In our last blog, https://www.linkedin.com/pulse/apartment-investing-series-working-brokers-todd-dexheimer/ we discussed working with brokers, which may be one of the most important parts of your team. Certainly, dealing with the right brokers, in the right way, will allow you to actually buy properties and have a business to need the rest of the team. Before we begin talking about the list of team members, let’s talk about how to find them. When I am entering a new market, I find a few property managers and real estate brokers. This can be done through loopnet/costar or just with a quick internet search. Call them up and talk about what you are doing in detail to find out if they can help, then ask for referrals. Ask the Broker who the best property manager is, attorney, contractor, etc. Do the same with the manager, attorney, contractor, etc. Once you do this with everyone, you will have a list of referrals to choose from.
Building a power team is critical to your success, so beyond a real estate broker, let’s discuss who you will want as a part of your team:
1. Property Manager
3. Property Inspector
5. Insurance Agent
8. 1031 Specialist
10. Cost Segregation specialist
11. Environmental company
Property Manager: This is the most critical part of your team after you have a deal under contract. They can also be very critical before you have a property under contract. A good property manager can help guide you when you are looking at properties to purchase and may even be the one’s to give you a lead of an off-market deal, after all, they are dealing with properties and property owners all day, every day. They will also be a big part of the due diligence. Be sure to find a management company that will walk all the units with you during your due diligence and give you a report on what they see and what they think can be achieved.
Property Managers will make or break your deal. If you have a good property, in a good area, but a bad manager, then you will have a bad performing property. Look for a manager that has experience in the sub-market you are in and with the type of property you are buying. If you buy in a C-class area with a manager that deals mostly with A-class properties, that is not a good mix. If you are doing a value add, make sure that your manager can handle a value add like the one you are doing.
The other critical thing with managers is to be sure they know your expectations. They need to know what you plan to increase rent to and when. They need to understand the type of tenant that you’re expecting and the qualification standards you want to instill. Property managers will also have to be connected with the other members of your team, especially with the contractors. I would be sure to set up weekly phone calls with your managers to be sure that everything is going as planned, especially at the beginning.
2. Attorney’s: Your attorney will either draft your purchase and sale agreement (PSA or P&S) or will review it. In many states, you will also have your attorney do the closing and all that is involved in that, including opinions for the lender on you/your company, title exams and insurance, Lien coverage, etc. The key is to find an attorney that specializes in real estate and has been involved in numerous real estate transactions like yours.
The other attorney that you may need is a securities attorney. If you are raising equity for the purchase, then you will need a securities attorney that can help set up the legal documents for the syndication and guide you through the process.
3. Property inspector: You will want an inspector to accompany you as you walk the property during the due diligence. The inspector will likely only walk 10-20% of the units, but they will get into the detail, as well as walk the common areas, mechanicals, roofs and exterior. Don’t skimp and think you can do this yourself. I am a licensed Contractor and have completed a few hundred renovations on houses and apartments and still hire an inspector for all my purchases. One other note on inspections – have the sewer scoped to be sure it is clear and have the property inspected for termites.
4. Lender: Be sure to contact lenders prior to putting a deal together. Get an idea of what they are looking for from you and if they will approve you. Commercial/Apartment deals look heavily at the deal, but it is a misconception by many that lenders qualify the deal alone. If you are buying something under $1.3 million, likely you will need to get a loan from a local or regional bank and sign a recourse loan. The same goes with a heavy renovation or low occupancy purchases, you will need to go with a local bank or a bridge lender. If your loan amount is over $1 million and you are in a secondary or primary market, then you may be able to get Fannie Mae or Freddie Mac financing with non-recourse. Make sure that you look into all of your options. Mortgage brokers are a great resource as well. They will shop multiple lenders and find the right one for you that can actually close on the loan. There are a lot of options in commercial real estate, get educated, so that you know what to expect. The other important thing to understand is the types of terms, as well as the costs associated with different lenders.
5. Insurance Agent: Please be sure to obtain quality insurance. Years ago I was going to manage a property for an investor out of California that bought a property for cash. A few days before the management agreement was going to start a tornado hit Minneapolis and damaged her property. She had no insurance coverage! Luckily for her the damage was only $15,000. My property down the road had $35,000 worth of damage, but we had good coverage and all expenses got paid by our insurance company. All insurance coverages are not the same, so be sure to have a competent agent that can describe the differences in policies and not just give you the cheapest rates.
6. Contractor: This is my bread and butter – dealing with and finding contractors. Contractors can be one of the least professional industries to deal with. There are a lot of one man (or woman) shows that will promise that they can handle your job. You will be better served dealing with an outfit that has employees and that can handle the job that you are asking them to do. When dealing with contractors, be sure that you have a contract signed with deadlines and penalties as well as payment schedules spelled out. Quick tip: don’t pay them before they do any work. You will be better served finding a contractor that can handle a few weeks without payment and that will allow you to pay them based on the work completed.
7. Appraiser: The bank will have it’s own appraiser and you will want to show up for that appraisal with comps and provide reasoning to justify your purchase price. Beyond the bank appraiser, it is good to have your own, to help verify your purchase price, rent projections and future estimated value.
8. 1031 Specialist: When it is time to sell, you may want to sell and purchase a new building without paying taxes. If that is the case find a 1031 specialist that can help you accomplish that is a must. This person/company will help you navigate the process to help save you 15% + on taxes due to the sale.
9. Accountant: Finding a CPA that knows and understands business and specifically real estate can save you thousands of dollars every year. You will want to find someone that currently invests in Apartments or has clients that do. Be proactive to ensure that you are setting yourself up in the right position.
10. Cost Segregation Specialist: Doing a cost segregation study can help save you thousands of dollars in taxes. Having the right advisor that can talk with you honestly about the pro’s and con’s of a cost segregation study on your building is critical.
11. Environmental Specialist: Be sure to at least do a phase 1 environmental study before purchasing, even if your lender doesn’t require it. This study will cost some money, but it could save you major headaches and potential lawsuits down the road.
12. Investors/Partners: You will want to be sure that you are able to close on a deal when you put one under contract. An apartment purchase of $5 million will cost you $100,000 or more in due diligence fees, earnest money, inspections, surveys, etc. If you don’t have the money in place to close, then that cost will be in jeopardy. If you do use partners or investors, be sure that your attorney helps you set up all the agreements and legal documents. Finding the right partners that have the same goals and complimentary skills can make for a successful business. More on this later
To your success!