Month: October 2024

KPIs and systems are great, but they are just the tip of the iceberg. You really need to dive deeper into your management of the property to get the best results. By this we mean, working with your property management company to improve their operations not just at your property but as a company. Making them better, makes you better and ensures future success for both parties.

1. Yearly budgets

• Do you give the property manager your yearly budget in advance or do you have them create their own? Different operators do this different ways and there is no right or wrong. However, we have them create their own first and then make adjustments based on their first run through. In our experience, their budgets have been much more aggressive than ours. If you show your hand too early they may lower their expectations. Let them tell you what they think the budget should be first. For all of our properties we have 2 budgets. Our proforma per our investment summary and the property managers budget. One great example is a property we own and operate in Phoenix, AZ. The property management company provided a budget that was $225k higher in NOI than our budget. This means if the property manager misses their budget by $225k we would still be flat to ours. If you give them a lower budget, they will lower their expectations and work to that budget.
• It is important to be on the same page with your property management company as far as your business plan but that does not mean they have to see all of your cards. People tend to play down to the level of their competition or expectations and you want your property management company working for you at the highest level, so we prefer to have their budget be a stretch goal to reach for.

1. Show up to the property unannounced

• If your property management company knows you are visiting, then the property will look its best. You will be surprised at what goes on day to day if you show up unannounced.

Look for cleanliness and overall curb appeal
Are projects that you were told were underway or completed accurate?
How do the renovations look?
Are things out of place?
What is the staff doing upon arrival?

• Also, drive by the property at night.

Do the gates work properly?
Is it loud outside or is there anyone causing a disturbance?
Do the lights work and are they adjusted properly?
Are there lights left on that should not be left on?

• These are all things you would not discover had you not visited the property. Always trust but verify and check in on your property. Your property management company should be handling these things but the only way to ensure they are being done is to check in on them from time to time and hold them accountable. At the same time be a good partner to them and help them improve.

1. Extended rent roll

• We have asked our property management company to include and customize an extended rent roll to include days vacant in each phase (eviction, rehab, in-house turn, lease up) to identify bottlenecks. Again, what gets measured gets managed. Getting the number of days a unit has been vacant is not telling you much. It is very difficult to identify why a unit has been vacant for so long. However, what if you know how long it was in the eviction process, how long for an in-house turn or rehab and how long in lease up?
• You can now average them out and know about how long each phase should be taking. This allows you to pinpoint where the management company needs to adjust and improve instead of just saying, we need to have days vacant be less. This does take additional work for the property management company, but it is worth it in the end. Knowing exactly where to focus your energy is crucial to creating a successful apartment operation.

1. Secret shopper reports

• We secret shop/audit our properties on a monthly basis and we do this in two ways. First, we have someone call into the property and speak with the staff or leave a message. Some of the things we are looking for in this call are:

Did they answer and if not how long did it take them to call back?
Were they friendly and inviting?
Did they sell the benefits of the community?
Did they ask for the close? Meaning did they schedule a visit or application.

• The next thing we do is setup a new email account and send them an online inquiry. It’s important to send these emails from a new email every month and also change up the message so it’s not easy to identify. If the manager knows it’s you, they are more likely to be on top of it. The goal here is to know how prospective residents are communicated with and being treated. Here are some items you should be looking for on the online shopper report.

Did the manager acknowledge and thank you for your inquiry?
Did they answer any questions you asked about or did the email look to be copy and pasted?
Were there links to pictures/videos/floor plans of the property and nearby schools and attractions?
How long did it take for them to follow up?
Did they ask for the close? Meaning did they schedule a visit or application.
Do they have an inviting photo of themselves in their email signature?

• First impressions are everything and by doing these seemingly simple things you can separate yourself from your competition very quickly. Always think about how you can best treat your prospective residents and how you can add value to them even before they sign a lease. Below is a screen shot of our template we use to score and keep track of the results of the online shopper report.

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• Managing property managers and implementing systems to hold them accountable may seem like a lot of work and it is! However, you have a responsibility to your investors and to your business to put these processes in place to get the best and most efficient results. If you are overwhelmed, take things one step at a time. Not all these things need to be setup on day one for you to be successful. The best advice we can give is to layout a plan in advance and take small steps towards executing your plan a little at a time. Many of these systems and processes were not setup when we purchased our first property. But little by little we added them and now we have a great system that allows us to be more efficient and get the best out of our property managers and the property. And we will continue to add, tweak and improve these systems.
• Remember, Always be Improving!

“ Failing to plan is planning to fail“
Alan Lakein

KPIs or Key Performance Indicators are the backbone to any successful business. KPIs are a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. As apartment operators, you too should have specific KPIs to track and measure the trends and performance of your property. Along with KPIs you should also have other systems or Standard Operating Procedures (SOPs) in place to hold your business accountable and to stay consistent.

1. Property Visits

• You must visit your properties and check in on the renovations, projects and overall condition of the property. We currently visit our properties every other week until the major work has been completed and once stabilized we visit once per month (and we do not live in our market). The devil is in the details and if you are not there seeing it for yourself, then you will not know the quality of the work being done. Pictures are not enough and can be taken at certain angles or doctored. We also suggest walking all vacant units and units under renovation, you never know what you are going to find or a talking point that comes up because of it.

