In our first article of the Apartment Investing Series – Getting Started https://www.linkedin.com/in/dexproperties/detail/recent-activity/posts/, we discussed the many different ways to get started in multi-family. If you are ready to take your business to the next level, you need to be able to first get in the corridor. After you do that, you will then need to take action to achieve your goals. In this series we will discuss getting going as a buyer – as the lead investor, the GP (general partner)/Sponsor, otherwise known as the head honcho!
If you decide that being an active investor, that runs the day to day operations of your multi-family business, then this chapter is especially for you. This is the route that I have gone and have enjoyed so very much. Let’s dig in further.
First things first. What type of asset and asset class are you going to buy and why? Real estate has 4 asset classes:
· A Class – This is the newly built apartment with the bells and whistles that has the upper level tenant base. The buildings are usually located in very hot areas and have really high rents. A Class is typically built in the past 10 years or fully renovated within the past 10 years. This asset class typically will yield the lowest return on investment, but is considered to be very stable. If you want a trophy, then buy brand new!
· B Class – Buildings that are 10-30 years old are often B class. The tenant class is white collar and some blue collar. They are middle class workers, who are living in the apartment by choice and many someday will own a house. A B class area will be a little older, but not run down and crime-ridden. Think of yesterdays trendy A-class market, but now that area is left behind for the new shiny object. Opportunity is abound in this asset class for value add, which we will cover in later chapters
· C-Class – Buildings that are 20-50+ years old are often C-Class. The tenants are blue collar workers, some government assistance, maybe have some credit issues and criminal blemishes. The crime in the area is not real high crime, but there is activity happening. In this area you feel like you are safe during the day and at night, but want to be on guard. These are typically renters by necessity and most will be renters for life. Again value add opportunities are available in C-Class areas
· D-Class – Buildings over 30 years old can become D-class and be in D-class areas. This are has been forgotten and is crime-ridden. You don’t feel safe here at night and feel on edge during the day. The tenants are low income earners or no-income earners. Many have government assistance and many have criminal records, eviction history, no/bad credit, etc. The buildings are typically run down and the neighborhood has blight. This area has the highest Capitalization rates on paper, but that all hinges upon being able to collect rent and not having massive vacancies and maintenance.
After you decide what asset class or 2 that you will buy, then you will need to decide the strategy that you will employ. Are you going to add value? Are you going to buy something in an area that is rough now, but you feel will become better? Are you going to buy stable assets and cash flow? You also need to determine the size and pricing of the complex and the age.
You will need to narrow it down to focus on a specific criteria. You want to be able to communicate to people, especially brokers what exactly you are looking for. For example: “I am looking for value add 100-200 unit buildings in C+ to B+ areas that are built in 1970 or newer for under $18 million. The buildings need to be 90% occupied and rents need to be a minimum of $75/unit under market value. We are willing to complete cosmetic renovations, such as flooring, painting, cabinets, lighting, etc with up to $7000 in upgrades/unit.” With this type of defined goal, you will be taken much more serious and you will come to mind when that type of property is available.
So, you picked a target apartment criteria, now we need to be sure that is available and that you can execute your plan or tweak the criteria. We can go about this several ways:
1. Drive neighborhoods to find potential properties and call owners (this may be the least efficient for a beginner)
2. Go to loopnet and the MLS to look for apartment buildings. This is great for a beginner, as it allows you to see a snapshot of what is available. The majority of the deals aren’t sold on loopnet, but it is a great place to start. Find properties and call the listing broker to get the offering memorandum (OM), rent roll, current P&L (often times called the T-12, which stands for trailing 12 months). Also, ask about the condition of the buildings inside and out and try to get a gauge on the necessary renovation as well as the upside potential.
3. Build relationships with brokers. This can be done as a result of step 1. A little secret (not really a secret if you’re in the space) is that most brokers don’t list their clients property for sale on sites like loopnet.
4. Go look at the properties. This is a very important step. Look at buildings and walk them with the broker or seller. Ask questions like, how old and what type is the roof, how old is the boiler, What type of wiring is there and what type of breakers, what type of plumbing is in the building, what type of construction is the building, etc. As you walk a few units, be sure to ask if they represent the majority of the units. Ask to see the worst units, ask how many units are vacant, ask about why they are vacant.
In the next article we will talk about building your team, what to look for and what questions to ask.
Check out our Podcast on this topic:
To your success!
Todd Dexheimer