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Multifamily Investing
The Handbook for Raising the Net Operating Income (NOI)
on Your Apartment Building Investments
Produced by the Multifamily Syndicate
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Dedicated in memory to my friend Douglas MacLean
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Table of Contents
Chapter 1: Overview______Page 9
Chapter 2: Investment Strategies______Page 17
Chapter 3: Deal Origination______Page 31
Chapter 4: Expense Reduction Checklist______Page 45
Chapter 5: Energy Saving Strategies______Page 53
Chapter 6: 30 Ways to Increase Revenue______Page 59
Chapter 7: Superior Debt Navigation______Page 73
Chapter 8: Future of Multifamily Investing______Page 81
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vi [email protected] Help: (305) 333-1155 Disclosure
The contents of this book, including any videos presented herein, do not constitute an investment recommendation. As such, this book does not contain all information that a prospective investor may desire in evaluating an investment strategy or individual investment.
Each investor must rely on his or her own examination of an investment strategy or individual investment, including the merits and risks involved in making an investment decision. Prior to making an investment decision, a prospective investor should consult his or her own counsel, accountants, and other advisors to evaluate the merits of an investment strategy or individual investment. Additionally, any discussion of the past performance of any investment strategy or individual investment should not be relied on as a guarantee of future performance, and no warranty of future performance is intended or implied.
Please check with an attorney or compliance officer before taking any actions mentioned in this book. Certain debt, equity, expense reduction, revenue adding, or other real estate investment details provided here may or may not be possible or legal in your jurisdiction and ensuring you are acting within the bounds of the law within your area is your own responsibility. The ideas included here are to help bring fresh ways to increase NOI to apartment buildings investments but the interviewees, author, and companies associated with this publication cannot be held liable for any result or lack of results from taking action on anything taken from this publication or any referenced resources.
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Chapter 1: Introduction
Through running our Multifamily Syndicate of 475 investment firms all focused on investing in apartment buildings, we have found a wide variety of investment strategies, philosophies, and ways to succeed in the marketplace. This book draws from the deals we examine, the debt deals we underwrite, the 300+ financings our team has closed during our careers, and the 20 families we represent worth over $100M apiece who almost all invest in real estate.
The purpose of this book is to focus on what matters most when investing in apartment buildings (also known as multifamily investing) and boosting the NOI on the property. There are many resources on property management, valuation, definitions, history, statistics, market reports, etc. But at the end the day, nothing moves the needle more and is a better investment of time than investing in the processes and strategies that will boost the NOI on your properties and ultimately increase your returns. The goal of this 90-page book is to give you the #1 most thorough resource and exhaustive source of ideas for you to improve the returns on your multifamily investments.
This book will start out with a very brief introduction of the multifamily space and then cover everything related to boosting NOI on a property, from superior deal origination and debt structures to energy saving devices and newfound revenue sources. The entire book is written to be consumed in less than 60 minutes. We made it this concise because we know your time is
9 Capital Raising by Richard C. Wilson [email protected] Help: (305) 333-1155 limited and valuable. We have included links to webinars, videos of expert panel discussions, and other resources to help you dive deeper into the topics discussed in this book.
Investors have poured billions of dollars into the multifamily segment, but consumers—from the millennial seeking an amenity-rich apartment to the Alzheimer patient in need of a memory-care facility—have proven that there is still strong demand for new development. Investors and developers have many reasons to like the multifamily segment.
Perhaps chief among those reasons are the financial incentives. Multifamily dwellings provide owners with a diverse base of renters that provide monthly income without the same risk of losing a high percentage of that income as, say, a commercial building, where one tenant makes up a larger percentage of the net income than any individual multifamily occupant. Furthermore, the government and agency lenders (Fannie Mae, Freddie Mac, and FHA) have numerous programs that incentivize development, ownership, and repositioning of multifamily properties, especially in senior housing and affordable housing where the government wants to encourage developers with cheap financing and other incentives.
The asset class has proven stable and many investors over the last several years have experienced substantial appreciation along with steady income, making multifamily an essential part of many investors’ portfolios. Indeed, over the last couple decades, private equity firms and hedge funds have joined the ranks of multifamily property owners, often making multi-million- dollar acquisitions.
But most multifamily properties aren’t owned by hedge funds and alternative investment firms. Most owners of apartment buildings and multi-unit
10 [email protected] Help: (305) 333-1155 dwellings are more typical investors, from a local business owner looking to diversify with a twelve-plex to a high-net-worth family that have owned several properties in the area for a generation or more. Many so-called “average investors” have been drawn to multifamily by the ability to obtain financing and the encouragement from financial gurus like those who have spoken at our real estate conferences, such as Grant Cardone and David Lindahl.
If you go into multifamily the right way, over the next decade it could be the best investment of your lifetime — and I put my money where my mouth is. I currently own almost 4,000 apartments and will soon have over 5,000.
- Grant Cardone, bestselling author, multifamily investor, and panelist at our Real Estate Investor Summit in 2017
In the years since the financial crisis occurred and the housing bubble burst, many institutional investors and family offices rushed in to scoop up undervalued multifamily properties. The collapse of the U.S. housing market left many over-levered real estate investors facing debt payments that were too high and in many cases the banks or lenders took the buildings in lieu of late or defaulted loan payments. Thousands of properties were sold for distressed prices either by the bank or owners looking to cut bait and sell in a difficult real estate environment.
Free Book: If this is the first time you are hearing about the family office investor concept please learn more by downloading a free copy of our bestselling: http://FamilyOffices.com
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Private equity firms, family offices, and even hedge funds capitalized on the opportunity, funneling billions of dollars in private capital to buy cash- flowing apartment complexes, condominiums, and commercial buildings. As we discuss at our many Family Office Deal Flow & Family Office Real Estate Investor Summits each year (http://FamilyOffices.com/Real), there are numerous reasons that family offices and other institutional investors are attracted to this corner of the real estate market. Here are a few of the reasons:
1) Cash-Flow: Family offices are buying multifamily real estate in large part out of pursuit of cash flow. A tenanted real estate property means that, assuming operating expenses are reasonable (including debt, importantly) and that you’ve selected a building at an attractive rate, you could see a profit in the first month. If you’ve ever rented an apartment in NYC (as I have), you know that apartment building owners may go several years without making any improvements to the property. Other, more active owners will make modest improvements to the facilities and the units over time in order to increase the NOI per unit and boost the overall value of the building.
Consider, for example, if a building owner decides to add a second bathroom to a 2-bedroom unit. That addition could increase the rent for that unit because with separate bathrooms, a two-bedroom apartment becomes more attractive to two renters sharing the apartment (and combining their income to pay more rent than a single renter would). For family offices and other investors in multifamily, increasing the NOI is key and the many different ways that owners can do this is an important (and attractive) feature of multifamily
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investments.
2) Avoid Development: There are a number of family offices that successfully develop real estate from the ground-up (at our June summit, we had a representative of Donald Trump’s family office speak about his boss’s well-known real estate endeavors, for example). But for many family offices, the notion of sinking millions of dollars into a real estate project that won’t return profits for several years isn’t as attractive as buying an asset that is leased/rented out and producing cash now. By avoiding development-phase properties, these investors also may be able to avoid delays like building permits, contractor disputes, zoning issues, etc.
3) Attractive Asset Class: One successful real estate investor who spoke at CapitalCon—a Family Office Club annual event featuring only speakers who have raised $100M+ in their career—offered the following explanation for why he moved from private equity to strictly real estate investing: “In what other asset class are you incentivized to borrow money to buy real estate and then if you improve an asset’s NOI by $105,000 in a 7% cap-rate environment you can increase the property’s value by $1.5 million?” If that doesn’t get you excited about multifamily, I don’t know what will.
4) Financing: Today is, of course, a time of historically low interest rates which allows borrowers (both individuals and institutions) to enjoy reasonable financing costs when acquiring these properties. Multifamily buildings are typically viewed by lenders as relatively low risk compared to other loans. Apartment buildings and condos generally produce cash to its owners (which goes to finance the debt payments on the loans) and, in the event of a default, the lender has a
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reasonably liquid form of collateral that it can expect to sell to a competitive market of buyers. Lenders also may have cheap access to capital thanks to GSEs like Fannie and Freddie and government programs that make it less risky to finance certain properties, especially those meeting the GSE requirements.
5) Housing Trends: After peaking a little over a decade ago, America’s home ownership % has dramatically fallen in favor of rentals. All that demand has created demand for more apartments and rentals for renters. While home prices suffered a severe blow and many home owners are still underwater, rental prices continued to climb, largely undeterred by an economic recession and a housing collapse.
6) Invest in What You Know: One investor on stage at a Family Office Club Summit recently talked about investing in what you know. It’s a philosophy by which many family offices abide and none other than Warren Buffett has echoed the sentiment with his Circle of Competence. For a number of wealthy families, owning real estate is intuitive. It doesn’t mean they made their wealth all through real estate necessarily, but it does mean that the families own a home (or several), or own apartment units, or feel comfortable buying buildings in their local market. At the end of the day, if it’s between buying a black box hedge fund that the patriarch can’t comprehend or acquiring equity in the apartment building near his athletic club, he’s going to go with what he knows.
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Here is a short webinar we conducted on Multifamily investing recently which provides an overview of the space in case you are a potential investor or new investor in the space: http://FamilyOffices.com/MultifamilyWebinar
The next few chapters of this book will briefly cover typical investment strategies and deal origination and then quickly get into the chapters on expense reduction, energy efficiency, and how to add new sources of revenue to your apartment community investments.
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Chapter 2: Investment Strategies
Spotting and recognizing opportunities is the trickiest part of real estate-- what is working today might not work tomorrow and vice versa, so our objective is to be as forward-thinking as possible, enabling us to produce great results for our investors. - Brian Burke, President and CEO of Praxis Capital and longtime multifamily investor
Many times, multifamily investors start where they can with lower quality B and C properties in the 5-25 unit or sometimes 50-100 unit range. Over time, however, most firms who have acquired 10+ properties develop a honed in refined strategy, with a unique strike zone from many others that builds on synergies, and allows them to only acquire properties which they can produce the best returns for themselves and/or their investors. This chapter will briefly review the most common strategies we see being used in the marketplace, but this list is not exhaustive and some firms will typically go with one strategy but opportunistically keep their eyes open to other ways of producing returns.
Strategy A – Re-Position: This strategy is going into a property that is generic and re-positioning it to cater to a specific demographic or tenant type that is going to be the target demographic moving forward. It could just mean bringing the property a bit more upscale to cater more to the type of
17 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 tenant that expects a certain level of quality, or it could be catering to seniors, students, executives, etc. One of our Multifamily Syndicate members, Dave Osborne of CRE USA, does this, on average spending $5k-$10k a door, which is the most common range we hear across all of our members. Many times that figure does not include upgrades to the exteriors such as paint, landscaping, roofing, parking lot, or clubhouse refreshing.
