INTRODUCTION

The Ultimate Guide to Multifamily Apartment Investing

Asset Class Overview

Class A properties are considered the “best in asset class” and get the highest rents in their markets. They feature resort-like conditions with fountains, grand pools, fitness centers, and other luxuries amenities. They are usually found in suburban locations.

Classification Grades

The real estate industry rates properties as Class A, B, or C according to conditions like age, amenities, quality, location, rent, and other factors.

Property Types:

Aside from the classes, apartment properties in addition have a wide variety of size and type. There are dense, urban, and high-rise apartment buildings while there can also be resort-type complexes with swimming pools, fitness centers, fountains and other luxury facilities.

Multifamily buildings are categorized as follows depending on their size and type:

* Low Rise or Garden Style: 2-4 stories high and typically found in suburban locations.
* Mid Rise: 5-9 story apartment buildings
* High Rise: 10 stories or higher apartment buildings

Key Economic Drivers of Multifamily Demand

These are the factors that directly affect the multifamily market in any given area. An increase in one factor can directly increase rental rates in a market. Now imagine what happens when multiple factors increase the demand. The result is a dramatic increase in rental rates and property values.

Attractive Modern Amenities

Renters now are also seeking attractive modern amenities within their building complex. These include amenities such as:

* Rooftop lounges
* Bicycle parking
* Bicycle mechanic stations
* Balconies
* Dog washing areas
* Fast internet connections
* Sound proof walls
* In-unit washing machines and dryers
* Package lockers
* Interior storage units adjacent to dwelling units

The newer Class A apartment buildings have become “hotel-like” in terms of service and amenities offered. They are very different from apartments of the past. These newer buildings are adapting and meeting the demands of the millennial renters.

Out of State Owners

For a more targeted list of motivated sellers see if you can get a list of all the “out of state owners” of multifamily buildings in your area. These owners would also be motivated to sell if they are having trouble with an apartment building. Since they live out of state they have less control of their property and more likely to sell if problems arise with their property.

Contact Property Owners

After you have your list the next thing for you to do is to start a marketing campaign. You want to contact owners from your list every 3-4 months. Even if they rejected your offer at first there may come a time where the owner’s circumstances will change. You need to be the one that they will think of when they are finally ready to sell. That’s why it’s important to market to them quarterly.

2. Finding REO Multifamily Properties

You can also find apartment buildings through a local bankers or lenders. You will need to find out who is in charge of the bank’s REO (Real Estate Owned) Department. You may either meet them in person if distance permits or you can talk to them over the telephone.

You can send a letter first to establish your credibility and schedule a phone call from there. Don’t get discouraged if you get rejected at first. They get calls from investors all the time. What you need to be different from other investors calling the bank is persistence. The other investors will call once then never follow up again.

Use the Law of Numbers and the Law of Chance in your favor. It is proven that 80% of sales are made after the fourth contact. The average investor quits after the first call. In order for you to succeed just call more times. You might even have luck on your first or second call that they have a property that they’re looking to dispose of.

After your first call put the banker on your contact list and mail him once every month and contact them by phone every two months.

5. Working with Multifamily and Commercial Real Estate Brokers

Another option when buying Multifamily Apartments is hiring a commercial broker to help you find them. They can provide you with immense information about local markets, a strong network of professional services, and have their own connections to off market motivated sellers.

A good commercial broker knows the history of all deals done in the local markets. They know the supply and demand of properties, the average and historical rents, and which markets to avoid. Always try to find a broker specializing in Multifamily Apartment buildings.

One good places to find agents in your local market is Loopnet. You don’t need a paid subscription to search but you might for more detailed information about properties. In this case you’re just going to use it to find agents in your market.

Start by identifying which market you want to focus on then. Then search Loopnet.com for Multifamily agents in that area.

6. Using Classified Ads in Magazines and Newspapers

There are two ways in using classified advertising in real estate. The first one is by looking under the real estate section of “properties for sale”. You may find apartment buildings mixed in with the single-family homes for sale. Usually off market deals not given to a real estate agent to put up for sale.

The other way is advertising yourself for properties.

You can place and AD saying:

“We Buy Apartments. Any Size. Any Condition. John 999-999-999”

This is an effective way to get sellers to contact you. You can reach a specific audience by advertising in a real estate magazine or reach a general audience by advertising in your local newspapers.

Multifamily Property Managers

Commercial property managers are small management firms that are hired to manage Multifamily and commercial properties. The mid and large size firms have a fairly large list of building owners they manage for. These property managers can be a great source of referrals to you by letting you know which owners are ready to sell and which owners NEED to sell. Develop a list of property managers in your market and network with them continuously.

Google search: Multifamily Property Management + your city

8. Trade Publication Newsletters

Trade publication newsletters and magazines can be a great source of keeping up to date with new developments in multifamily and commercial real estate. These types of publications also include advertisements for properties for sale. You can also advertise in these trade publications / newsletters the same was as magazine and newspaper ADs we mentioned earlier.