1. Weekly Calls with Weekly Reports

• What reports are you receiving on a weekly basis? We receive a weekly comparison to budget, updated rent roll, updated project list, interior renovations update, snapshot of vacant units, notices to vacate, renovated units along with a weekly report which includes things like occupancy, pre-leased units, traffic counts and conversions, vacant units rented and not rented, move ins & outs, ready units vs. down units, delinquent counts and $ amount, promise to pays, lease expirations, notice to vacates, work orders received and completed, month to date total income received, reasons for cancels, denials and move outs, and any misc. information like large repairs, suggestions, etc. Suffice to say you should be receiving a lot of information from your property management company in order to track the performance of the property.

1. Access to their Property Management Software

• The reports mentioned above are typically pulled by a property management software that your management company uses. These weekly reports are just snapshots of what is going on, you should also have access to this software to view up to date and daily statistics. This allows us to look at the reports and statistics mentioned in the weekly reports but in more detail. These include a deeper dive into potential residents, the sources these leads come by, work status of residents, lead pipeline, etc. Being able to look at these report allows you to see trends and get a feel for the flow of traffic. Looking at a weekly report is great but when you look day over day you are able to identify more opportunities.

1. Monthly Reports

• How detailed are your monthly reports? Are you only looking at the income statement which is just a summary of your monthly income and expenses? If this is all you are looking at or getting from your property manager then you’re not digging in deep enough. Our reports are 200+ pages and include each and every payment and expense along with proof of payments from our property management company among many other things. (See the next page for a snapshot of what we receive in our monthly reporting).

Here is the Index page of our monthly report where you can see all of the items included in the report that we review.

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5. Audit your Financials Monthly

• Not only should you be receiving these detailed reports, but you should also be auditing them, which means reading through them to look for errors, inconsistencies and anything else that sticks out. We once found a $10k charge for a plumbing expense that was not for our property, and had we not looked we would have been responsible for this expense as it was not found by our manager. Do not make the mistake of only looking at line items that are over budget, there have been many times when the summary income statement looked fine but after digging into the General Ledger we have found expenses that were either double charged, coded incorrectly or were not supposed to be there. Property management companies have multiple properties they manage, and their accountants are in charge of multiple properties, so there can be mistakes made. You need to be a second set of eyes and question charges that look to be out of place and/or unexpected. If you are new to looking at a report like this, then you may want someone on your team with this experience. If you can’t afford someone on your team then you will need to dedicate the time and energy of knowing these reports very well and over time you will improve.

5. LASAL (Leads, Appointments, Showings, Applications, Leases)

• This is something we learned from our friend and mentor Neal Bawa. Not only do you want to know the sources of where leads are coming from and how many of each you are getting on a daily, weekly and monthly basis, but you also want to track the conversion of each of these into the next so you can identify bottlenecks and what needs improvement. Imagine only knowing that you had 30 leads last week and you have 2 leases signed. In this scenario, it’s difficult to really know what the issue is other than the conversion % was low. But what if you knew that of those 30 leads, there were 5 appointments booked, and of those appointments there were 3 showings and of those showings there were 2 applications and of those applications there were 2 leases. Now you know that somewhere between the leads and appointments there is something creating a low conversion rate. Maybe the leads are not quality leads, or the property management company is not getting to those leads quick enough. Regardless, you have identified the area of the bottleneck and now you can dig in further to investigate instead of just guessing. We have our manager provide us an update on this weekly and we track this week over week and month over month to see if we are improving in each of these areas.
• This also holds the property manager accountable while training them to improve in this area. Each market and class of property is different so it is tough to have a specific rule of thumb you should be seeing here, which is why it’s important to not only track this weekly but month over month to identify what is a good performance vs. a bad performance.

5. Customized Reporting

• As you add more properties to your portfolio and become a better operator you may want to start customizing your reports to track even more trends and KPIs. You may also want to track the performance of your entire portfolio vs. a specific property. There are tools out there that allow you to create dashboards where this information can be pulled for you whenever you like. We use a tool called Tableau and are emailed a daily snapshot on the performance of our individual properties and our entire portfolio so we can identify trends and constantly improve on our properties performance.

“ Action without planning is the cause of every failure “
BrianTracy

Once you have selected your property management company, you just sit back and let them manage your property, right? Wrong! Managing the manager takes planning and work, it is not an easy task but applying these guidelines and building systems to hold them accountable will go a long way when getting the property to operate efficiently and in executing your business plan.

1. Trust but verify

• A great example for this is when a unit is being renovated. Let’s say you have a unit that you’ve been told is “complete” but really there is still a few more touch up items left to do and it won’t actually be rent ready for two to three days. To the property management company this is not a big deal as it’s just a couple of days. But for the owner who is trying to identify the bottlenecks and how long each part of the process is taking, it could result in you looking into or being concerned about the wrong thing. You may think it’s taking too long to lease up when in reality the rehab just took longer than you were told. Part of the job of an asset manager is identifying bottlenecks and finding a solution to those bottlenecks. If you don’t verify, it’s tough to identify the right issues.