This strategy has been successful as of late with buildings that lack the type of amenities that many millennials and younger consumers want. For example, here in Miami, it has become standard for the Downtown, Brickell, and Coconut Grove buildings to offer a premium gym, outdoor pool(s), valet parking, and even spa services. In a relatively short amount of time you’ll see a building that was ordinary and rundown transformed into a millennial hotspot with a popular bar leasing the bottom floor and a bevvy of amenities to attract younger tenants with disposable income.
One example of such a re-positioning deal that could also be described as a fix and flip due to the speed at which a buyer came to them was completed by Nizan Mosery of Cornerstone Investment Partners:
“Cornerstone purchased a 224 unit complex in Houston 6 miles south of the new ExxonMobil office complex. We purchased it for 6.7m and within 28 months we sold it at 10.25m. Our investors made around 87% total cumulative return...we bought it at a great time. We brought in a top management company that knew the market well and knew how to collect rents. They were very relevant in the due diligence process, retaining residents and checking new prospects. We handled the deferred maintenance quickly
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and gave our residents a place they could be proud to call their home. The market was just at the right point where we were able to ride the cycle up and enjoy fast appreciation...it’s all about the market timing, location and great management.”
Strategy B – Fix & Flip: This strategy generally involves extension renovations to a property after acquisition and it is typically taking a C or B property and trying to make it a B+ or A property so rents can be greatly raised. Usually the property is let to settle to get it leased up at the higher rental rates and bring the rolling 12 months rent roll up to as little vacancy as possible before selling. This lends itself, if there are not great delays from permitting, to a 3-4 year holding time minimum and it may take 6-24 months to sell the asset, so it easily gets into a normal private equity fund-like 5-7 year holding period.
Strategy C – Aggregation: This strategy could involve another investment strategy as a first step to make the property more effective in its local market, but then importantly involves no real intent to then sell the property off. The goal here is to acquire good properties, clip decent % coupons each year, refinance perhaps every 10-30 years, and keep on acquiring more apartment buildings. Some of these investment firms will sell if they get an above market price offer on a property, but their intent is to acquire properties to hold for the very long-term or forever.
Discussion Panel Audio Recording: One example of an aggregation strategy is a group that has spoken at
19 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 our events. They buy and hold student housing apartment buildings. If you are interested in the student housing space specifically, we had a discussion panel on this exact area recently at one of our conferences. The audio recording of that live discussion is available here: http://FamilyOffices.com/StudentHousing
Strategy D – Partial or Full Development: Many multifamily groups have construction experience and leverage to do ground-up construction or major renovations and expansions of smaller multifamily buildings. Since most people don’t want to get into this capital intensive of a business due to the extra degree of risk, potentially longer investment horizon, and operational risk that permits or construction won’t go as planned, it is a less crowded space. Many who succeed in the space look for what is referred to as infill spots—highly dense urban locations that are desirable to reside in which may have a plot of land available or which may be zoned for 150 units while only having 25 or 50 units on the land currently. Typically highly experienced developers can promise better returns than those buying cash flowing properties on an IRR basis. The general consensus is also that if you invest at the wrong time or a construction loan gets pulled by a bank due to being at a bad part in the economic cycle, you are more likely to lose money or lose all of your money in these types of investments.
Strategy E – Conversion: Finally, we have the conversion strategy of taking a hotel, senior living, or condo building and turning it into a multifamily. This is probably the least popular strategy because it requires many moving pieces and variables to line up just right. Due to permits, code requirements which change drastically over time, permits, and the associated cost with doing a conversion, we rarely hear of someone going after this
20 [email protected] Help: (305) 333-1155 strategy exclusively. In fact, out of 475 multifamily independent sponsors and investment firms we haven’t heard of a single one that solely focuses on this strategy, yet each strategy listed above has firms which only stick to one approach on each investment they take.
The conversion strategy may be the least straightforward, so we pulled a few case studies from interviewees for you to see examples of how this works:
We acquired a property in the San Francisco Bay Area, in a core East Bay market that was built in 2008 in the thick of the real estate meltdown. The property was purpose-built as for-sale condominiums, but the collapsing real estate market eliminated the developer's exit. The property fell into bankruptcy and ultimately foreclosure and was subsequently acquired by a multifamily operator who rented the units to tenants and operated the property as conventional apartments. Seeing the opportunity here, we acquired the property for $15,750,000, resurrected the homeowner's association, and began selling individual condominium units, some to existing tenants, and the rest to homebuyers. Within two years, we sold all of the units for almost 150% of our acquisition price with very little capital improvements needed on the 9-year-old property. What was so different here was this was not a condominium conversion, which would require hefty construction to bring the units to condo standards and also carry entitlement risk from discretionary governmental approvals. This property was already built as condominiums, so this was a simple arbitrage play where we sought to capture the delta between the bulk value and the individual value. Spotting and recognizing
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opportunities is the trickiest part of real estate—what is working today might not work tomorrow and vice versa, so our objective is to be as forward-thinking as possible, enabling us to produce great results for our investors.
- Brian Burke, Praxis Capital
One case we purchased in bulk condos units in which developers had gone bust in 2010 in TriBeCa. The units could not be sold, as pricing at the time was very different and these apartments possessed terrible layouts and design. The closet space was a major problem, fixtures and design were lacking, and the concrete ceiling beams were wavy, uneven, and unsightly. We were able to bring more value to the units by creating much better closet space that HNW executives would need for their families. We took the original closet and made it a hers closet and then built out separately an entire his closet. We were able to do this with the spaces as they were loft spaces with 1,000 sq ft masters. We also added high-end chandeliers and lighting fixtures while creating encasements with sheetrock for the beams to make them symmetric and more appealing. We were able to immediately bring in cash flow with our local knowledge as we bank at Citi Private Bank and Citi Groups headquarters were two blocks away, allowing us to find executive tenants quickly.
We also specifically added one unit on the top floor below the PH unit that possessed views of the Hudson River. The thought process was that because the specific PH above this unit possessed NO views of the Hudson
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River from any of the rooms due to terrible design and layout. It only had top outdoor space that had views. Now with our unit that possess views in every room, we are able to achieve PH pricing for this unit by marketing them as a combination, giving us a much higher exit then what could have been achieved with the unit on its own.
- John Sorkvist, Quest Soho Equities, LLC
The strategy a firm employs will change how they look at a market, underwrite a deal, and manage a deal post-closing. For example, we interviewed Brian Burke within our Multifamily Syndicate on what numbers he looks at first and most closely while investing and here was his response:
The first numbers we look at are the number of units and the year the property was built. This might seem strange, but we have a specific “box” that we like our properties to fit into. If it is too old, too new, too small or too large, we simply skip it.
From that point, there really is no “first”. We do a deep analysis on every property that fits our box and scrutinize every line item of income and expense. We input all of this data into our analysis model and compare the trailing 12-month income and expenses to the trailing three- month income to form a base to our estimates of what the income and expenses will be going forward. On the income side, we also layer in a study on comparable rents at similar upgraded and non-upgraded properties in the area. Once we have all of that data, we forecast target rents, a ramp rate to get to the target, and build a forward-looking ten- year income statement. Ultimately, what we are aiming to achieve is to
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underwrite our exit, which means, "what price will we be able to sell for in three years, five years, or ten years." So to answer the first part of your question, I suppose this all means that the first number we look at is ultimately the last number we'll ever see—our exit price.
Numbers that we ignore completely are the ones that don’t conform to our operating experience. For example, if the property is running $600 per unit per year in payroll, we’ll ignore that number because we know that it costs twice that amount to effectively run a property. On second thought, we don’t “completely” ignore that number. We would use it as a clue that the property is being mismanaged and will most likely suffer from deferred maintenance.
- Brian Burke, Praxis Capital
Many multifamily investment firms invest regionally or in just a few select cities mostly. Out of our 400+ multifamily real estate relationships, we know of only three who are truly national in scope and active nationally. Even then, though, those are strongest in one region or two to three cities. This is due, in part, to the challenges of sourcing and managing deals, and the difference in tenant expectations and demands. It is also due to the scale of this industry—there are so many apartment buildings in just South Florida, San Diego, or New York that you could build a valuable portfolio while staying focused geographically. The advantage to that narrower scope is that you stick to what you know and keep your costs down by being able to manage those closely associated properties more effectively if they are not all spread out.
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Video: Here is a recording of a discussion panel on multifamily investing where you can hear five multifamily investors on stage at one of our 80 live conferences we have hosted discussing current trends, investment strategies, and how they approach the apartment building marketplace: http://FamilyOffices.com/MultifamilyPanel
Closely related to investment strategy is the investment structure through which investments are being made by a firm. There are four typical investment organizations that acquire multifamily buildings: 1. Independent Sponsors: The most common type of multifamily investment firm is the independent sponsor model where properties are purchased one-off by a nimble team who may or may not do property management on their investments, but who drive their value up through one of the strategies mentioned earlier in this chapter. In this type of a model, assets can be held for a short or long period of time and, while some independent sponsors are under pressure to sell after a certain number of years, there is typically less pressure than you would find within a traditional investment fund. 2. Funds: Investment funds are unique in that they often have the most pressure to sell their assets within 7-10 years of acquisition. Many times, the managers of the fund will not be able to show a great IRR
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or earn their performance fees unless they sell before a certain time threshold. This is one reason why there is always asset turnover. As these are professional investors, however, the properties they offload often have had the low-hanging fruit already plucked and they will try to sell into the marketplace at lower cap rate valuations. This makes the prospect of buying from one of these professional funds less appealing than a truly off-market deal where there remains a lot of untapped potential. 3. REITS: Real Estate Investment Trusts (REITs) focused on apartment buildings are typically buying 1,000+ unit portfolios or communities with 500+ units in them as a large part of their interest. REITs are publicly traded and often have significant market caps which allow for larger transactions. They have different investment strategies, but are typically holding their assets for 5-10 years at a time with an ability to sell again quickly or hold longer if they would like to. Multifamily REITs have, of late, been pouring their billions of dollars into new ground-up construction of residential housing— rather than paying top dollar to acquire a developed building or portfolio. Here’s an interesting recent article on this trend if you’re interested in learning more about how REITs are deploying capital to the multifamily sector: http://www.nreionline.com/multifamily/multifamily-reits-pour- money-new-development 4. Single Family Offices: A family office is a holistic wealth management team for an ultra-wealthy individual typically worth $50M or $100M minimum and oftentimes $500M or more than $1 billion. Usually these are buy and hold (or buy and hold forever)
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investors who are acquiring properties for the cash flow, tax, and appreciation benefits. Single family offices often hire talent out of REITs and sponsors to help them navigate the opportunities available and develop their own strategy for long-term acquisitions in multifamily.
