Charles discusses tips and strategies for quickly reviewing multifamily real estate deals.
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Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing how to quickly assess a multifamily real estate deal. So, first off, what are we looking for? You’re going to have your first filter, being the desired number of units, your desired areas, markets, neighborhoods. These are classified A to D what we are looking for as a company is C to B class properties, no less than 75 units. When we’re doing a syndication. Now, this is important because this is going to weed out a lot of properties. Someone sends you a five unit property, and you’re looking for 50 unit properties. It shouldn’t even get to you. We’re also looking for high vacancy. We look want to see poor management and properties have been mismanaged. We want to see below market rents of the properties, and we want to see if the area is common for tenants to pay for their own water, right?
Higher than normal expenses for the property. We want to see a high turnover at the property and deferred maintenance, right? That is a sign of a tired landlord. These are all items that can be fixed with correct management. Now, when we’re looking at the specific property at first look, it’s going to be, what’s the property’s age. What’s the current occupancy, is it 90% or plus, or minus, then that’s going to be important financing we get. And also the business plan. What’s the overall condition of the property. Is there a lot of deferred maintenance? And what is the current expense ratio? Normally, rule of thumb is a 50% expense ratio is pretty standard, but a lot of different factors. So that’s like I said, just a rule of thumb. You have to really dig into it. And then when you’re looking at numbers, I want to see late fees.
Are there a lot of late fees? Are there any concessions, right? Is there any free rent being given to the tenants when they move in? And what is that for? How long is that? What does the area you look like, are there better or worse properties in the area? And then what are they renting for? I want to check crime. We go and use a lot spotcrime.com. It’s a great website for doing this. We look on Google earth. We want to know if it’s going to be a value, add opportunity or a management play. So if it’s a value, add opportunity, that’s usually something that’s already stabilized. And it’s just below market rents compare to similar neighboring properties in the neighborhood. Or is it a management play? Is there high turnover? Is there a lot of expenses? This is a management play. What we like to see is probably have both of those together.
We’re also looking when we’re looking at the property is what type, what is the unit mix? Okay. Typically it’s one, one bedroom for every two, two bedrooms. It all depends on the demographic of typical target renter. If you’re in an area with a lot of younger professionals, you might have one more, you might have more one bedrooms than you would two bedrooms, but usually it’s one, one bedroom for every two, two bedrooms. How do you determine market rents and what are the market rents? We look when we’re determining market rents is apartments.com, rent bits, rent the meter Zillow. The main thing though that you want to do is when you’re really serious about an area is you want to call competitors and you want to mystery, shop them. You want to go to the properties. You want to see how their amenities differ from the property that you’re planning on buying.
They want. You want to see how the lifestyle is for people in that property versus the one you’re buying. And so you can get a real apples to apples when you’re comparing market rents, place an ad on Craigslist is the big thing to do. You can place an ad on Craigslist and you can gauge the price of that unit by the number of calls that you get. You want to look. If that property is unstabilized for stabilized, it’s usually 90% economic occupancy shows that that property is stabilized. If it’s under that, it’s usually considered unstabilized by lenders. Unstabilized property requires repair. Be very careful, not your first few deals. Should you be getting into anything like this? You have to have seasoned partners with you. If you’re going to do that right away or do it down the road. And when you’re a seasoned partner, cashflow will usually not start right away with unstabilized properties.
You need to have large reserves and you need to raise all of the cap ex capital expenditures upfront need to have property manager that worked with unstabilized properties before. That’s a big must. Okay? And you’re going to be paying a 10% to 15% surcharge if they’re handling project management. So if they’re going to handle all of the different subcontractors and general contractors and everything like that during this whole renovation process, and you’re not doing it, not someone from your team, you’re going to be paying that 10 to 15% surcharge. You have to know your investors have to know what they’re getting into. Are your investors looking for an opportunity like that now with a stabilized property, these properties require minor renovations, 2000, $3,000 per unit. Are you able to get your unit renovations back in 36 to 48 months? So if you’re putting $3,000 into a unit to raise rents a hundred dollars, you’re going to get that back in 30 months.
So make sure that you’re not over renovating for the area and for the rents that you can achieve a stabilized properties, a much shorter process handling deferred maintenance. It’s not that big of a deal. Cashflow will usually begin once you close. Okay? So that means you can start doing your distributions in three months or six months after closing, not weeding 12 months, plus with an unstabilized property, what is the lowest monthly net operating income the property has earned in the last few years in that worst month, would you still cashflow with your new debt? That’s a very important, very easy to determine stress test, um, type of the type of construction and roofs. That’s another thing that you’re going to look at. Is it frame, is it concrete block? Is it flat roof? Is it pitched? These are all important factors when I’m initially looking at it because a lot of operators will have set on what they want and what they don’t want. And this is going to get you down to only the properties that are going to fit inside your specific bucket of what you want to actually underwrite. You don’t want to spend hours and hours on each property that don’t fit your criteria. All the links referenced in the episode, I will put into the show notes, please rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. And I look forward to two more episodes next week. See you then
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.
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