• Let’s look at another example. Visibility of signage is a key component to driving traffic to your property. In the evenings, it’s crucial that there is ample lighting throughout the property but also on the signage that is advertising your property. Most of the time, the staff is only on the property during daylight hours. It is not often they would be able to identify any issues with the lighting and may just assume it works if there are no complaints. It’s important to verify that your signage is visible and well lit. Again, you may think that the signage is just not working when in fact it could be the lighting that is your issue.

2. Push back and be in control

• This is your property, not the property management company’s. They are there to support you and execute your business plan. Do not be afraid to push back and be in control. Yes, they are the experienced experts, but they do not always have the right answers and are often stuck in their ways. If you want to see things done differently then you need to communicate that and guide them through the process and your expectations. 

3. Things must be measurable and traceable

• If you can’t measure it, you can’t manage it. For example, if your leads for future tenants are down and you ask your property management company what they are going to do to drive more leads. “We will start marketing more” is not measurable, traceable or an acceptable answer. An acceptable answer and one that is both measurable and traceable is, “We will market on these 3 platforms, it will cost this much money and we will provide a report weekly that tracks the results so we can see which platform is performing the best and what your cost per lead and conversion is.” Again, if you can’t measure it you can’t manage it. Your systems must be ones that allow you take make educated decisions.

4. Document all calls/meetings

• This is self-explanatory. Things get forgotten or slip through the cracks very easily, documenting conversations allows you to go back and keep track of things that need to get done and holds the property manager accountable. This goes back to things being traceable, you always want the ability to go back and look at past conversations and performance.  

5. Be proactive, not reactive 

• If you are a syndicator, you are managing other people’s money, which means you better not be waiting for something to go wrong. You should instead be putting systems in place in advance to always reduce or eliminate risk. Do not wait for the property manager to be proactive or tell you when something is not right, most managers are very reactive. This is another way to separate yourself from your competition as it is natural to be reactive. Try to see and question things before they go wrong. Managing apartments is all about who puts out the most fires most efficiently and who reduces the amount of fires they have; you do this by being proactive.

6. Do not relax or become complacent

• Even when your property performs ahead of budget for a given month or better than expected, does not mean there are not opportunities to improve. You should always drill down, peel back the onion a layer further and be proactive even when things seemingly are going well. Just like they say, “Always be Closing,” you should also “Always be Improving.”

“ What gets measured gets done“

Peter Drucker

When it comes to the success of your business plan as a multifamily operator or asset manager, it all starts with the selection of the right property management company. A property management company will either make or break your deal and it is important that you put the time and energy in up front to select and partner with the best and most experienced property management company to execute your business plan.

1. What is their track record?

• This may not be something that the property management company will be open to share but if they are not that should be a red flag. It’s also important to ask the property management company for referrals so you can get the point of view of their clients on the things they do well and could improve on. As in most cases, if you can find a current or past client that was not referred to you by the property management company, that would be ideal, as you are more likely to get a straightforward answer. Regardless, you want to make sure that the property management company you are going to work with is professional, flexible and qualified.

1. What types of assets do they manage?

• Equally as important is selecting a property management company that has experience in the class and type of asset you plan on purchasing. For example, you would not hire a company that specializes in mobile home parks to manage an apartment building.
• Nor would you hire a company that only manages 50-unit apartments and under in a Class D area when you look to purchase a 100 unit property. You want to match your asset criteria with a property management company who specializes in that space. It is important to let each property management company know from the start when you are interviewing them what your criteria are and to ask if they manage assets within that space and what their experience has been. You want someone with expertise, not someone who has 1 or 2 assets within those benchmarks.

1. Get referrals from other investors

• As you start to build your network out you will meet others that plan on investing or have already invested in the same market you plan to. Use them as leverage and get their opinions on who the best property management companies are in the market. There is no reason to reinvent the wheel if others have already been there.

1. Tour & meet with as many property management companies as you can

• Speaking with these companies over the phone will only go so far. It is extremely important to meet with these companies face to face. This will give you a sample to compare them with one another and also see what type of person you will be working with and if you gel with them. One of the most important pieces of selecting a property management company is finding one that aligns with your mission, vision and values

1. How is their communication style?

• Transparency and responsiveness is extremely important to us and it should be to you too. The slower they are to communicate the longer it takes to get things done. In any investment, timeliness is crucial. If you don’t test this out in advance you will be dealing with the consequences of not doing your due diligence. As they say, hire slow, fire fast. That is no exception when hiring a property management company. Working with them in advance will save you time, money and massive headaches in the long run.

1. Will they customize reports and SOP’s to your standards?

• This is a big one. Every investor is different and wants to see things a different way. When I worked in the golf industry, I worked for multiple owners and each had different ways of managing their golf courses and wanted to see different KPIs and reports. Remember, you own the property not them!
• If you want adjustments or custom reports, they should provide this for you as long as your request is reasonable. Do not settle for what their standard is if you want to see things differently. As we will talk about later, you need to be in control of your property (your business).

1. Who will your Regional Manager be?

• This is the most important person when it comes to hiring a property management company. In a sense you are not hiring the management company, you are hiring the Regional Manager.