For more information on family offices, be sure to visit http://www.FamilyOffices.com It’s important to understand these different types of multifamily investors when you are analyzing a counterparty on a transaction or trying to understand how you might structure your own firm.
Here is one story of how one of our Multifamily Syndicate members, Brian Burke from Praxis Capital, turned around an unsafe community:
We purchased 276 units in Houston, Texas. When we acquired the property, maintenance had been deferred for nearly two decades. The property was well-located, but lacked curb appeal and the units were in really bad condition. Upon touring the property, we discovered really poor living conditions, sometimes up to ten people in an apartment with no furniture. Delinquencies were high and so was the crime. Executing the transformation was a challenge—while workers were onsite diligently working to improve the condition of the property, residents and non- residents alike were stealing their tools as soon as they looked the other way. Early in the process, some members of this criminal element, from the safety of their car and an easy escape route, shot at our painters while they were the most vulnerable—while on their ladders painting the side of the building.
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But we didn't back down. After six months of renovation, installation of a perimeter security fence with controlled access gates, an improved look and "a new sheriff in town", the property took a noticeably positive turn. The criminal element was out, living conditions improved, residents were paying their rent on time, and a new sense of community was felt throughout the property. The transformation was so stark that our online rating went from 0% recommended to over 85% in less than 18 months. The broker commented that "it was the best apartment renovation he'd ever seen" and the property was a top 3 finalist for the Houston Apartment Association's Property of the Year.
And while all of that is nice, our investors saw the income increase 32% in just two years. This transformation was accomplished with new exterior siding, paint, landscaping, roofing and pool repairs coupled with a nice interior upgrade consisting of new paint, appliances, cabinets, flooring, and fixtures. In addition to the physical improvements, better management, a resident-focused approach and inspiring a sense of community with resident events all worked in tandem to turn the impossible into the very possible.
Before we finish out this chapter on investment strategies, we wanted to share this case study showing how one of our Multifamily Syndicate members, Gail McCarthy from Strictly Commercial USA, navigated a bogus rent roll and an unsafe apartment community. Her story illustrates how discipline and creative financing can make problematic deals turn out to be a success story:
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This is a 152-unit B property in a B area in Alabama. We acquired it in 2006 and we own it to this day. As it turned out, the “Certified Rent Roll” that we accepted during the due diligence period was bogus. Upon the final walk-through, the discrepancy was exposed and we re-negotiated at the closing table prior to closing. However, there were still quite a few “warm bodies” in the units (and the rent roll) that weren’t paying rent. So, we tasked our new property manager with evictions and leasing up with an improved tenant profile. I made a surprise visit to the property and determined that the property management company was either criminal or incompetent, but, either way, they had to get out because our occupancy got down to a dangerous level. We fired the property manager, hired a new one, turned the vacant units, leased them out, and paid our bills. During this time, we also added value to the property by addressing maintenance items, improving the property, and reducing expenses.
Another “issue” that we addressed was the troublemakers causing mostly drug-related problems and threatening the safety of our staff and tenants. As a result, we have always had a “Courtesy Officer” living in one of the units – rent-free. Yes, I said it, but safety is a valuable amenity and it is part of our mission to provide a safe place to work and live. Here’s how it works: We have a local police officer, typically from the narcotics unit, living onsite. In exchange for “rent,” the Courtesy Officer does the following: • Keeps a police car in the parking space in front of his unit while off duty.
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• Accompanies the leasing agents/maintenance staff when addressing any tenant complaint. • Walks the perimeter of the property to ensure that all exterior lights are on and working and that all doors to the leasing office, fitness room, maintenance shop, pool area, laundry room, etc. are locked after hours. • Keeps an eye on the cars that come through and has the ability to warn unwelcomed individuals of their trespassing on private property. • Provides a police presence to make the troublemakers uncomfortable and the tenants feel safe.
When we purchased the property, we assumed a Fannie Mae loan and secured seller financing. After a couple of balloon payments to the sellers and a couple of years of high interest mortgage payments, we did a cash out/refi with a Fannie Mae loan with a much-improved interest rate; as a result, we were able to get back almost 70% of our original down payment. Nice! Since then, we have enjoyed consistent cash flows.
This is a great story to end on because it shows how some unique strategies don’t have a neat label like the broader investment strategies that we discussed in this chapter, but nonetheless can make all the difference in boosting the performance of multifamily investments.
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Chapter 3: Deal Origination
It is all about referrals, you want to look at deals with low levels of competition or where you are the only bidder at the table, whether that is through referrals or getting to the owner before they are ready to sell so you are top of mind when they are ready.
– Richard Beleutz, Alternative Investment Resource
Finding an excellent deal in a relatively efficient market is challenging. If you find it easy, it is because of your extensive relationship network or you have a different definition of what a “good deal” is than most of us in the marketplace, as high cap rate apartment buildings are highly sought after. Just like deal origination in any other real estate space, the experienced operators look at a lot of deals and say no to almost everything. Some operators use the quote of 100 deals investigated to invest in one; others say they look at 200 in order to close one. The exact number doesn’t matter as much as the realization that you have to kiss a lot of frogs to find something worth investing in.
Ivan Barratt of Barratt Asset Management summed it up by saying that due to their 14 properties under management that are medium-to-large sized and cash flowing they can afford to be patient and only say yes to the truly exceptional deals a few times a year.
We have found through face-to-face meetings with well over 5,000 private
31 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 investors that you need as much high quality deal flow as possible. We view it as a totem pole: if you see just 20 pieces of deal flow a year, the top 1% in your mind is going to be drastically different from the individual who screens 200 pieces of deal flow. The more quality deal flow you can get, the better. That is how you uncover anomalies and find the deals that shouldn’t really exist—and soon won’t once you or a competitor lock them down and correct that market inefficiency. This idea is particularly powerful as there are many ways to attract deal flow that are not expensive and simply take a long-term approach to your craft, building of relationships, focus, and positioning.
At our live investment marketing strategies workshops, we talk about examining your marketplace and visualizing it like a geographical map. If you can think about all of the places someone may go to sell their apartment building or who they may talk to first while preparing to sell a multifamily community, you may be able to cut that off “at the pass” or reach them before they have taken any actions. This could mean looking in county records to see who owns the properties you want to acquire most, being known by the top 20 apartment building brokers in your space, building relationships with title insurance professionals, appraisers, apartment building insurance agents, commercial mortgage professionals, or figuring out how to be first in mind or top of mind among apartment building owners. By looking at the competitive landscape like a map, you can try to lock up those sources of deal flow. Like Coca-Cola does with their soft
32 [email protected] Help: (305) 333-1155 drinks—be in all of the expected places, the movie theaters, hotels, theme parks, gas stations of your space, but also in places where your competition is not. Just like Coca-Cola started selling products such as energy drinks at clothing stores or coconut water at spas and gyms, you can figure out how to get deal flow in ways your competition hasn’t even tried. This is the value of visualizing the competitive landscape of where deal flow could come from. The reason I like deal flow origination is the same as why I like discussing how to attract investors; a lot of it comes down to positioning and then building systems around your positioning to attract what you want most as often as possible.
Deal flow can come from banks, local investment clubs, investor or real estate conferences, direct mail, listings services such as LoopNet, service providers operating in the space, classified advertisements, brokers who focus on your space, or like how we orchestrate deals in the Multifamily Syndicate where we act as a referral between members who have found a great deal, but can’t execute on it due to its location, capital requirements, or timing. One of our Multifamily Syndicate members that we are working on a JV deal with right now is Malik Sabree of The Mores Group, LLC, who has a lesson common strategy of buying multifamily properties straight from the developers so he is part of their exit strategy, and he often knows what will be coming online long before it is completed, which gives him time to study the market and prepare for filling the building with tenants.
Conducting our interviews reaffirmed how critical a book on deal origination is when talking about multifamily investing. The Worcester Brothers of Worcester Investments, active Charter Members in the Family Office Club and Multifamily Syndicate, summed that up by saying: In our experience, it
33 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 all just comes down to how you buy. If you buy right, the property is set up to succeed; if not, then you’re going to be fighting an uphill battle. Don’t get me wrong, a good rehab and repositioning plan is vital. So is the ongoing property management. Yet no post-purchase plan can ever completely fix a bad buy. I know that wasn’t the question per se, but I think it’s so important to remember. We spend way more time thinking about how to make good purchases than we do anything else. We’ve never really been buying a property and thought “yeah, it's an okay deal” and it turns out to be a home run. The best deals are when we know we are paying considerably less than the intrinsic value of the property.
The sentiment that the Worcester Brothers expressed in that quote is one of the reasons why we are so excited about the Multifamily Syndicate community. It’s exciting to see how our members share deal flow, deal origination strategies and data like NOI. with each other so that more deals can be done more swiftly with better results by leveraging the community. I love companies and people with extreme focus; I find it breeds results. Interesting enough, the Worcester Brothers only invest in one place, Kansas City—and here is an example of their focus on deal sourcing resulting in a great deal being completed—which they provided to us recently in an interview:
We purchased the Fairway Apartments in June of 2012. Several months earlier, we were doing our due diligence on a nearby property we had under contract and came across the Fairway Apartments. We try to not only visit all the surrounding
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properties of a potential purchase, we also try to get in contact with the properties’ owners to build a relationship and get whatever information we can about the area. After talking to the owner of Fairway Apartments, we found out he was interested in selling. • A few things were clear right off the bat: Fairway was on a golf course and in great shape, it was severely underperforming as the occupancy was hovering in the 70% range, and the owner was out of town and not happy. After some back and forth, we negotiated a greatly discounted price of a little under $3.2 million, or roughly $21,000 per unit, which reflected the property’s poor performance. If there’s any “special sauce” to be found in this case study, I think it’s how we found the deal. By contacting the owner directly, we never had any competition in our negotiations. The seller wanted a quick solution to his problem and we were able to help solve it. • Upon takeover, we put $200,000 into the rehab which was focused on getting units ready, some minor unit upgrades, and landscaping and signage. This is important because the property did not demand a major overhaul. It was already one of the nicer properties in the area and aside from a few physical issues, only needed to be managed better. • Fifteen months after the purchase, we paid back 80% of our investor-partners capital with a refinance. We continued to operate it for another three years, then sold in 2017 for $5.9 million. • I like this example because it highlights the importance of a great purchase. What we did with the takeover plans and rehab of the property certainly moved the needle in the right direction,
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but if the purchase price had been too high, then it would not have been a successful investment.