Here are some resources for you to look into:

9. Commercial Real Estate Service Providers

Commercial real estate service providers provide accounting, advisory, design, marketing or related services. They can be an architectural firm, property management companies or accounting firms.

Make a list of all the services an apartment owner would need and google that service in your market. Once you build a list begin to contact them and let them know you are in the market looking for apartment building owners who want to sell.

Here is a sample list to get you started

1. Real estate attorney
2. Real estate CPA / accountant
3. Commercial property manager
4. Commercial mortgage broker
5. Commercial real estate agent
6. Hard Money lender
7. Commercial general contractor
8. Commercial property appraiser
9. Commercial property inspector
10. Commercial HVAC servicer
11. Commercial pool service
12. Commercial landscape company

Just remember to add “+ City” when you are Googling for these services. You want to focus on your market first before you reach out to outside vendors.

10. Real Estate / Apartment / Commercial Networking Meetings

You can attend networking meetings specializing in real estate so you can meet brokers, sellers, buyers, property managers, and other people in the same business as you. Networking meetings can present you numerous business opportunities and new business relationships with people on the same ship as you. Not to mention sellers that want to sell or vendors who can refer sellers to you.

One of the biggest organizers of networking meetings is Meetup. They offer hundreds of real estate networking meetings in each state. Check it out below:

Meetup Real Estate Networking

Google search: Real Estate Apartment Networking Meetings + your city

13. Finding Apartment Deals Online

Truth be told, by the time an apartment building gets listed on these public sites it’s been looked at by all the big players in the market and passed up. Meaning it probably wasn’t that sweet of a deal. Now it’s just a regular sale at the retail price.

In any case, it’s still a good place to find apartments for sale in your area. If its been on the market long enough then maybe you could negotiate a better deal. Here are a few places to look into when your ready to buy in your area.

Does the property cashflow?

After you get the figures above analyze them to see if you want to buy the property. You can determine the cash flow of the property by subtracting the Total Annual Operating Expense and the Annual Debt Service from the Gross Operating Income. If the cash flow is negative move on to the next deal.

That numbers may be low but remember that you are assuming that the market will appreciate and your tenants are the ones paying for the mortgage.

You can take less Cash Flow if you are in an appreciating market. You will need a larger cash flow if the market you’re in is near its peak. If the market is declining, aim for an even greater cash flow to avoid negative cash flows when the market declines.

2. Find the Seller’s Motivation

Part of your research is finding out all you can about the seller. That includes his background, his financial position, and what’s motivating him to sell. You are more likely to negotiate better terms when you work with motivated sellers.

Here are the main reasons sellers are motivated to sell:

5 Mistakes to Avoid in Negotiating Multifamily Apartments

STEP 2 – Negotiate Terms

Once you present the offer it is most likely that the seller will not agree with 100% of your terms. Him or his agent will counter you by sending you a counter offer or by changing the offer directly.

It’s easier to just get the seller on the phone and come to terms but that wont always be possible. When you are buying larger properties you will most likely be dealing with the seller’s agent.

The agent will always want to use their standard agreement forms as well as tip the terms to seller’s benefit. In a “hot” market (Seller’s Market) the buyer really has no choice but to agree to the seller’s terms. Otherwise he loses the deal to the buyer right behind him.

In a down market (Buyer’s Market), when the sellers are desperate, the sellers now have to agree to the buyer’s terms or risk not selling their property for months.

Regardless, there are standard and common terms and periods that most agents will accept. The bottom line, always leave clauses to protect yourself and your deposit should something not be to your liking. Always have a standard period for inspections, due diligence, and the ability to cancel should something arise that you don’t agree with.

Step 4 – Submit Loan Package

Immediately after opening escrow and receiving escrow documents you will prepare the loan package and submit to the lender.

You should already have an idea of what loan program you will be using before you even opened escrow. This is not the time to be going “rate shopping” nor checking to see what loan program you “qualify” for. All financing options should have been reviewed before you opened escrow.

You will want to have a good Commercial Mortgage Broker at you side during the process of finding a Multifamily Apartment property. He will inform you of all the different types of programs there are and which is best to suit your needs.

Typical apartment loans can range from 20% down on the low end up to 40% down on the high end depending on the market and the properties financials. The stronger the market and the stronger the property (cash-flow) the lower the down payment requirement will be.

A commercial bank will always be risk-based when making decisions on a property. It’s just about the buyers financials but about the overall market risk and property risk as well. The lender will also give you feedback on whether or not your property is a good deal or not.

Your experience will also come into play as a decision factor for the lender. The larger the investment size the more experience the lender will require.

All these factors should be considered before you even start searching for properties. There is no point in locking up property you can’t close on. Too much is at risk.