How do their properties perform?
What type of person do they hire?
How well is their staff trained?
Are they open to new and modern ideas?

• These are all questions your should be asking yourself when speaking with the Regional Manager that will be in charge of your property. If you don’t know who this will be, then find out immediately.
• You should also shop/audit properties your Regional Manager is in charge of to get a sample of how they run their properties. Each Regional is different and therefore their properties will perform and operate differently from one to the next. To take it one step further, rate that Regional compared to the rest of the portfolio. You want to make sure you have the right Regional Manager on your team.

1. How many properties does a Regional Manager manage?

• There are only so many properties that one person can handle. Too many properties could mean that your Regional will be spread too thin and that means less focus on your property. You will want to ask how many properties they currently manage and if they have a max number the company will allow them to take on. A good rule of thumb is 8 properties or less. Any more than that you will start to see a drop off in their performance.

1. Are they keeping up with technology?

• Technology is constantly changing and you want a property management company that embraces those changes, not fights it. Technology is a game changer and those who embrace it can separate themselves from their competition.

1. Do they have infrastructure and a training program?

• Size matters. Having the ability to have corporate staff and training programs goes a long way. Turnover and staffing issues are bound to happen and it’s good to have a team that can handle it. Some may say that going with a larger company means there will be less focus on your properties and you’ll just be a number on a spreadsheet. We have not found this to be the case, if you take your time and take the steps necessary to vet multiple property management companies you will find one with good infrastructure that also treats you well.

Want a free copy of our “65 Questions to Ask a Property Management Company”?

Text “SELECT PM” to 31996 to receive your free copy today!

“ Proper Prior Planning Prevents Poor Performance “
Don Meyer

Having a plan to execute on is where it all begins for anyone who wants to achieve their goals, and this is no different when trying to take your Multifamily business to the next level. These 6 steps were the foundation for our company to get to the point to where it is today and will continue to be the road map for our future.

1. Decide 

Decide to take the next step in your life and your business and take massive action. Do not be a tire kicker, do not go back on your goals and do not procrastinate. Deciding means to go all in; have a plan and be committed, be intentional and be consistent. 

2. Create Core Values

When you have core values, decision making becomes much easier and you have clarity on the direction you want to move towards. If you have a decision weighing on you, you can simply refer to your core values.  If it does not align with them, then it is an easy no. If it does align, then you move forward with the decision. Our core values at Limitless Estates are to Impact the Lives of Others, Community Development, Inspire Others and Create Win, Win, Win Scenarios. All decisions that we make on the business revolve around these core values.

3. Align your Goals with your Family

Alignment of goals is extremely important and it’s best to deal with this beforehand rather than after the fact. Much like creating core values, if your goals are aligned with your families, then the tough decisions become much easier because you are on the same page. If you don’t start on the same page and align your goals, it will be a rocky road.  Make sure you take the time to lay everything out with your family so you can work together on accomplishing your goals.

4. Education + Action = Results

This section speaks for itself but you cannot create results without either of these two. Make sure you are consistently educating yourself and never stop learning, then use what you learn to take massive action. And remember, FAIL stands for First Attempt In Learning. As long as you take action on what you learn, failure is a good thing and your action will begin to turn into massive results.

5. Create an Educational Platform

When I first got started in multifamily, I relied heavily on modeling after others (per Tony Robbins). There is no reason to re-create the wheel, model after those who are succeeding at a high level at the things you want to be successful at and you will get there much faster. That being said, creating an educational platform has helped many multifamily investors leapfrog their competition and launch their successful careers. Find something you have a passion for and that you excel at and start there. Educational platforms can be as simple as a blog, meetup or a podcast, and can be as complex as a coaching program with live conferences. Whatever you choose, do it consistently and with the intention of always adding as much value back to others as possible.

6. Expand your Network

As they say your network is your net worth. The more you get out there and expand your network, the faster you will scale your business. I am now just one phone call away from solving my next challenge because of my network. And when you know that, you can be fearless when going after your dreams and goals.

When looking at the returns for a particular investment it’s important to understand that the there are several different factors to consider and not just the overall return of an investment. The ratio between Cash on Cash return and IRR is something you will want to pay attention to that can easily be manipulated. A 50% ratio is a good rule of thumb between these two factors, meaning you will receive half of your return during the life of the hold (Cash on Cash) and the other half upon sale (IRR). Seeking only an overall investment return could be a mistake as it could blind you to digging in and asking the right questions. In a situation where you are investing in an opportunity that is heavily weighted towards IRR over Cash on Cash, much of the returns are based off of the speculation of how the market will be performing in the planned sale year. Therefore, you could be waiting several years to make your return with none of it ever coming to you if that assumption was incorrect. You could say the same of Cash on Cash returns but those are more projections based off of current NOI, market, neighborhood and property factors; and not an assumption of where the market will be in the future.