In larger marketplaces that are more competitive to own apartment buildings in often command high price tags and provide low cap rates. For this reason, and to avoid a potentially overpriced market, many investors aim for what are referred to as tertiary, secondary, or emerging market cities. These are cities that are not top-10 metro areas, but still have good demographics of job growth, education, migration, or other factors working for them. We interviewed David Osborne of CRE USA from our Multifamily Syndicate and he mentioned, for example, that he is focused on Denver, Phoenix, and Salt Lake City in large part due to job growth. Another expert we interviewed, Ivan Barratt of Barratt Asset Management, currently invests in Indiana and Ohio while keeping his eye on Kentucky and Tennessee. When we asked why, Ivan’s response was insightful: We like to focus on market rate, workforce trends, and small to medium-sized Midwest cities. By doing so, we are able to acquire assets at well below their replacement value to defend ourselves against new developments, and meet our minimum going in cash-on-cash yields required to de-risk our investments for ourselves and our investors.
Some investors, however, feel safer investing in the core cities, as they know there will most likely always be a diverse economy there and demand for places to live. This high demand and low cap rate environment magnifies the return on investment if you are able to drastically boost NOI. For example, in a 10% cap rate property, any increase in the effective profitability of the property gets a 10x valuation – so $1 of NOI boosts your valuation by $10. In a 5% cap rate property, however, every $1 of NOI you generate boosts the
36 [email protected] Help: (305) 333-1155 valuation by $20 because it is a more desirable property and/or location. There are many investment firms still focused on the larger cities. For example, John Sorkvist of Quest SoHo Equities, LLC only invests in Miami and New York because he knows those markets, is always in them, and he wants to focus long-term on his areas of strength rather than investing in secondary markets to try to obtain the higher going-in cap rate. Similarly Nizan Mosery of Cornerstone Investment Partners used to invest in secondary markets nationwide and has refined his approach to investing now only in the southeastern quadrant of the U.S. because it is local to him and he can become a specialist in navigating those markets and build a real reputation within those areas among both investors and deal sources. Interestingly, he was the only person we interviewed who said he looks at family creations—where new families are settling down and having kids and he doesn’t think many others even consider that statistic.
Where you focus on getting deals can directly impact how you need to go about sourcing them, and how much competition there will be when trying to close a deal. Here is how Mike Butler from Cambridge Equity Partners sums up the value of having a tight geographical focus:
Our geographical investment strategy centers around primary and large secondary markets across the Southeast region of the U.S. for several reasons. First, acquiring assets in these markets are almost always served by numerous airlines which allows us to easily travel to and from our complexes on short-notice. Whether for surprise visits to check on our property management teams or to oversee
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capital improvement projects, easy access to our investments gives us the “hands-on” level of asset management we require. We may be out-of-state owners, but I can assure you we are not “absentee” owners. It is important for us to remain visible to both our investors and customers.
Second, the massive job growth the southern states have accomplished during the ongoing recovery from the last recession is undeniable. Job diversity and growth are one of the top drivers of rental demand and rent growth in any market. The pro-growth states, such as Tennessee, Georgia, and the Carolinas to name a few, have been continuously named in the industry as some of the best states to do business in. We continuously monitor these and other data-points that influence multifamily investments to stay ahead of market trends both on a more granular, local level as well as national.
Improving deal flow is critical. The more high quality deal flow you can see, the faster you move up the learning curve, become in tune with new trends in your region, and the more you can spot an anomaly in the marketplace where your firm could add the most value and potentially earn superior investment returns. We spoke with dozens of our syndicate members and interviewed over a dozen of them formally and here is their advice on sourcing deals:
My best deals come to me from having great relationships with the right brokers in my market. There is so much to be said for building good strong relationships with brokers. Once a broker/agent sends you a listing of theirs, it is now up to us to decide if we will pursue it or not. Once we decide that we will pursue, we must do whatever it takes to close
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on that asset. Once we have done that, now we are the A list. The best way to receive that listing is to create a bond. It must be a sincere bond. Get to know the hobbies of the broker, what kind of family they have, etc. - Nizan Mosery, Cornerstone Investment Partners
We source from two primary channels. The most robust is our network of broker relationships. As an apartment owner, I constantly get calls from the most active brokers in every market. The reason they call is to find out what my plans are for a particular property that we own. When is my loan maturing? What was my plan when I bought it? What was my expected hold time? What the brokers are doing is building their database of not only who owns what, but when they might want to sell and why. So there really is no one more knowledgeable about what is or will be available to purchase than the brokers that specialize in this asset class.
So when I am looking to buy in a particular market, I want to get to know all of the brokers in that market. I benefit from all of their phone calls to owners and leverage that database when I ask them what properties they are marketing and what properties are not on the market but might have willing sellers. Of course it’s not that simple, the best deals go to the buyers that the broker knows will close—so buying property and performing well, basically doing everything possible to make the broker’s job easy leads to deal flow from that broker.
The second channel is direct from sellers. This really only happens with sellers that know us and/or we know them. For example, if someone on my team previously worked there, or, more likely, we’ve bought from
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them before. Just like I stress the importance of making the broker’s job easy, we also aim to make it easy for the seller so they think of us first when they are considering selling a property.
– Brian Burke, Praxis Capital, Inc
We won’t bore you with repeated answers, but suffice it to say that just about everyone said their local navigation of working with specialized real estate agents who only represent apartment buildings is key. They repeatedly have mentioned how they will get early looks, exclusive access, or more information from brokers who they know well. This is not surprising, but it does circle back to the strength you gain by focusing on one single market or single city—as you can really take the time to dig in and get to know everyone very well. Your ability to close on deals you put under LOI becomes critical to establishing rapport with a broker and earning their respect. If a broker doesn’t believe that you’ll close or at least put in an offer, then it’s far less likely they’ll call you the next time they have a hot deal. This is especially true when the broker is working on a quiet or off- market deal and only bringing it to a small circle. Those kinds of deals are, of course, exactly the ones where you want to be the broker’s first call so that’s why building trust with these brokers is so key.
I have one $1B+ client that doubled their assets under management last year. The client has closed on over 20 properties and they have closed on every single one they have put under LOI. That track record of closing gets them excellent deal flow, which in turn helps them boost their investor returns, which helps them raise more capital and close on more deals. That’s the type of virtuous cycle you want to build and what we’re advocating in this
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Deal Flow Webinar: If you would like additional strategies on attracting deal flow that we don’t have room to share within this short book please see our 60 minute webinar on filling your deal flow pipeline here: http://FamilyOffices.com/DealFlowWebinar
Much of the time, properties are overpriced for those looking for value in the marketplace, but even so a lot of multifamily deal sourcing is deciding which properties not to look at or spend much time on. We interviewed Steven Cohen, President of Standard Management, a Multifamily Syndicate member who we have gotten to know through some debt work together. Steven had the following to say on how they weed out potential investment properties:
We have a first pass set of numbers, which we call our “Acid Test”, to characterize the deal and prioritize it on our Pipeline. Our 3 Prong Acid Test comprises numbers defining a) the quality of the assigned Public Schools, b) the Median Household Income in the zip code per the U.S. Census Bureau, and c) the % of individuals below the Poverty Level as defined by the U.S. Census Bureau.
Public schools across the country are ranked between 1 - 10 by a national non-profit and published on their website: www.GreatSchools.org. They identify and rank the elementary, middle
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and high school each with their own rating. We look for the average of these 3 numbers to be at least 6, with a preference for the higher the better. It can be offsetting when the elementary is say 9, but the high school is a 2 regardless of the middle school. We will often meet with community organizations and even the school representatives to further vet out the trends in the local public school, as this is a significant factor for us.
The median household income provides us insight as to the “rent paying capacity” of the general population of people living in that zip code. Residents typically pay between 25% and 33% of their income on Housing/Rent. We correlate this to the rents being paid at a property as a contributing factor in assessing the upside in rents we can or cannot plan to charge. Lastly, the percentage of people below the poverty level further provides support and insight into the immediate neighborhood.
The pool of investment peers of ours looks at a vast range of figures and various modes of prioritizing their focus. When filtering through so many deals, we find these numbers an efficient way to manage our pipeline.
- Steven Cohen, Standard Management
One cost savings strategy that I used earlier this year was using an in-house agent whenever possible on bid submissions. (Be sure to look at state laws, regulations, and disclosures.) For a recent acquisition I completed, I used a W-2 employee who was licensed as my buy-side agent. The benefit of using a full-time employee is that they spent very little time on the actual deal, so they were fine signing over all commissions due on the buy-side to “the
42 [email protected] Help: (305) 333-1155 house” or basically to me so that at closing I could save those fees. On a small deal, this could be just $35k-$100k of savings, but on a large deal it could equal $250k-$500k of fees saved. Say, for example, you are targeting an apartment complex that you are proactively reaching out to selling for $20M, saving a 1.5% brokerage fee would save you $300,000 at closing potentially if you used an employee who was licensed and could sign over commissions at closing towards your closing costs. While some real estate agents may frown upon this practice, I’m not writing this book for them— I’m writing it for those of you who appreciate ideas like this so you can re- invest that into hiring better quality management or re-investing in your properties in other ways. I have found that savvy investors, self-made ultra- wealthy investors, and other successful people appreciate hearing about these strategies (as long as they are ethical, legal, and disclosed) because it shows you are a good steward of wealth and you’re watching the bottom line.
To finish off this chapter, we chose a quote from a Multifamily Syndicate member that sums up the often medium-to-long-term nature of any investment business, where those who invest in relationships, positioning, and a consistent unique focus are the ones who emerge victorious:
Sourcing the best deals takes more than just looking at listings. We largely do this “the old fashioned way”; developing relationships. We find that some syndicators rely too heavily on technology and neglect the fact that people like to do business with people that they know and like. Because of this, we seek to build relationships with brokers, owners, and property managers before we ever start to look at deals in a market.
When entering a new market you need to be both known and credible.
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Simply firing off all-cash offers won’t necessarily get the job done and allow you to purchase properties. A multifamily property owner wants certainty before he or she enters into an LOI that ends up in a 2-4 month due diligence period. We consider our brokers and vendors as part of our “team of teams” and consistently meet with and cultivate these relationships, oftentimes sharing what is working and what is not in our markets.
Our approach is time intensive and can often take many months or years to pay off. However, once you’ve established these relationships, they can pay dividends year over year and they become the foundation of our presence in a market. This approach has led to around two-thirds of our acquisitions occurring off market.
- Peter Cannell, Cannell Capital Partners
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Chapter 4: The Expense Reduction Checklist
In this chapter, we will provide you with a checklist you can use for each part of the property to potentially reduce expenses and improve your bottom line. This list comes from our experience, interviews with those within our Multifamily Syndicate, and from the underwriting experience we have looking at apartment buildings. Just as with the rest of this book, please check local county/city/state jurisdiction laws and regulations on what is allowed in your area.
