Clearly, creating an effective exit strategy is important prior to acquiring a multi-unit property. After all, investing in this highly profitable market doesn’t come cheap. With that in mind, you will need to think of a way to recuperate your losses when the market for multifamily properties isn’t doing well. We are at peak in many over-heated markets around the country as I write this.
There are buyers but very few multifamily assets that are available in good emerging markets, bidding wars are happening and the sellers want to dictate much higher sales prices due to extreme competition. But syndicators, like me, need to be very careful and savvy in picking the deals on actual financial numbers and with highly motivated sellers. It may take underwriting 100 deals to get one golden nugget; but that is the only prudent way!
If a multifamily asset is consistently underperforming; Many investors would think about selling their assets right away before losing too much of their value to an unstable market. For this, they need to calculate for their return of investment against the actual value they paid for in the first place. Regardless of how slow property sales are going, you need to make sure you still net a handsome amount at the end of the day.
How will you do it, though?
Again, before buying a multifamily property, you need to break the ice on the things you need to prepare. Property liquidation involves how much you actually gain from the property itself. At Moneil, we make a distinction between using cap rates and cash-on-cash returns. These help you build the value of these assets and determine a selling price that brings in the highest return.
Once you have used these instruments to calculate your assets’ value, you can now select a proper exit strategy that will deliver the highest rate of return. Here are my favorites:
If you opt to generate a positive return, you can hold the asset until the market stabilizes. Job growth and tight inventories can drive up the prices for condominium and apartment units. Adding to the appreciation of multifamily values is the fact that millennials are buying large swathes of multifamily units across emerging local markets in states such as Texas and Washington.
When you hold and sell, the trick to get the highest return is to start with a good number of apartment units at 80 percent the asking price. For example, if you are set to acquire 120 units for an asking price of $3 million, you can negotiate to scale down the price to $2.5 million. When the market is going well, rising rents will drive the value of these units upwards. Give it another year and the value will snowball to a selling price that covers the initial cost of acquisition and, more importantly, bring in a large profit!
Another great way to get large profits from liquidating your multifamily investments is forced appreciation.
Using this strategy, you can set (or manipulate, if you will) the value of your assets through property improvement projects. For one, you can renovate these units and repair non-functional or broken fixtures. This of course is a large investment on your part, so you might as well secure your finances for the repair and renovation works. Another way to consider is to provide more available living spaces. If you can’t afford to build more rooms, you can at least convert certain portions like the basement into bedrooms or apartments. That way, you enable the appreciation of the properties with lesser costs.
Lastly, you can limit your monthly expenses by controlling electricity and water consumption. For this, make sure to install energy-efficient bulbs and opt for waterless urinals. The amount you save on these essentials can help drive asset prices up.
If you are focused on enhancing the expandability of your assets, you are looking at a strategy that allows you to tap into a new income stream and raise value.
Repositioning involves a lot of approaches. For commercial assets, building modifications can help you tap into new markets, thereby increasing the rents for these assets. However, a more viable repositioning strategy involves lesser capital expenses than remodelling the entire appearance of the assets.
You can use ratio utility billing (RUBS). This allows you to transfer part of your monthly utilities costs (i.e. water and power) to your tenants. This eventually increases your net operating income and, in turn, raises the capitalization rate of your assets. With that being said, you can set a higher price for a handsome profit, and this is because you didn’t pay a single cent for repositioning your multifamily units.
Now that you have an exit strategy in mind, you can now hunt for potential multifamily investments. If you have other exit strategies that should be mentioned here, feel free to share them in the comments below.
Whenever investors come across the term net operating income or NOI, several assumptions come to mind as to how this metric is used. In multifamily investing, NOI is an instrument that’s very powerful for many reasons.
First of all, valuing multifamily assets involves more or less a different set of dynamics. Single-family homes are appraised based solely on median property values, the amenities available to homebuyers, the size of the home by square footage, among others. Multifamily assets, on the other hand, are valued based on the same factors plus the income they generate from rental fees. Toput it simply, multifamily properties provide an actual cash flow which also figures in the valuation of these assets.
This is where NOI comes in. It shows how much you are going to earn from the acquired assets. It shows the health of your cash flow by determining your income from rental fees minus the expenses incurred from managing and maintaining these assets.
In a way, NOI can actually help you determine whether or not a piece of multifamily property consisting of 20 or more units would be a good (and more importantly, highly profitable) acquisition. It gives you a good picture of what your cash flow would look like based on available data.