Much like you would question any sponsor on their underwriting assumptions, one key area that can change the returns of any deal is the exit cap rate, which can drastically change the IRR. Because of this, it is easy for a sponsor to have an opportunity that is heavily weighted on IRR to make an investment look appealing. This is why you should always pay attention to the exit cap rate of any investment. Now, how do you determine what exit cap rate is considered ok? This is where the market cap rate comes in and each market will have a different cap rate based on many economic factors which we will not get into here. You can find out the market cap rate of most major markets by simply calling local brokers and asking them or finding market specific market reports which are available online and also provided by most large brokerages.

The market cap rate is more important than the purchase cap rate in my opinion when it comes to evaluating the exit cap rate of a value add investment. The purchase cap rate certainly has its place but is more tied to how much value there is to be added to a given investment and can be strategically maneuvered. Here are a couple of examples why you should focus on the market cap rate vs purchase cap rate when evaluating exit cap rate of a value add investment.

EXAMPLE 1

Market CAP rate – 5%

Purchase CAP rate – 6%

Exit CAP rate – 6%

In this example, if you are evaluating based off of the purchase cap rate you are discounting the fact that this was purchased below market value and therefore discounting or limiting it’s potential upside. This to me is a safe exit cap for a 5 year hold, as it is 100 basis points higher than the market cap in this location. This means that the sponsor is assuming that the market conditions are going to be worse over time which is a conservative and prudent assumption. That being said, there is always a story behind every property and you should ask about the story and fully understand it. In this example, we are assuming the 5% market cap rate is 5% in the neighborhood that it was purchased as well.

EXAMPLE 2

Market CAP rate – 5%

Purchase CAP rate – 4%

Exit CAP rate 5%

In this example, you may be looking at the purchase cap and say to yourself that the exit cap is 100 basis points higher than the purchase so this is safe. The problem is this property was overpaid for, as the market cap is 5%, so the exit cap projection is 0 basis points higher than the current market cap. At this point, my advice would be to dig in a little deeper and understand why. Estimating the exit cap to be the same as the market cap at purchase is an aggressive assumption. What this situation is stating is that the market will be just as strong in the future as it is today.

Here is an example on how much an exit cap rate can change the IRR of an investment.

EXAMPLE

Projected returns of an investment are 8% Cash on Cash and 15.24% IRR (this is a good ratio, a 52% ratio of Cash on Cash to IRR). Here you are not over leveraged on the IRR. To show the affect an exit cap rate can have on a project, below is an example in this situation to show how easy it is for a sponsor to get the IRR up.

Let’s say the exit cap rate in the above example for a 15.24% IRR is 5.7%. If changed just 50 basis points to 5.2% the IRR goes up to 18.27% and changes the ratio of Cash on Cash to IRR to 44%. On the flip side, if the exit cap is changed from 5.7% to 6.2% the IRR is now 12.46% and the ratio changes to 64%.

This is not to say that an investment that has a Cash on Cash to IRR ratio of lower than 50% is not a good investment. There are several that could be. However, if this ratio is below 50% (especially the further it is from 50%) you should be asking questions to better understand why and what the story behind it is. From there, it is up to you to make the decision on moving forward.

The ironic thing about this example is that if these two scenarios were the same property but just presented differently from the sponsor; and they hit their 8% cash on cash return, in the end you will get the same exact overall return. Because no one can predict the exit cap rate (sales price), therefore the back half of any investment is speculation. For this reason, the Cash on Cash return is just as important (if not more important) as your overall return and you should be considering both sides of this equation and not just the overall return.

Real Estate is Local

-What market is the investment in? And not just what market, but what sub-market and what neighborhood? Real Estate is local and has almost 400 metropolitan statistical areas (MSA’s). Just because Dallas/Fort Worth is booming does not mean that every real estate investment in DFW is going to be a good one. You need to know specifics about the investments. What neighborhood is it in, what is the median income of this specific area, is there any new construction or development going on, does this specific area have issues with crime, what is the HISTORIC trends of vacancy and rent growth in this market, is there job and population growth, etc. Use the resources at the end to help you find the answers to some of these questions.

Growth

-Plain and simple, you want to invest in an area that is seeing growth. This is as simple as it sounds, use the resources page to find out whether or not that particular market is and has recently seen job, population, wage, rent and even occupancy growth. Now, do you need to see growth in 100% of these areas? Not necessarily, but the more the better. You want to see that the market is growing, not shrinking. Generally speaking, you also want to be in MSA’s that have a substantial population. If you go invest in a market with 30,000 people and it’s seen 10% population growth year over year that isn’t saying much. Make sure the market you invest in has good, sound economics.

Historical Data

-When looking at the assumptions made by the Sponsor be sure that historical data is being used. For example, if the market is on fire and is currently seeing rent growth of 5%, occupancy at 97% and CAP rates at re-sale at 5% does that mean it will always be like that? You better believe not! Assumptions need to take into consideration the HISTORICAL averages so that the investment can withstand a downturn in the market. In the same example above, if historical averages are rent growth of 1.5%, occupancy at 92% and CAP rates at re-sale at 7% and the Sponsor assumed the best case scenario then you better be prepared for a pretty sour outcome. Keep in mind that that in order for there to be an average, that means that there are times when the market is worse than that average. The longer the hold period of an investment the more conservative the assumptions should be and the more you will need to rely on historical data.