The reason why there are almost always areas where expenses can be reduced or revenue added (even in a competitive and relatively efficient market like multifamily) is because of the sheer size of the space and the myriad ways that these properties are operated. Ivan Barratt of Barratt Asset Management brought this up in our interview. He said that their whole strategy is to focus on buying from under-capitalized and stretched-thin mom-and-pop operators or bloated real estate giants. So, in either case, there is a lot of low-hanging fruit maneuvers available for their team to work on from day one.
Before getting into our checklist of ways to reduce expenses on your apartment buildings investments, we want to share a great quote from a Multifamily Syndicate member regarding how she reduces expenses:
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I look carefully at property taxes. Every municipality assesses properties with a legally specified process—for their specific county. Every county, everywhere, makes that determination. Upon transfer, the tax liability will change based upon what? Sale price? Comps? Which comps do they use? Does the commercial property appraiser use an income approach? What cap rate do they use? What vacancy rate do they use? You don’t want to get this wrong in your underwriting and there’s no need—a simple call to the commercial property appraiser in the county in which you invest will answer these questions for you.
- Gail McCarthy, Strictly Commercial USA
Expense Reduction Checklist:
1) Property Management: Some multifamily investment firms swear by doing their own property management so they have frontline information on how things are going and can address problems and experiment with new ideas more aggressively and transparently. Others use third-party property management firms. For those looking for solutions software wise for property management, we have found Cozy, Appfolio, Buildium, Propertyware, Property Matrix, PropertyVista, and YardiBreeze are used widely in the space and can supplement or replace in some cases traditional property management functions. 2) End Rent Concessions: Be firm on pricing—if needed to close someone, throw in more value such as a premium parking space or bike storage area or something they may value, but always throw in value and not discount your rent price.
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3) Require Auto-Drafting: Forget trying to collect checks—require automatic wire transfer or check drafting processes for paying rent. This gets you paid on time more often and makes it automatic—less time spent collecting money, depositing checks, and chasing rent means less expenses and more revenue. 4) Annual Portfolio Insurance Audit: Get new quotes on each property by themselves and as a whole each year—this requires almost no time of your own; it is the insurance agent re-earning your business and you potentially saving money and switching only when there is savings. 5) Challenge Property Taxes: Many people do this every year, consultants can help you with this 6) Service Providers: Get new bids on key services such as landscaping, etc. to make sure you aren’t overpaying for a basic service. 7) Investigate Solar & Wind Investments: While some of these may have a payback period that is 5, 7, or 10 years out, it may drastically reduce your energy usage within the clubhouse area and help boost NOI, plus managing these installations and navigating the technology as it improves will lead to this being an area of strength as the feasibility of use increases each year. 8) Insurance Pricing Power: Only one multifamily investment firm brought up insurance pricing as a point of leverage for them. It makes us think others may be overlooking this area.
Here is what Peter Cannell of Cannell Capital Partners had to say: Leveraging our pricing power with insurance carriers has allowed us to significantly lower our costs to insure our properties vs prior
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ownership. We have seen costs decline from $300/door to under $200/door. In one case, we also uncovered a material change to the FEMA flood maps, which allowed us to drop flood insurance 6 days into our ownership. Small details like this add up across a portfolio. 9) Rigorous Reference Checking: One interviewee, Nizan Mosery of Cornerstone Investment Partners, mentioned that they drastically reduce community problems, disturbances, and damage to property by thoroughly vetting tenants before they are approved to live in their community. This helps keep the community high quality, safe, and welcoming, while also keeping down repair costs. 10) Increasing or Decreasing Turnover: In some cases, you may decide that reducing turnover in any way possible is in your best interest because thorough cleaning and negotiating a new lease and having the space empty for 2-12 weeks could be very costly. If you are in a hot market, however, where rents are always on the rise, such as a student housing market or central urban location, you may look for high turnover so you can constantly raise rents to market levels. This is true for Alison Hoornbeek, who runs Conscious Investments, Inc,. a multifamily investor and member firm of the Multifamily Syndicate. Alison likes to rent to students when she knows that it is to her advantage to be able to turn over the lease sooner rather than later. One of our interviewees, the Worcester Brothers of Worcester Investments, stressed how there is a dual benefit to having a conversation with the tenant early regarding renewing their lease. This makes it more likely that issues can be addressed and that they will stay, but also gives management a heads-up in case they are
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deciding to leave so that vacancy can be planned for and the empty space marketed. 11) Tenant Turnover Timing: Many of our members audit when leases renew so they are spaced out. If you have more than 10% of your leases turning over in any one month, you may not be able to fill them as steadily. Another consideration based on your location is that you may want no leases expiring during dead months of the year where you typically get no inquiries for new rentals. 12) Vacancy Reductions: The faster you can fill an empty unit, the less cost you will have in paying for base utilities and the less lost rent you will be missing out on. For this reason, being on top of those moving out to have same day or next day cleaning and fixing up of the unit and posting it for rent before it is available can be helpful. Many owners rent their units on several portals which include: a. Zillow b. Trulia c. Redfin d. Apartments.com e. Craigslist f. RadPad g. Oodle h. Hotpad If you have your base listings on the most detailed platform and excellent pictures getting additional listings up is quick and easy, plus it can typically be done by an assistant, so you are spending none of your time doing so. 13) Staging: One strategy investors use for renting out apartments faster and sometimes at premium rates is staging. Generally this is done
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with real estate sales, but overlooked with rentals—but it can help the potential tenant imagine what it would be like to live there and make the place more inviting and less cold and empty feeling. Whether your goal is faster rentals, better pictures, or higher rents, staging may be something to consider. There are software programs now that allow you to virtually stage units as well by uploading pictures and details of your apartment unit for rent. 14) Energy Efficiency Investments: In the following chapter, we will discuss energy efficiency and various ways to save money by investing in updated technologies and solutions.
One of our Multifamily Syndicate members is highly focused on expenses while conducting due diligence on potential acquisitions. Here is a look at part of his approach:
One of the first numbers I look at, long before any offer goes out or even before I call the selling broker, is the Expense Ratio (ER). The Expense Ratio (the ratio between gross income and expense when expressed as a percentage) when compared to the asset class of any given property gives me a quick idea of how the property is being run and, in turn, will give me a sense of whether the seller has a realistic idea of the value of the property.
As an example, a class C property, which is typically an older property where utilities are paid by the owner, will have a higher expense ratio—somewhere in the range of 55-60%. If I am looking at a 1970’s built property where it is an “all-bills-paid” asset (class C) and I see an expense ratio in the mid 40’s, something isn’t making
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sense and raises more questions (doubts) about the validity of the financials.
Another scenario I frequently see when considering the ER versus asset class is builder-owner operated assets. Typically, these owners can significantly cut costs on repairs/maintenance and other capital expenditures that give a falsely low ER. The higher NOI leads to a higher valuation that is difficult for any new buyer to reach when negotiating the sale.
- Mike Butler, Cambridge Equity Partners
It can be hard to get a clear sense of what is going on with a property manager or apartment community you are acquiring. Many times it is due to poor oversight which creates the opportunity, so by the very nature of that you won’t often know what you are looking at until you go in person and you can assume many numbers are going to be outdated, inflated, or just plain wrong due to lack of care. This was brought up by several multifamily professionals, including Jake Harris from Harris-Bay LLC:
Initially we do a lot of back of the envelope assessments. Typically, we have a pretty good idea on what the market rate rents are and then can compare that vs current rents. We then start to dig down into how many units, what sizes, is landlord paying utilities, do they have a marketing plan for leasing, and then an assessment of what it would take for us to remodel one unit to achieve market rate rents. As far as what we ignore or overlook, it really
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depends on the deal—we try not to ignore anything. However, in many scenarios when we are buying distressed assets or poorly managed assets, there is a real lacking on financials. They either don’t exist or are highly inaccurate. Therefore, we assess things based on intrinsic value and have to reverse engineer what we believe a more realistic financial scenario would be. This is a problem when you are doing value-add and lower market deals (B and C assets).
Discussion Panel: To finish off our chapter here is a short discussion panel from one of our Family Office Deal Flow Summits on finding hidden value in your real estate investments, you will find the content relates directly to the content of this chapter of the book: http://FamilyOffices.com/Hidden
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Chapter 5: Energy Saving Strategies
This chapter will cover in detail all of the potential ways that you can save energy and reduce the costs of operating your apartment buildings.
One of the most useful answers we got from conducting our interviews on making multifamily buildings more efficient was from the Worcester Brothers of Worcester Investments. When asked about how they look at energy efficiency, here was their answer:
Each property has to be looked at in terms of condition, expenses, current technology and utilities in place, etc. In addition to the basics which most are aware about:
a. The most important one to us is the longer term plans for the asset. If we plan on owning a property for ten years, we are more likely to invest in energy efficiency as our cost vs reward is higher and we experience the long-term benefits of those upgrades. If we plan on selling, we are more likely to advertise those potential energy savings to interested buyers as opposed to doing them ourselves. Although those savings can boost NOI, they may have minimal impact on the actual trailing twelve, so how early those upgrades are made should be considered as well.
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b. Another thing that people often fail to consider is the implications of certain energy efficiency efforts. If I install low-flow toilets that aren’t effective and cause residents to flush multiple times, then we are not actually saving energy or money. If we install low-flow showerheads and the residents are unhappy with them, the higher turnover can very likely cost more than the energy savings. c. In regards to common area lights, we like photocell lights that respond to sunlight as opposed to traditional timers. When the sun goes down early for parts of the year, the lights need to turn on accordingly, and resetting traditional timers is a hassle. d. This doesn’t exactly fall into the category of energy savings, but one helpful thing in regards to lowering water bills is alerting the water company when water usage does not translate into sewer usage, as you are charged for both. A few examples are filling a pool, a sprinkler head has burst, or any other type of water leak on the property. The water company will charge you less for this usage.
I recently spent some time speaking at an angel investor community event on the trend of many ultra- wealthy individuals worth $10M+ or $30M+ creating their own single family offices. While there, I was approached by 25-30 companies raising capital for various new and better mouse traps and most were the usual mix that didn’t stand out and honestly just looked risky. But then I met Oded Malky, a multifamily owner of several buildings and an engineer by trade. Due to not having any sufficient solution available to him, he went to work creating his own wireless sensor based boiler controller system which allowed him to create a “smart building” and regulate and diagnose
54 [email protected] Help: (305) 333-1155 remotely via any device and see how the HVAC and boiler were performing while also optimizing the use of energy. I immediately wanted to learn more and spent an hour that afternoon learning about his technology and how he came to invent it. I immediately saw the connection with the many family offices in our Family Office Club and members of the Multifamily Syndicate. And after looking through their data room and reviewing evidence of their results in reducing, on average, 33% of energy consumption on buildings they were installed on, I joined their board as an equity holder and champion of what his firm, SHM Controls, Inc., is doing.