You should know exactly what you qualify for. What you need to close. How much down payment will be required. If a partner is needed for extra experience. And what other factors will be required. This is a must to know before you enter into contract.

Step 8 – Sign Loan Documents and Wire Down Payment

By this time, you have been going back and forth with your lender. Giving them documents and reports. Ordering the appraisal and inspection reports. Going over fee’s and terms. And finally getting to the point where you are ready to sign docs.

Once you have gone over the fees with escrow and the lender you will be ready to “sign docs.” This is where the lender sends over the final loan documents to escrow or whoever is in charge closing the loan. You and everyone that will be on the loan will meet at a location and sign all the necessary documents the lender needs to fund the loan.

After you sign the loan documents you will then wire the amount to close into escrow or the designated account. This amount will be the closing cost and the down payment total. Escrow will be giving you this final figure before or when you sign the loan documents.

Step 9 – Close Transaction

After you sign and wire in your closing funds escrow, title, and the lender gather all the final documents needed to fund and close the transaction. This can take a few days to a few weeks depending on the complexity of the deal.

Escrow or your attorney will ask for any remaining documents needed from you and coordinate the closing of the file. You should keep a copy of every paper you signed and all the documents you have been given. You should be building a property file since you opened escrow. Anything and everything that has to do with this property should be saved into a clean organized file.

Once escrow closes you start the take over process. The management company you hire will help guide you through this process.

Selling Your Multifamily Property Through An Agent

After you increased the income of your property and decreased the expenses the value of your property will be at its peak. Now is the right time to sell for maximum profit. You can sell your property by advertising it yourself or by hiring an agent.

You can go to real estate websites to find commercial Multifamily real estate agents. One site is www.CCIM.com. This website offers a designation that few brokers and agents have. Getting a CCIM designation is a very hard and rigorous process that requires months of training and exams.

There are other sites like www.Loopnet.com who have agents across every market in the US. Costar.com is another to find agents.

Be sure to do your research on whichever agent you chose before you decide to hire them. There are many sites like Yelp where you can see what others have said about a specific agent.

Here is how using a commercial agent might benefit you:

Warning: Real Estate Agent Tactics

In efforts to get your listing agents will excite you with an overpriced sale amount on your property. 1 month after they put the property for sale they start requesting for a decrease in price. The initial price was just to get you excited to sign the listing agreement with them. This is a common practice from agents to get listings.

You need to know how to compute the value of your property yourself. This will eliminate any unreasonable expectations you may have. This will also insure you know when an agent is misleading you or maybe doesn’t know what they are talking about.

Make sure that the agent your hire immediately puts your property up for sale on their MLS (Multiple Listing Service), Commercial real estate websites like Loopnet and Costar, and other relevant sites in your city.
Commercial real estate agents are infamous for holding on to “pocket listing”. Which means they don’t put the property up for sale to the public. They try and sell the property themselves to their list of buyers in order to pocket the entire commission. Not making it available to the market will limit the number of potential buyers and can reduce the price you could get for your property.

The agent you use should be experienced in selling “Multifamily Apartments”. Make sure they have been selling these types of properties for the last 10 years. This will insure they have the experience and the buyer’s network to sell your property as quickly as possible.

Avoid signing a listing agreement that exceeds 90 days. This is to prevent you from being stuck with an agent that you are not satisfied with or is not marketing the property effectively. This also puts more pressure on them to sell the property quickly or they lose out on the listing commission.

Selling a Multifamily Apartment Yourself

Below are some easy and effective strategies in selling your property yourself. If you are in a hot market it should be fairly easy if you put it on the right sites. But if your in a slow market or it’s a specialized “different” property then using an agent might be the best way to go.

Opening Escrow and Starting the Process

If you are using an agent then they will take care of all this and manage the entire process for you.

If you are selling the property on your own then you will need to do some research. Depending on your state you will either use an escrow company or an attorney to open escrow and hold the buyers deposit.

The easiest and safest way it to use a title company’s escrow. That way no matter what happens the title company is held liable. Since you will need to order and pay for a title policy anyways you might as well use them for escrow as well.

Title then will take the buyers deposit, open escrow, order the title policy and manage the entire process for you. This way you only need to work with one party the entire time. If they need anything from you they will guide you along the way and give you all the paperwork you need to close on the transaction.

Which title company should you chose? Well that’s part of your research. You can start with the big ones like First American Title Company. They are probably one of the biggest in the world. So I’m pretty sure they are already in your city.

But please do research title companies in your city. Check out reviews and call some of them up on the phone. Ask them if they work with Commercial Properties and if they can handle the escrow on selling your apartment. Get their fees and call the next title company.

Once you decide on a company they will walk you through the entire process and make sure all legalities are covered. Again, since they know they are liable you can feel safe that their attorneys and experience are making sure everything is done properly.

Once you closed your transaction then rinse and repeat the buying and selling process.