Job Diversity

-Not only will you need to look into job growth in the market and sub-market you plan to invest in, you should also be looking into the diversity of the job market. You do not want a market that is fully dependent on the success of one large company or industry. If a certain industry takes a hit there needs to be other industries within that market that are there to keep it from tanking. To be safe, there should be no more than 20% of a market that is made up of one industry and the diversity should be spread out into 3-5+ strong industries.

Net Absorption

-Net absorption is a measurement of the net change of the supply of commercial space in a given real estate market over a specific period of time. It is measured by deducting commercial space vacated by tenants and made available on the commercial space market from total space leased up.

-Is there overbuilding happening? If too many properties are being built then eventually there will not be enough people to fill all the available units in the specific market, which ultimately results in lower rents, higher vacancy and more competition. Building is a good thing, but there is such a thing as too much of a good thing.

Market Cycle

-All markets have cycles much like the economy as a whole. Since real estate is local and has nearly 400 MSA’s, each one is not in the same cycle as another. There are too many factors involved for each market to react the same way. Market cycles can be a tough thing to gauge and does not make or break a potential investment. The key is that there needs to be a solid business plan in place, and that business plan must take into consideration where the cycle currently is and where it is headed. 

Resources

Below are some great places to get information and data about specific markets.

-Market Research – Free Resources

-City-data.com

-Census.gov

-Bestplaces.net

-Milken Best Cities Report

-CBRE

-Marcus & Millichap

-Yardi Matrix

-Ten-X

-American Fact Finder

-Market Research – Paid Subscriptions

-Co-star

-Neighborhood scout

-Local market monitor (LMM)

-Integra Realty Resources (IRR)

-NCREIF.org

-Resources – Rents

-Trulia.com

-Zillow.com

-Rentbits

-Rentometer

-Apartments.com

-Resources – Crime

-Trulia.com

-Crimereports.com

-Spotcrime.com

-Lexis Nexis 

There are so many factors to consider when evaluating a potential investment and at times it can be overwhelming, especially for those who may be investing in their first real estate opportunity. Investing in real estate is not rocket science and sometimes it’s just about gaining a little clarity on what you are looking for. These are many of the things you should be taking into consideration when breaking down a multifamily investment.

Fees

-There are many different fees a Sponsor can charge. Here are some of the most common fees you may come across;

-Acquisition Fee – A fee the Sponsor receives at the formation stage of the offering. The fee compensates the Sponsor for time, effort, and expertise used in obtaining the investment opportunity. Typically, the acquisition fee is stated as a percentage of the price of the property acquired. Generally, this method uses 2% to 5% of the price of the property.

-Asset Management Fee – The Sponsor receives payment for managing the company, apart from managing the real estate which they may not actually do. Asset management fees may be based on the amount of money raised from investors. If the company raised $2 million dollars, the asset management fee might be 1% to 2% of that amount, paid annually. Many Sponsors also set the amount of the asset management fee as a fixed annual dollar amount, paid monthly or quarterly.

-Refinance Fee – When a property is a value add or a new construction project there can be a time when the property can be refinanced to return the investors a portion of their original cash investment without selling the property. If the Sponsor has ownership interests in the company, they may get a share of the refinancing proceeds. In addition, the Sponsor may get a percentage of the refinancing proceeds. It is common for the refinancing proceeds to go directly to the investors as a return of capital. If the proceeds exceed the investors’ original investment, the Sponsor and the investors will split any excess. Sometimes the refinancing proceeds are simply split between the investors and the Sponsor without regard to whether the Sponsor has any ownership interests.

-Disposition Fee – Typically charged for services rendered in an investment disposition, including sales marketing, negotiating and closing of the deal.

-There are several other fees that can be charged, you want to look out for investments that are fee heavy, especially those that lean towards the Sponsor being paid first. That being said, you actually do want your Sponsor to get paid so there is an incentive for he/she to perform, just be sure that his/her interests align with yours and the Sponsor is not making money if the investment is not performing.

Splits/Returns

-The next thing to look for in the offering is the investor returns and the splits between the Sponsor and the investors. There are too many ways that the splits can be structured to label them all here, but here are a few ways they may be structured to give you an idea.

-Straight Equity Split – These splits can range anywhere from 60/40 to 70/30 to even 80/20 with the investor getting the greater of the two and the Sponsor with the lessor. In the example of a 70/30 split the investor gets 70% of the equity and the Sponsor the remaining 30%.

-Preferred Return w/Equity Split – This is a scenario where the investor receives the “preferred return” before the Sponsor gets paid anything. If the investment does not hit this preferred return (let’s say 7%) then the remaining balanced is accrued until that payout is caught up. At that point there would be a split of equity as decided in the PPM.

-Waterfall – These splits can be structured in many different ways. One of these ways is as the investment hits identified markers the returns adjust. For example, you could have an 8%, 12%, 15% waterfall where once the 8% is achieved the split turns more in favor of the Sponsor, and again at the 12% and 15% marks. Although this seemingly does have a performance piece tied to it and your interests are aligned with the Sponsor, be careful with these. This falls under the same category of having too many fees. Typically, the more experienced and senior Sponsors are able to pull these off.