One important point regarding energy saving that was really driven home through reviewing SHM Controls is that of profit magnification when it comes to low cap rate properties. In markets that are very expensive, every dollar of NOI is valued very highly. So if on average clients were saving say $2,000/month on energy using a suggestion in this chapter, that is $24K a year and in a 5% cap rate valued property that equals $480K (24k x 20) of value created potentially for what may have been a $10k installation and $1-
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2k/month carrying cost. That type of magnification of potential returns is not found often in business and it is one upside of a low cap rate environment for those who can work apartment buildings and find the upside consistently in holding them. The week that this book is being published SHM Controls has completed another installation in 4 buildings for a single family office who attends our Family Office Club events and has spoken at many of our conferences—I see a device like this gaining in popularity over the next decade and I’m always keeping my eye out for additional solutions.
Jeff Kissee is a Charter Member within the Family Office Club and has spoken at our events. Jeff is also the Managing Principal at Capital 8 Group which is one of the most energy efficient focused multifamily groups in the United States spending 60% or more of their capital expenditures on energy efficiency in each multifamily project they invest in. They see the medium and long-term payoffs from doing so and much of these benefits kick in after just year 3, so they are looking to upgrade many aspects of every property they acquire to save energy and make them more efficient. One example of results coming from such investments is a property they recent sold where the utility reduction of cost was over 44%.
Here is what one Multifamily Syndicate member, Peter Cannell of Cannell Capital Partners, stated about their approach to energy saving strategies:
Utility savings represent a significant part of our business plan for our acquisitions for a few reasons. For many 70s and 80s vintage properties, the opportunity to reduce water and/or electric consumption is
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significant. These savings can be realized very quickly and have an immediate impact to our NOI. Lastly, lenders have offered very attractive “green” lending terms, which can oftentimes be 25bps or more in savings.
In our case, the best ROI has been on water savings. The savings from low-flow toilets, aerators and showerheads yield a payback period of less than 9 months. We are spending roughly $300-400/unit to make these changes that result in lower energy costs, better NOI, and more attractive loan terms.
Somewhat less impactful, but still worth doing, are upgrades to common area light fixtures using LED technology. Lastly, a very low tech way to saving on utility costs is to ensure staff are walking vacant units and turning down thermostats and lights, since those costs are being paid by the property and not a resident.
There are new solutions being released every year that can help reduce energy use and they include: 1. LED and/or automatic turn off lights 2. Atomized water for showerheads 3. Boiler controllers and IoT smart HVAC controllers 4. Low water use dual flush toilets 5. Solar Panels 6. Water efficient sprinklers 7. Window films which reflect lights and keep out the heat 8. High efficiency air conditioning and heating units 9. Use of gray water for landscaping and other uses One final note here to keep in mind is the section within the debt chapter of this book on green credit programs with top lending agencies which can add
57 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 additional incentives for putting into place efficient lighting, water devices, and technology such as that which SHM Controls provides. We speak to many multifamily sponsors who have bought and sold a few dozen communities and don’t know these programs even exist.
Video: As a final resource in this chapter for those interested in learning more about what is possible for those multifamily investment firms focusing on energy efficiency here is a short video recording of a talk given by Jeff Kissee at our Family Office Super Summit recently: http://Familyoffices.com/Kissee
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Chapter 6: 37 Ways to Increase Revenue
Almost every seller overstates their revenue and understates their expenses. - Samuel K. Freshman, Chairman of Standard Management Company
Finding additional ways to increase revenue can have one of the greatest impacts on your NOI and being creative here can really pay off in improving the valuation on your portfolio. It is important to remember someone is buying essentially a business with the operating profits of that business being what the value is based on, not the value of the walls and structure of the apartment building. If you are in a 5% cap market area, your valuation goes up by a multiple of 20 every time you create $1 of revenue. Another way to say it is that every $1 of extra bottom line created you create $20 of valuation increase.
Just like everything else mentioned in this book, local, state, and federal laws should be reviewed before taking action on anything to ensure that everything suggested here is legal to do in your jurisdiction.
It is important to note that if you follow many of these strategies, a potential
59 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 buyer could be skeptical of the revenue you are generating from these ancillary sources. Samuel K. Freshman, Chairman of Standard Management Company, stated “almost every seller overstates their revenue and understates their expenses” and that is what every experienced multifamily buyer assumes going into a deal. Because of this, having proof, transparency on invoices, records, and wire transfers and making sure it is all very well documented or on a larger deal even audited by a third-party firm can be a great benefit to have in place for the potential buyer—or some of your work in this area could be discounted and thought of as “too good to be true” or discounted as “other revenue” that is not rent related and to be examined and confirmed after closing.
Before we get into our checklist of ways to increase revenue, we wanted to share some quotes from the several dozen interviews we conducted while creating this book. Here are some experienced apartment building investor takes on how to increase NOI or revenue:
The low-hanging fruit is to improve the curb appeal and interior finishes of the asset. If the property doesn’t look good from the street, the best prospects will drive on to the next property. Starting with landscaping, paint, signage and amenities such as outdoor kitchens and pool furniture, we aim to attract new prospects into the leasing office. Dressing up the leasing office maintains that good first impression and the prospect will want to see the model unit. An attractive model and upgraded interiors will allow you to achieve higher rents than a similar but non-upgraded property.
Next on the list is superior management. Holding resident events,
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whether for the holidays or just a summer pool party, builds community spirit and a sense of belonging, which reduces turnover and promotes good online reviews and resident referrals. Holding seminars such as how to build your credit, how to make a budget, or even non-financial social topics further deepen the relationship between resident and management. A good relationship promotes timely rental payments and less turnover, both of which lead to higher NOI.
– Brian Burke, Praxis Capital, Inc.
While discussing ways to increase revenue with the Worcester Brothers, they mentioned how even though their multifamily firm only invests in Kansas City, every property is unique and their approach, level of rehab, and revenue increasing strategies are always unique to the property. Nothing is ever cookie-cutter even while focusing on a single geographical area.
I have organized the following revenue boosting ideas into the basic moves that almost everyone already knows and then more innovative strategies that are more likely to add value. Both could be used a checklist against new properties you are considering and potential moves for existing portfolios.
Basic Revenue Increasing Strategies:
1. Raising Rents: The most obvious strategy of course, many apartments rent for below market-rate rents due to poor negotiating, or a desire to reach 90 or 95% occupancy in preparation for a sale. Many times investment firms budget $5k-$10k per door for new flooring and appliances as well in order to raise rents further. Many
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apartment building owners also make sure curb appeal and re- branding is done first so that tenants are attracted to the leasing center and want to inquire about living there. Nizan Mosery is the CEO of Cornerstone Investment Partners, a multifamily investment firm, and he mentioned during our interview that he and his team immediately raise rents by $20 when they take over a property and they keep raising them in increments until they get push back in the marketplace. 2. Premium Units with Private Yards: Some units on the ground floor could have private fenced off grass areas, garden areas, etc. for private use, BBQing, and gardening. This could allow you to charge a premium for these units vs. others. 3. Add More Units: Is it possible to get washer/dryers inside units so you can charge more rent and turn what is now the laundry facility into one or two more units? Is there a unit or two taken up as a leasing office that could be converted? What is the land build-out allowance for additional units? 4. Adjust Fees: Shopping the competition on what they charge on fees and what you could be charging to ensure you are competitive but not leaving money on the table can help boost NOI. 5. Rooftop Space: While not permitted with some buildings, many with flat roofs have un-used rooftop deck space which could be used as part of an amenity, space to be rented out, or storage units to be leased. This is dead space many times that is not used. 6. Varying Rents: A complex you invest in may be charging everyone the same rent yet in almost every case some units are more desirable. Some units have views, some my face water, some may have been updated more recently, some may be larger, and some could be closer
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or farther from parking or noisy elevators. Blending the rents can help you get more total rent out of a property and play to those who at the end of the day will pay an extra 5-7% for little perks like location. 7. Trash Pick-Up: Many communities offer trash pick up services, so you don’t have to walk your trash to the dumpster. The handyman on site will simply collect it off porches each morning for $9-$20/month to save tenants time and hassle. 8. Utility Reimbursement or RUBS: If you are paying all bills directly as a property owner, there can be big savings in charging back all utilities. This can be expensive, but is often worth doing. Remember, once you make one-off capital expenditures, if it boosts ongoing NOI then it could greatly improve the valuation of your property—and that is what the next buyer will be focused on after things stabilize for 2-5 years post enhancements being completed. 9. Co-Working & Home Business Space: There could be potential to turn part of your clubhouse into a co-working space with internet connections, a printer, a small meeting space, etc. so that those working from home have a place to meet clients, get out of their home environment, and have a low-cost alternative to having a formal office and without the hassle of driving to a WeWork or Regus flex office space in town. 10. ATM Machine: For large communities and communities with street- side access with some foot traffic, getting an ATM machine installed could be an additional source of income. 11. Gym Membership: If you don’t have a gym onsite, you may want to partner with a local gym and offer your tenants a discounted membership rate they can’t get by going directly. This will be seen as a benefit and again could be another $10-$15/month revenue share
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with your community with each new member who joins. Dues should be collected by the apartment community and then the lesser amount released to the gym for their membership to remain active whenever possible to ensure payment collection. 12. Retail Space: While most properties will not have this option, one thing to keep an eye out for is properties with a retail component. This can be looked at in two ways—an existing piece of real estate that could have a Starbucks or coffee shop could be good to add because as part of an investment community, the total NOI may get a multiple premium at the cap rate of what apartment buildings trade at. Another way to look at it though is seeing if that piece of the property could be sold off to take some money back off the table after closing on the property. This is often done in the hospitality space, where the rights to the restaurant may be sold off immediately after a hotel is acquired to de-risk the approach and invest more capital in improving the hotel operations. 13. Preferred Moving Company Vendors: You could have reputable, insured and bonded local and national movers that could be on a preferred vendor list for anyone moving in or out who is looking for a professional moving service. Pre-negotiated rates could get them 5- 10% off normal prices and a 10-20% split with the community could be negotiated with those moving companies seeking consistent business. Oftentimes these companies have related/associated storage businesses and offerings as well—further revenue which could be shared on. 14. Move in Fees & Move Out Fees: Instead of charging a security deposit which puts tension in the relationship between tenant and landlord sometimes and can be a barrier cash-wise for some people,