The Cons of NOI
Just like any other real estate instrument, NOI can be an inaccurate tool when it’s improperly calculated. What adds to the complexity of NOI is the fact that property values change drastically depending on market performance. This makes it difficult to ascertain how much you will be actually earning in a not so steady property market. Aside from that, it is also difficult to arrive at a precise NOI amount when you have to include variable expenses such as taxes, loans, and expenses for property renovation and repair projects.
NOI has its limits, but it can still guide investorsinto getting all their money’s worth. When it comes down to searching for the best multifamily assets, making an approximation wouldn’t hurt. After all, whether you use capitalization rates or cash-on-cash (COC) to determine the value of the assets you are acquiring, NOI is one thing you wouldn’t want to disregard. I definitely have concentrated my attention on momentum plays, that is assets who have yielded great COC returns over the last 12 years.
You only need to make sure you are doing it right when calculating for NOI.
Since NOI is based on how much cash your assets are generated from tenants, it is important to look at how much you can actually earn from rentals (A1). Aside from that, you can include income from other sources, such as parking fees, cleaning services (A2) and RUBS-Utilities Bill back (A3) Once you have acquired a gross monthly rental income based on these three variables, you need to deduct the losses you have incurred from vacant units (B3). This leaves you with a gross operating income (GOI).
As you can see, we’re not there yet in terms of knowing how much income flows straight into the bank. We still have to deduct operational expenses covering property insurance, taxes, repairs, and utilities costs (B4). We now arrive at a net operating income which we can use to determine overall cash flow performance.
Here’s an illustration of the formula you are going to use:
A1 + A2 + A3 = GOI
GOI – B4 = NOI
Apparently, calculating for NOI looks so simple. It’s the collection of the right data that offers the most pressing challenge. You only have to make sure you get every single detail right from the get go. When properly determined, NOI can help you find the investment options that guarantee the best possible returns.
Increasing your NOI
NOI is a metric that shows how healthy your multifamily investments are. Sure enough, a higher NOI means these investments are profitable. It also helps you qualify for loans a lot easier since a high NOI demonstrates your capacity to make commercial loan payments. But how do you exactly increase NOI? Well, there are several options. You can open up new income streams by charging for the use of certain amenities. For example, you can charge your tenants for pool access if the property you have acquired has an indoor swimming pool.
Another option is to reduce operational costs. You can implement cost-saving measures such as installing energy-efficient bulbs to control energy consumption. You can also share utilities costs with your tenants. Not only will this reduce your gross operating costs, but it also provides an added income stream to include in your NOI as illustrated in the above example.
I hope this guide helps you understand how to use and calculate NOI. It’s easy, it’s simple, and it will help you find the right investments in no time!
If you want to know more about NOI and other important details about multifamily investments, feel free to leave a comment below.
As a rockstar real estate investor, you know that it’s important to work hard (sometimes beyond your limits) in order to reap hefty gains. After all, everything has its price, and if you want to earn a lot from your investments, you will have to make the extra effort for it.
For a lot of people, investing in real estate may seem like a walk in the park. All you have to do is to put your money wherever there’s a great opportunity, sit down, and wait for the cash to come flooding in. If things would have gone this way in the real estate business, then I would become just as rich as Zuckerberg or Gates! In my dreams! Unfortunately, this isn’t the case for me and all other investors who have made it “big.”
In reality, I worked hard to earn success, and I am still working hard to maintain it. You see, investing doesn’t come easily to anybody. Even the veteran investors, entrepreneurs, Attorneys, brokers, and realtors are still being challenged day by day because the Commercial and Residential markets don’t stay at ease.
If there’s someone I can compare to a real estate investor, then it’s a rock star. It takes a lot of talent, dedication, and creativity to be someone like Eddie Van Halen or Jon Bon Jovi. So, investors will have to see to it that they have the mindset of a rockstar in order to reap success.
Apply these habits to daily life, so you can party like a rockstar when the deals are closed and the contracts are signed!
Technology changes over time. Every year, we often hear of a “disruptive innovation” in the real estate industry. For sure, it’s something that you would want to adapt. If it’s something new, by all means, assess its potential impact to you as an investor. By possessing a curious mind, you can definitely find the tools and applications you need to use.