-Every Sponsor will have a different structure and none of them are better than another. Ultimately, it comes down to the returns of the deal and whether there is a sound operator and business plan in place to achieve those returns. Do not overthink the splits, again it’s about the return on investment. Here is another thing to think about when taking a look at the returns.

-Cash on Cash vs Overall Return on Investment – Be careful that the investment is not backloaded. Meaning you receive very little returns during the meat of the investment and only make the majority of your return upon sale. The sale is speculative as the Sponsor is not able to tell you where the state of the market and the investment will be in 5-7 years, so there is an assumption made here. These assumptions are well thought out and backed by data and several key factors. However, you want to be sure that your returns are made throughout the life of the investment and not just at the sale to ensure a stable, prudent investment.

-When you look at the returns of an investment it comes back to your goals and why you are investing in the first place. If you are not sure what type of returns you want to make then you are probably not quite ready to invest yet and need to educate yourself a bit more. Once you have a goal and a target return in mind you can go out and shop these investments and find the best one that fits what you are looking for.

Timeframe

-The timeframe of each investment will vary based on the business plan. These can range anywhere from several months to even as long as 10+ years. Most if not all of these investments are not liquid so your money will be tied up for a period of time. It will be important to ask what the expected timeframe of the investment will be and whether or not you will be able to sell your shares or pull your money out. Each deal will be different. Again, this goes with making sure the investment fits your goals.

Business Plan – Operating Agreement

-What is the business plan? Meaning how do they plan on getting the investment to perform the way they have projected? There are many types of investments from buy & hold turnkey, light, medium and heavy value add to ground up development. Each of them comes with their risks and rewards but typically buy and hold along with light value add would be on the more conservative side where as heavy value add and ground up development is more high risk. So back to the business plan. Multifamily is great because it literally is a business. If you operate it more efficiently than the one next door then your property will sell for more. The greater your Net Operating Income (NOI) the more the property will sell for, which is why having an experienced and focused operator is so important. So how do you increase the NOI? There are countless ways but typically it is by managing the property more efficiently (saving in expenses) or improving the property and increasing the incomes via rent increases or other income streams like charging for utilities, laundry, vending machines, etc.)

-When looking at the Sponsor’s business plan you need to ask yourself if it makes sense. Can they really get the rent increases and the expense savings to where they say? There are several resources at the end of this document that can help you research some of these items but they will vary deal by deal. You can also call brokers, property management companies and other investors that are local to that area. Bigger Pockets and Facebook Groups are also a great resource for asking these types of questions.

-Next thing to look at is who the property management company (PM) is that the Sponsor has selected, is it 3rd party property management or do they provide their own in-house? Neither is bad, you just want to be sure that the PM being used has a good track record and has experience in managing the type of asset that is being purchased. For example, if the subject property is a class C value add project then you want a PM that has prior experience with this type of asset and work. A PM who only focus’ on buy and hold class A properties would not be a good fit here.

-Next is the exit strategy. Are there multiple? What happens if there is a recession and the plan was to sell/refinance in year 3 and now that’s not possible? What are the back up plans? At the very least there should be 2 exit strategies. Whether that is refinancing after stabilization and returning capital back to the investors, stabilizing and selling in year 5, or holding long term and taking advantage of the cash flow. It boils down to not putting all of your eggs in one basket, there needs to be multiple exit strategies just in case things do not go as planned.

-Along the same lines as exit strategies, one thing you will want to know is the CAP rate a re-sale or reversion CAP rate. This is the speculative piece we talked about earlier. The reversion CAP rate is the rate that is used to derive reversion value which is what the Sponsor expects to receive as a lump sum at the end of an investment. I know, fancy right! Basically, that is a fancy way of saying where does the Sponsor think the market is going to be when they plan on selling the asset or what does he/she expect to sell the property for. Again, this is all speculative which is why you want to be sure that the Sponsor is being conservative or has a very good reason for his/her assumption. There are so many variables at play here so a rule of thumb is not possible, just be sure to check with credible resources and ask the question of whether the CAP rate at re-sale is justified.

Lastly, you need to make sure the business plan follows the 3 rules of Multifamily real estate investing.

1.) Be sure the property cash flows

2.) Be sure the Sponsor has raised sufficient funds to cover the cost of ALL capital expenditures, emergency reserves and working capital

3.) Be sure the Sponsor is securing long term debt, preferably 10+ years

Private Placement Memorandum (PPM)

-A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration. The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the terms of the offering.

-The following are some questions you should be asking yourself as you read through the PPM.

-Do I have to stay in the deal the entire time or can I sell my interest?

-What happens if the project needs more capital?

-What happens to your money if the lead Sponsor passes away?

-What happens to your money if you pass away?

-What are the voting rights?

-Can the lead Sponsor be removed if they are severely underperforming?

-What is the compensation structure?

-What are the terms of the loan?

-What is the funding and payout schedule?

-How will I be updated on the project after closing?

-Make sure you read the entire document! You are giving your hard earned money towards this investment so you better understand all of the risks that come with it. These are just some of the many questions that should be asked before going into an investment. As mentioned earlier, if these questions cannot or will not be answered by the Sponsor then that is a clue and you should run for the hills!