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consider charging a move in fee of $199-$500 that they don’t get back, it is just the cost of moving in, and you could also have a move- out fee of $100-$400 as well that perhaps goes away if they stay for a second year or longer, etc. To mitigate risk of damage to the property, you could consider having them get a SureDeposit or other Surety Bond type agreement before moving in. 15. Renters Insurance: Consider requiring this for tenants—can be purchased for $9-$15/month and you could offer it for $14.99- $19.99/month or more. 16. Quarterly HOA or Resort Fee: You could charge quarterly a $29.99-$99 fee for amenities overall—if you think your property warrants this. 17. Leasing Washer/Dryers – A unit may have hookups and you can decide in your market to provide those at one rate or rent them to tenants for $X/Month during their stay. 18. Onsite Storage: One trend that is only going to grow is providing self-storage facilities onsite at apartment buildings. This is something still not often offered in much volume and can be a major driver of NOI growth. These could be small spaces that are vertical or larger spaces that would not be suitable for additional living units or that used to be garages, etc. One mini storage unit option that we have found being used for example is Trachte Building Systems. 19. Preferred vs. Covered Parking: One approach is to charge $X for reserved parking spot numbers and then $Y for covered parking. Building a carport could cost $750-$2,000, but can pay back in just 1- 2 years. You take the capital expenditure hit once, but then your NOI is higher from that next year on. 20. Billboard Locations: See what regulations are in your area and what
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the visibility of your apartment complex is to see if putting up a billboard or advertising of some type could make sense and produce extra income. 21. Dry Cleaning: Another idea is to partner with a local dry cleaning company and offer them exclusive rights to sell their services to your tenants for 20% of their gross revenue. They can increase their prices 5-20% to make up for that loss in their margin or just eat that cost as their marketing cost. 22. Pet Daycare or Pet Sitting: Have tenants who go to work during the day or travel sometimes and need someone to help with their animals. This can be done inhouse in theory, but is typically best outsourced like most other things with a local group who would like to serve your apartment community. 23. Food Delivery: Typically you won’t be having a restaurant onsite, but if there is a local, around the corner food provider with a good reputation and broad menu, you may allow them exclusive access for easy access to your community and help them with menus distributed onsite, etc. for a small monthly fee to help them grow their business or a cut of revenue if you can track that via orders in some transparent fashion. 24. Advertising: Depending on how many communities you own, there could be opportunities of earning extra income through the sale of services to your tenants. Again you would need to check regulations on what is being sold, but as your total units grow, your ability to leverage that portfolio, especially if it is concentrated in just 1-2 cities, greatly grows. 25. Fiber Internet & Cable TV: Include this in the package but on top of rent, saying you have it pre-negotiated at $59.99 for normal speed
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or $79.99 for Fiber ultra-fast, etc. when your cost to the cable company could be $40-$50/door can be an additional revenue enhancer as well. 26. Cell Tower Leases: Some of the multifamily sponsors who have spoken at our Family Office Club investor summits have given examples of placing cell phone towers on their properties and they have done well including that in the NOI of the property long-term. 27. Vending Machines: Forget candy bars and chips, even though you could vend those as well—think more of what you see at airports where products that cost $5, $20 and $100 are vended out of a machine that is easier for quick purchase than getting in your car to go to a local store. This can be more practical than opening a “community store” since it can be more secure and have less employee oversight/management issues and costs. 28. Short-Term, Furnished & Airbnb Rentals: Seeing if the apartment building is near an office complex, vacation hot spot, university, convention center, or airport could lend itself to renting furnished rooms for a premium or renting short-term to business travels or extended stay travelers at a premium to what a normal rent rate would be. 29. Pet Rent: Charging pets for rent is commonplace in many markets now and can bring in additional income, and it makes sense as one pet typically wears an apartment more than an individual. 30. Bike or Bike Rack Rentals: Storing a bike in an apartment community can be annoying. Some communities offer special bike storage areas, lockers, parking spots, or rental bikes so that there is no need to own a bike for the once a month bike ride for fun. Having a relatively cheap fun option of renting a bike may be seen as a benefit
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to some millennials who may be used to not having to own as many things in today’s Uber/AirBnB world. 31. Re-Positioning the Asset: This refers to catering to who is your most profitable or common tenant type in your market. Are you serving 60% executives, seniors, students, low income, small families? Adding in a playground, bingo night, networking breakfasts, etc. may help you attract more and keep your target clientele type and allow you to charge more for rent. If you can cater to your ideal client’s every need, you will meet their needs most likely better than others and you may be able to charge a premium for that experience and unique solution that you have crafted. 32. Appliance Upgrade Offers: Planning to upgrade some of your units once someone moves out anyways? You could offer a $200 fee or $300 fee to do it while someone is living in the unit—this way, they are taking $200 or $300 of the $3k in costs themselves and you get to charge the higher rent perhaps immediately or after they do move out—and hopefully keep them more loyal to the property. 33. Small Appliance Rentals: Renting out of a carpet/rug steam cleaning machine, high power vacuum, etc. can result in additional income as well. The property has to be large enough for this to make sense, however. 34. Charge Extra for Weekly or Bi-Monthly Payments: Some tenants in low or middle income areas may appreciate being able to pay half of their rent on the 1st and half on the 15th of the month, or splitting rent up into weekly payments. This is extra tracking, though, so it needs to be automated and charged a premium for this service. Instead of $1,250/month rent, perhaps you charge $679 every 2 weeks or $361 every week. While some tenants will likely not even do the
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math on how much extra they are paying, it is transparent for anyone who wants to do the calculation to see what they are paying for that splitting up of payments. 35. Referrals: Encouraging tenants to refer friends to a property when a unit next door to theirs is going to open up or when any unit is opening up can help raise tenancy rates. Having a cash reward or benefit such as preferred parking free for 3 months, etc. that after 3 months they would need to pay for—so they are getting a taste of that upgrade could be nice for them but also a soft upsell on them paying for that after the 3 months are up once they get used to it. 36. Kids Activities: Adding in a certified daycare, after school music programs with a local violin or piano teacher, arts and crafts, or sports lessons on extra space within the community can be something you could charge for and charge less for each year someone renews their lease with you. You could make a 33% margin on this for example at the start and give someone 5% off each year they renew their lease with you. 37. Strategic Soft Benefits: Another strategy some apartment building owners use is to have something position as premium, such as faster internet, preferred parking, career resource center, etc. ideally something that costs them very little in hard costs—and then provide that for free to someone who signs an 18-36 month lease instead of the 12-month term. This reduces turnover/cleaning costs and packaging offers like this to get someone into a more expensive unit or a longer lease when that is your goal can help build your NOI.
As you can see, many of these items are either you incurring a one-off capital expense to create ongoing revenue, or it is thinking creatively on how to
69 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 capture more of a wallet-share of your tenants so you can get that multiplier on the 5% cap rate or whatever your local cap rate may be working for you. In other words, the more revenue you can get occurring through your apartment building instead of them buying things outside of your building, the better for you as the community owner. May some buyers discount slightly some of these sources of income? Yes, but you only need one buyer and once you learn what strategies are practical for the types of buildings you acquire, you can develop your go-to model that you are most comfortable with.
To drive home how powerful implementing even just some of these revenue generating ideas can be when combined in creative ways, our syndicate member Malik Sabree of The Mores Group, LLC shared this: Similar to bulk cable agreements, we entertain bulk Concierge Services. The service is $75/unit and we re-sell it for $125/unit, in most cases. The 3rd party company offers personal and professional concierge services which include, but are not limited to: errand runs, pet sitting, daily trash pick-up, routine scheduled cleans, routine housing efficiency checks, etc. This service alone improves our closing ratio and increases resident retention percentages, which ultimately ensures a positive impact on our NOI.
Finally, here is a case study from one of our participants who used both revenue-adding and cost-cutting strategies to rapidly improve a property:
We bought our first property in the Atlanta market, a 100 unit, $9M acquisition that fit our model for
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value add and was in an area that had strong market momentum. It is near the new Braves’ stadium and experienced fantastic rent growth in the first 18 months that we owned it. Our exterior and interior improvement plan was on schedule and the property had a great new feel.
However, the best value-add execution will always be second to a well- run asset. While we partner with the region’s top property management company, we began to notice certain signs that management was not optimizing operations. During our regular property visits (some unannounced), we noticed a pattern that led us to make both onsite and regional staffing changes.
This situation highlights what we already knew; everything comes down to having the right team in place. People are the key to a team’s success. If a member of our team is not performing to expectations, we are always going to look for opportunities to give them the resources to develop, improve, and reach their full potential. However, this strategy does not always work and at that point we need to make changes to the team so that we can continue to provide our investors with the best performance possible. Within a single calendar quarter of operating with our new staff, we saw immediate improvement in NOI. This change resulted in a 19.3% increase in NOI.
- Peter Cannell from Cannell Capital Partners
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Chapter 7: Capital Raising & Debt Navigation
This book is about how to increase your NOI on apartment buildings investments, so we will not spend much time on capital raising or debt navigation. That said, we have found that the rounding up of equity investors is harder for most investment firms than identifying someone who will lend against an apartment building.
Equity Capital Raising: If you are looking for help on how to raise capital, we can help with resources, strategies, and suggestions on what not to do to save you time and money. I have helped raise well over $200 million for various investment firms, I represent more than twenty families worth $20 million each, and I have coached over 1,000 clients on how to raise capital more effectively. This provides me with a unique perspective and view of investors’ needs and what common things go wrong when a team sets out to raise capital.
The consistent mistake that we see is that 90% of those raising capital are doing so in an old-school traditional work-the-rolodex fashion of reaching out to their investor relationships and cold-calling upon potential larger more sophisticated investors. The problem is that the more valuable the investor, the more they will disregard cold inquiries. The solution to this is not making more and more calls and playing the numbers game—it is investing energy in attracting investors. This can be done through your branding, your
73 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 laser focus on a specific strategy, what five social and business communities you choose to be part of, what thought leadership resources you produce, where you speak at publicly, where you get published, where you live, and who you decide will be your target investor type over time. Just as you would add amenities, visual details, or a community name to attract a certain type of tenant, being intentional in what type of investor you are attracting and being consistently found by those looking for help with real estate investing, or how to get access to commercial real estate can be designed and planned for. I have found that if those raising capital invest 80% of their energy into attracting capital vs. chasing it with cold calls and emails that don’t get returned, things change and drastically improve over time. This is the approach I took to building the Family Office Club into the leading community of ultra-wealthy private investors globally with well over 1,500 registered family offices and thousands of additional investor participants. These strategies work because investors are busy and they want to work with someone familiar, that they trust, who is an Excedrin to their specific type of migraine—which could be a frustration of high fees with other investment firms, or lack of hard assets, or lack of income, or lack of transparency, or lack of good returns. Figuring out what type of headache you want to be the remedy for and who you will serve is a big part of deciding on your positioning.
