is improving I look at the other metrics you mentioned. Good advice sir.
@Gino Barbaro thanks for the opportunity to get the answers on some of the question.
Should one first get a contractors before he buys the multi-family property (6-20 units in this case) or he can do it after the property is purchased?
Also, questions from @John Jacobus were excellent - sorry if I missed your respond on them, but could you please provide your answers or point if there were answered somewhere else?
I would say for a lot of beginners it would be communicating with brokers. Most know that they should, but don't know what that looks like. I have done deals with brokers, but still struggle with how much is too much/too little. Some brokers like to talk and seem like they enjoy the communication, others take 3 days to get back to you or say very little.
Other things I feel are important is choosing a market/sub market and niche within that. Where to find good data can confuse people.
Raising money is big and getting financing
Finding the right team is maybe the top of the list and how and when to fire members of the team.
Another big question would be how to get started and do I need to graduate? I just did a podcast interview today and my guest said that his biggest mistake/regret was not buying large muti-family sooner. I had to laugh and shake my head, because I say the same thing. We both thought for some reason we needed to graduate to get to the bigger units. So much banging our heads on getting small deals and ignoring the big deals. The small deals have been very profitable for us, but not nearly what the bigger deals could have been. It took me well over 100 deals to finally "graduate."
Gino Barbaro 1/How to get more deal flow, even in times where cap rates are getting compressed(already posted this one, buddy:-))
2/How to properly line up investors so when the time comes they will get on board.