Does the investment fit your goals?

-After you’ve done your due diligence the last question you should be asking yourself is does this investment fit my goals? Just because everything looks like a “good deal” does not mean it’s the right investment for you. You have to take a look at where you are in your life and what your 1, 3, 5 and even 10 year goals are. If the investment fits your goals then great! If not, then pass and try to find one that does. Here are a few more things to think about when asking yourself if this investment fits your goals.

-What is the minimum investment?

-How long will my money be tied up for?

-Do I trust the Sponsor?

-Do I believe in the business plan?

-Do my interests align with the Sponsors and their vision for the investment?

-Will this investment bring me closer to achieving my goals?

-Do I feel comfortable with the risks outlined in the PPM? 

-Investing in real estate is not difficult. And you can build great wealth with it as a vehicle. However, you need to be educated and prepared just like you would with any other investment. Otherwise, it is just speculation and gambling. And when you play that game the house always wins!

-Key Takeaways

-Be sure you know who are you investing with

-Be sure the Sponsor has a solid and trustworthy team with a positive track record

-Be sure your goals align with both the Sponsors and the investment itself

-Educate yourself

-Do your own due diligence, trust but verify!

-Follow the 3 rules of Multifamily real estate investing 

Track Record

-Does the Sponsor have a proven track record? Ask the Sponsor to provide you with past investment performance. Remember, past performance does not dictate future success. However, having someone with experience who has been successful in the past is a positive sign. Note: If a Sponsor tells you that they cannot provide you with any information on past performance that is a sign! Transparency, communication and trust are key! Know who you are investing with. Anyone can make the numbers on an excel spreadsheet or a PowerPoint presentation look great, the real key is who the person executing on the business plan is. Always do your due diligence on the Sponsor and key operators of a deal.

-What if this is the Sponsors first deal? This is not necessarily a deal breaker but here are a few things to look for if this is the case.

1.) Are there other people on the Sponsors team that does have Multifamily experience and if so, what is the source of that experience? Experience can come in many forms. Passively, raising money, putting up earnest money and/or due diligence funds, signing on the loan. However, the real source of where you want to see that someone in the deal has experience is in operating a Multifamily property of about the same size and scope as the subject property. There is a huge difference between owning a 15 unit Multifamily that is turnkey in a A class neighborhood vs. a 120 unit Multifamily that needs $10k/door in rehab and in a C class neighborhood. Make sure the experience level lines up with the deal.

2.) Does the group have an Advisory board and if so, who are they? This is not necessarily the best option but if there is experience on the Advisory board in the form of mentorship, it is better than having a first timer Sponsor with no guidance.

3.) What is your level of trust with this person and how well do you know them? Regardless of these factors, if you do decide to move forward with a first time deal Sponsor it is highly suggested you invest the minimum amount to start until the Sponsor gains your full trust and proves that he/she knows what they are doing.

Team

-Here are some important team members and their roles:

-Property Management – By far one of the most important roles on the team. Property management is the team who executes the business plan and either guides it to success or inevitably steers it to failure. Be sure to do your due diligence on the property management team that has been selected to run the subject property. More on property management later.

-Contractors – There are times when the property management company will have an in house team who does all of the rehab but this is another extremely important team member who will help in executing the business plan.

-SEC Attorney – This is the attorney that will be drafting up all of the documents including the operating and subscription agreements and most importantly the Private Placement Memorandum (PPM).

-Commercial Lender – Responsible for the lending activities in banks, credit unions and other financial institutions. Sometimes referred to as commercial loan officers, these banking professionals work almost exclusively with businesses, reviewing the very complex financial activities of these lending applicants. In many cases they also serve as an advisor to the Sponsor.

-Please note that due diligence on all of these team members may not be necessary, as the Sponsor needs to have these people on his/her team and needs to be able to explain who they are.

Due Diligence

-For one reason or another, passive investors tend to shy away from requiring the person who is going to handle their money for the next 3-7 years to tell them who they really are. Why?!?! This is your hard earned money we are talking about here, you have every right to perform due diligence and request for references and a background check. Remember, once you build trust with this Sponsor this becomes less and less a requirement, always remember to trust but verify.

Communication

-As I mentioned earlier, communication is key. Here are just a few of the questions you should be asking yourself as it relates to communication.

-Does the Sponsor take several days or longer to get back to you? Or maybe they don’t get back to you at all?

-Do they answer your questions with full transparency or are they beating around the bush?

-Do they know the answers to the majority of your questions? Does it sound like they know what they are talking about?

-These are all signs and if this is how they present themselves before they have your money, you can bet that it will be the same or even worse after. Make sure you are receiving the kind of communication that you expect and that the Sponsor knows what they are talking about. 

-Investing in real estate is not difficult. And you can build great wealth with it as a vehicle. However, you need to be educated and prepared just like you would with any other investment. Otherwise, it is just speculation and gambling. And when you play that game the house always wins!

Key Takeaways

-Be sure you know who are you investing with

-Be sure the Sponsor has a solid and trustworthy team with a positive track record

-Be sure your goals align with both the Sponsors and the investment itself

-Educate yourself

-Do your own due diligence, trust but verify!