This decision on positioning drives your branding, fees, marketing materials, and where you should be investing your time. If you get all of this right, you will have an unfair advantage over those which offer the bland generic investment firm with no on type of investor in mind, no helpful educational materials, and no visible long-term commitment to their craft through their sharing of their expertise. We have found that most apartment building
74 [email protected] Help: (305) 333-1155 investments firms start because of expertise in finding deals, working the deals, or re-positioning and very few are started because someone is great at raising capital. For this reason, many common mistakes are made which can cost you $100,000 each but yet are easily avoidable by having someone point them out upfront. Some of these expensive mistakes include: 1. Not bringing on a partner focused 75%-100% on capital raising or not dedicating a full-time employee to generating and following up with investor leads. 2. Having very poor materials, no one-pager, no website, and too long of a pitch deck or no deck at all. Having no data room or poor responses that are undocumented during due diligence is another sign to investors that you are not 100% serious and invested in your venture. Nobody will take your firm more serious than you take it yourself. 3. No working with investors for the long-term—the more credible the investor, the more flow they are seeing and doing everything to build a long-term relationship through which you can show deals is where energy should be focused rather than rushing around throwing potential investments at investors who barely know and trust you. 4. Charging fees that are average, yet your firm is small and not proven and not stable. If you are an early stage firm, charge more investor aligned fees, more performance fees and carry and less management fees and closing fees. Investors don’t invest based on fees, but they can lean forward and see whether you are really eating your own cooking or not by what you communicate through them, and you can stop an investment through high fees.
We don’t have room in this book to devote 20 or 30 pages on capital raising, but the study of this area runs deep and energy invested in figuring out how
75 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 to more effectively raise capital could pay dividends for the next 10-20 years in your business.
We could write a whole book on it...in fact, we have! Our #1 bestseller on capital raising, Capital Raising: The 5 Step System for Raising Capital from Private Investors, is available on Amazon or you can download a copy for free at http://CapitalRaising.com That resource includes more than we could ever share here on how to raise capital consistently for your projects. This is a concise easy-to-read book and it is the core system around which our full day investment marketing and capital raising strategies workshops are based. To see our upcoming workshop schedule, please visit http://FamilyOffices.com
We have live coaching workshops to consider leveraging. At our last workshop one real estate sponsor said he came to our workshop last year and took action on our advice and raised $600K in two weeks and went on to attract numerous additional investors after that.
Debt: While construction and bridge financing is far more challenging than financing a cash flowing property, these two financing options do exist and may be used (for a high rate, typically). What separates the most effective investors, however, is that they never overpay, aren’t restricted in their debt covenants, and they always make sure to get at least two to three quotes before going into a deal. It can be easy to just rely upon the same bank or same lender every time you do a deal without shopping around, but then you may miss out on special credits,
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incentives, or soft dollar benefits of considering another lending source. This is a hidden source of value for those reading this who haven’t explored other options.
Most multifamily investment firms write-off the returns that can be increased through navigating the debt piece of their deal because they see it as a commodity, aren’t aware of new programs that are available, or don’t know what options they have for different levels of leverage that they may desire on different properties.
Regarding length of financing, unless someone is exploring a bridge loan option or construction loan, most multifamily sponsors we speak with opt for long-term financing over 20 or 30 years. Steven Cohen of Standard Management is one of the many sponsors who agrees with this approach stating, We believe there is great value to locking in rates for as long as possible, and that the cost of 15 or 25 year fixed rate money is well worth it. On some deals, we have locked rates for 15, 25 and 35 years over the past few years. The 35 year rate lock and corresponding amortization was through HUD. Baring the 6 – 9 months it takes to rate lock, and the excess paperwork, we found this to be a tremendously strategic approach to financing properties to maximize cash flow and remove interest rate risk.
Sometimes we have found that a small sponsor may find an excellent multifamily deal but only have 3% or 5% of the capital to put up and they may need to JV or partner with a larger sponsor who can leverage their balance sheet with the banks to get the deal done. Who has control in this case is typically the person putting up more capital, but that is not always the case. We have two deals currently within the Multifamily Syndicate where
77 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 we have helped connect two syndicate members to enable them to submit a better application for financing and it is a win for both due to how hard it is to find excellent deal flow—everyone is looking for the anomaly and doesn’t want to lose it once they have found one that hits their strike zone.
Credits & Special Programs: There are many programs that you should be aware of which we find many in the syndicate are not being told about by their current lenders. These include the Small Balance Loan programs Fannie & Freddie have available and green building credits can lower your interest rates on loans. By looking for buildings that would qualify or finding out what it would take to qualify for such credits and programs, you can potentially boost your investment returns. As mentioned earlier, this is often overlooked and is a new program that is one additional maneuver and consideration that can add to your investors or your own IRR on an apartment building investment. Essentially, you are qualifying your loan as a “green MBS” which allows the agencies to market that investment to those wanting to support and allocate to green and sustainable initiatives. We don’t have space in this book to dedicate the 5-7 pages required to explain these programs, but our team has worked with clients before on this area and would be happy to speak with you directly on this area.
Other areas where we have seen special lending restrictions or a change in rates include military housing zones (whether or not your building has military tenants), rural areas, redevelopment zones, and student housing/university areas. These factors can increase or decrease your allowed LTV, interest rates, or lending terms.
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The origin of the Multifamily Syndicate is our work on the debt side. Allan Avila on our team has completed over 300 financings during his career and we hired him away from JP Morgan, where he worked for over a decade. We found most individuals were going to one bank for their financing or going through a commercial mortgage broker charging them 1% on their loans to find them a bank to lend through. We have found that we can get paid by the banks in most cases and charge our clients (multifamily investment firms) nothing and still find them 2 to 3 of the most competitive quotes in the marketplace without charging them the 1% a commercial mortgage broker would typically charge while also providing those that lend through us with strategic access, resources, and benefits that only we can offer by operating our Family Office Club investor community.
Due to our 100% ownership and operation of the Family Office Club community of over 1,500 registered family office investors, and Allan’s background, we found that we could offer something unique to our syndicate in working with members who want to make sure they have the most competitive debt pricing, and get assistance after placing debt through us on the equity side through marketing materials development, capital raising coaching, investor conference access, investor databases, and other strategic resources to help them grow their portfolio of multifamily assets.
If you would like to hear more about how we can compete for your business and reward you with benefits from the Family Office Club in ways nobody else can, please reach out directly to Allan at
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[email protected] or by calling (305) 677-3338.
You can learn more about our lending work at http://MultifamilyLendingPartners.com
Interview: As one final resource in this chapter I wanted to share a link to a 30 minute interview I did with Grant Cardone on his TV Show, Power Players recently where we discuss family office investments and deal origination strategies. In this video you can see how our thinking on attracting investors is night and day different than from most strategies on attracting debt partners and raising capital from private investors: https://GrantCardoneTV.com/Richard-Wilson
80 [email protected] Help: (305) 333-1155 Chapter 8: The Future of
Multifamily Investing
This is an incredibly exciting time for multifamily real estate. Consumer trends have shifted in favor of apartments and residential multifamily. All that demand does have a limit, of course, and as the multifamily sector continues to mature and become more competitive, we’ll see what are secondary tertiary cities get their cap rates naturally beaten down over time. There can only be so many times that you hear people are going to “alternative markets” such as Jacksonville, Austin, and Nashville before going another layer deeper may be needed for some strategies to keep working.
The further compression of cap rates will only raise the value of those who can contribute to positive NOI on apartment building communities, so our hope is that this book will be useful for a decade to come and hopefully ever more so as we update it with new lessons learned.
Since there is a real ROI when you lower turnover costs and can charge more for rent, we expect an aggressive increase in standardized hard and soft amenities, both free and included with rent and premium paid-for items. One example is an apartment building sponsor now that is bidding a $15M property’s loan through us now. If it goes through, they will be able to provide all of our Business Training Institute’s (BusinessTraining.com) 16 career training programs to their tenants at no cost to them. This is
81 Visit: http://FamilyOffices.com/Syndicate [email protected] Help: (305) 333-1155 something nobody else in their market will be able to offer, for sure not at $0 in cost. Property owners will continue to add on features and benefits such as this as markets get more competitive, so it would pay for those investing in the space to get ahead of that curve.
The future of the multifamily space will inevitably include more online capital raising on a deal-by-deal basis and we are watching this closely among our members in the syndicate. That said, only 2 of our 400+ multifamily investment firms are relying almost entirely on general solicitation online to complete deals, and 20-30 others are experimenting with third-party platforms and conduits to identify new investors with mixed success.
While we track over 400 sponsors now who typically hold 500-3,000 doors each, in the future there will be many sponsors who managed 25,000 and 50,000 doors who want to remain private and will dominate the marketplace more than any set of firms do now outside of the public domain. These super-sponsors will be able to offer things to tenants that would not be feasible for the upper 10% of sponsors today who manage just a few thousand doors.
There are many books on apartment building management, or the full cycle of acquiring, fixing up, or running an apartment building community, but many of them skip over or skimp on actual NOI boosting strategies. I hope you have found this book to be a unique resource and something for you and your team to refer back to over time to ensure that you are considering all of the possible options on the table.
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One of my favorite sayings is “a laser focus cuts through the clutter”; it allows you to make high conviction decisions, attract the right partners, stand out from competitors, and acquire only that which fits your highly refined strike zone. This book provides a buffet of ideas—no one team is meant to digest all of these ideas and implement them all, but I hope that from picking and choose what looks useful that you will refer your team to this resource and refer back to it over time to see what next iteration may be possible and in line with your long-term objectives.
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Multifamily Syndicate
The Multifamily Syndicate is a network of over 450 investment firms focused on investing in apartment buildings who JV invest with each other, leverage the syndicate lending resources, and exchange deal flow. Anyone looking to invest or currently allocated to apartment buildings can join at no cost by connecting with our team via the phone number and email listed at the top of this page.
Richard C. Wilson has helped raised over $250M of capital for investment managers and now advises on over $4B of assets on the buy-side. Richard runs a team of 20 full-time professionals and is the Founder of the Family Office Club (FamilyOffices.com) which is a community of over 1,500 registered family office investors. Richard has his undergraduate degree from Oregon State University, his M.B.A. from University of Portland, and has studied master’s level psychology through Harvard’s ALM program.
Allan Avila has closed over 300+ financings over the past decade and is head of the Multifamily Syndicate & Multifamily Lending Partners division of the Family Office Club. Allan helps coordinate deal flow, bridge loan sources, rate comparisons, green credit provisions, joint ventures, and benefit programs for multifamily investment firms and investors. To explore working together, please visit MutlifamilySyndicate.com or email us at [email protected]
85 Visit: http://FamilyOffices.com/Syndicate