What is it you want to do for the day? You always have the choice of filling up your organizer with a lot of tasks and appointments, but this will only result in clutter. A rockstar investor knows two things when it comes to completing plenty of tasks:
1) Proper time management
2) Priorities assessment. If you have a lot of things to do to focus on those tasks that have a lot of weight. Assess the most urgent things to do so you can finish them before the deadlines.
Rockstars are not only famous for their skills onstage. They are also known for their charisma, which allows them to connect instantly with their audience. You can have the same level charisma by simply being where the action is.
Surround yourself with like-minded people and talk about the things that matter – and not just about real estate investing. Offer your insights about the trends in your industry and demonstrate humor. Achieve high charisma by flashing an optimistic smile!
Learn to adapt these habits every single step of the way. With the constant application, you can make it to center stage like a rock star investor!
If you have other ideas on becoming a rock star in the world of real estate investing, share them in the comments below. Let’s discuss them together.
For many investors who have yet to dive into multifamily syndication, investing small provides a whole range of benefits. Acquiring a large number of apartment units is profitable, but smaller units can also generate a good cash flow. Acquiring a large number of apartment units is very much comparable to starting small with 10-50 units.
The reasons for this is that there’s less competition when you are investing small.
This is because you are at a level playing field. You are competing with investors who are at the same spending range as you are. It’s important to search for small multifamily properties that promise a high rate of return.
So, in a way, you still have the choice of entering the multifamily market as a single investor. You will have to face several challenges before you can finally have your own inventory of apartments.
Now, this is the part where it gets rather complicated. For most investors, there’s no predicting the path the market is going to take. The most critical challenge would be the acquisition of multifamily properties when the trend is gradually shifting towards secondary markets. That and uncertain demands in construction have made it difficult for investors to take the first step.
Nonetheless, investing small in multifamily properties is still a viable option when you are aiming to enhance your cash flow. You only need to leverage what you already know to find profitable opportunities.
You can also use my tips when you decide on acquiring multifamily properties between 10 to 50 units:
Location is always important when your main focus is to find properties that offer the highest yields. While you can’t determine whether or not a city is performing well. You can still acquire a helpful illustration of local markets. Some markets are overheated or, as we say, the market is at its peak. Yes, that’s true, but I totally believe that it’s still possible to find the best opportunities out there. You just need to work a little harder and stay in the market to catch the fruit!
As always, I would point out that research is vital. If you are a syndicator, you ought to lay your eyes on emerging markets. Look at the figures representing job growth, employability of the population, and purchasing power. If these indicators are in the high, then you might as well move in to acquire properties in these areas.
How about for single investors? You can still conduct research on your own, but it still helps if you already foster a network of property managers, realtors, and brokers who can fill you in on what markets are “hot” right now.
Once you already know where to invest, you can then focus on getting the required information on the units you opt to purchase.
Of course, this stage comes before the purchase itself, so extra care has to be taken when you are analyzing your expenses and coming up with a figure you can work with. Details such as the listing prices of the units as well as the median property value in the community are important bits of information you wouldn’t want to overlook.
After that, you can proceed to analyze your total finances. Include calculations for monthly maintenance costs and compare these with your monthly cash flows. Once you have added up all the important numbers and see a positive outlook in your cash flow. You now have a good reason to invest in the properties. The two categories of expenses that affect a purchase are the higher Tax Expenses at a new high purchase price, payroll expenses, and the deferred Maintenance Capital Expenditures in your calculations.
Your choice of financing is crucial. It takes a lot of careful consideration to find a loan that enables you to maximize your investment and, more importantly, your cash flow. Being where the market is, and with the prospect of increasing interest rates, it’s advisable to get 10 to12-year term loans with assumable clauses.
However, one disadvantage with this is that you as a single investor will be shouldering the finances on your own. This would mean handling the necessary paperwork and all other processes that lead up to a closing. This wouldn’t be a problem if you happen to have substantial resources to pull your investment together. Partnering with a high net worth family member or business partner can help in acquiring larger size multifamily assets.
Going solo is still a worthwhile thing to do in a multifamily market. If you are aiming to get higher yields. You might as well form a syndication with equity investors to increase acquisitions and, more importantly, secure a steady cash flow. That’s the world I have lived in for the last 12 years.
Read more about making it big as a syndication investor from my other blogs! Keep focus and taking daily steps to crush it big; perseverance and positive attitude pay off big.