If you are thinking of flipping MULTIFAMILY read this!

Multi-Family and Apartment Investing
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If you are thinking of flipping MULTIFAMILY read this!

Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

So I work with a lot of clients analyzing properties.

A trend I am seeing is a critical mistake made by buyers of value add multifamily.

The larger number of unit buyers 50,100 units or larger do not typically make this mistake. I see it more in smaller 10,20,30 unit properties. The investor buys with the goal of selling with forced appreciation in a few years.

They go in basing pro-forma exit off of getting TOP MARKET rents after rehab. Unless you are in an extremely tight rental market which most places are not ( by tight I mean there are waiting lists at every complex in the area and rents are skyrocketing ) then you do not need to base a stabilization at the top of the market rents.

The goal of stabilizing after rehab is to lease up the FASTEST with the BEST tenants. I have seen a few properties recently where the owners have owned for about 3 years. They started asking out too much for rents after rehab and the absorption rate was slow ( absorption rate is how many units you are leasing up per month ). If you have 20 units for example and do one a month it might take close to 2 years to get fully occupied. If you are doing 4 a month full occupancy might occur in 6 months time.

The issue is these owners only had stabilized at 90% or better for 6 months which took them 3 years from date of purchase to accomplish. If they would have simply chose a nice rehab with middle market or lower rents and proper marketing the tenant demand would have been huge. You fill up fast and then increase annually. You take only the best tenants from screening taking away the best ones from other property owners.

The properties with the slow stabilizing times kill it for a seller because the lenders I know will not allow 75% ltv on a 6 month 90% occupancy seasoning. The banks feel the property has not had years of track record yet so some will do it but at 50% ltv. This could still work if the seller takes back a 25% second. The seller usually will not as that eats up all the equity in the forced appreciation. If a buyer has to dump down 50% then they will look at other larger properties with better scale.

So just something to consider if you are an investor trying to employ this strategy.

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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
12y

@Joel Owens  This is a great article on the strategy of repositioning Joel Thanks!

@Account Closed  This is great input too Minh on how the owners are leasing out at 10% below market and selling at proforma. Do you find that these investors sell at the market Cap rate for the given area and building type or are they pricing their cap a bit higher to unload the property faster (leaving more meat on the bone)?

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  • Dave Savage
    Investor · Rochester, NY · Member since 2012 · 316 posts · 102 votes
    12y

    Thanks for the great info @Joel Owens . What is the typical seasoning time at 90% to get a 75% LTV?

    I think the approach to stabilize at mid-market rents and then raise rents as you have stable tenants is a good approach.

    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Joel,

    Interesting post. I guess it pays to know what you're doing. The mistakes can be costly.

    We are in a very tight market with vacancy rate at 2.7%. What I see with buildings being repositioned is that the buyer will bring rents up to about 10% below fair market rent. Then, they turn around and re-sell it using pro-forma rents. It's very effective, and it works great in the Bay Area. Most buyers are Asians and Caucasians. The catch is finding these deals. Some of the deals are locked up before they even hit the market based on my observation. I can give examples if you're interested. :>)

    0Reply
  • Brian Moore
    Investor/Syndicator · Downers Grove, IL · Member since 2014 · 80 posts · 78 votes
    12y

    I know this thread is a few months old but I just started posting on BP (despite reading the forums for a year or so) and I am finding that I have a LOT to say:

    @Joel Owens Great initial post. Something that every flipper and rehabber should be aware of when they first analyze their deal.

    In Chicago where I do business the deals are priced as a multiple of gross income (GIM = gross income multiplier) and to a lesser extent, cap rate. To increase the value of your multifamily property you MUST raise rents. If you can make your deal pencil out for less rent and you achieve a good return, then that's great. Most often I am pushing rents to the max and would prefer to sit on a vacant unit for a month (8.3% vacancy) instead of cutting rent $100 (5%) because next month the property is worth $12,000 more (10 GIM x $100 x 12 months).

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    @Joel Owens  This is a great article on the strategy of repositioning Joel Thanks!

    @Account Closed  This is great input too Minh on how the owners are leasing out at 10% below market and selling at proforma. Do you find that these investors sell at the market Cap rate for the given area and building type or are they pricing their cap a bit higher to unload the property faster (leaving more meat on the bone)?

    1Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    @Albert Bui ,

    I can only speak for my area. In general, multi-family investors tend to be more savvy than residential investors. Most investors typically ask for the moon. If they don't get their wishing price, they don't mind letting the property sit on the market while collecting their monthly rent checks. There's not much motivation. They either take the property off the market if they don't get their price, or some sucker will come along and pay their wishing price. 

    The true sales are when the kids inherited the properties and decided to take the money tax-free, or husband passed away and wife is too old to deal with it, or divorce, or probate. Unfortunately, some brokers will take advantage of the clueless inheritors and buy them for great prices only to turn around and flip them. A fancy term for that is repositioning. Some properties will make it to the market and will sell for what the market is willing to pay. 

    I've seen brokers passed some sweet deals to the whales hoping to get their business down the road. What they don't understand is that these whales are not going to give them any business. If these brokers are willing to bury their sellers, who would say that they are not going to bury the whales in hope to get in bed with other whales? 

    Based on my observation, if you're in the network, you will get meat on the bone. If not, it's nothing but bone. The clueless ones entering this arena would likely lose their shirt. It's a brutal business because too much money is at stake. If you don't know who's the sucker in the deal, you're it. :)

    1Reply
  • Daniel Sanchez
    Beverly Hills, CA · Member since 2014 · 67 posts · 14 votes
    12y
    Originally posted by @Account Closed:
    @Albert Bui ,

    I can only speak for my area. In general, multi-family investors tend to be more savvy than residential investors. Most investors typically ask for the moon. If they don't get their wishing price, they don't mind letting the property sit on the market while collecting their monthly rent checks. There's not much motivation. They either take the property off the market if they don't get their price, or some sucker will come along and pay their wishing price.

    The true sales are when the kids inherited the properties and decided to take the money tax-free, or husband passed away and wife is too old to deal with it, or divorce, or probate. Unfortunately, some brokers will take advantage of the clueless inheritors and buy them for great prices only to turn around and flip them. A fancy term for that is repositioning. Some properties will make it to the market and will sell for what the market is willing to pay.

    I've seen brokers passed some sweet deals to the whales hoping to get their business down the road. What they don't understand is that these whales are not going to give them any business. If these brokers are willing to bury their sellers, who would say that they are not going to bury the whales in hope to get in bed with other whales?

    Based on my observation, if you're in the network, you will get meat on the bone. If not, it's nothing but bone. The clueless ones entering this arena would likely lose their shirt. It's a brutal business because too much money is at stake. If you don't know who's the sucker in the deal, you're it. :)

    Wow, quite a 'meaty' and great post (;

    My own experience in the business is usually off-market deals are coming up during scenarios when investors are exiting or during exchanges. I'll say this, finding a solid network to work within does offer its advantages. Investors with growing portfolios like to stay specific to their regions, so it stands to reason that a broker such as myself will always be 'in the know' when searching for product. Once a deal is on the MLS or LoopNet, usually it means most investors have shopped the deal and passed on it.

    Its a value add for the bigger investors and developers to have us bringing them deals that are not readily available to everyone, and in turn, does give me continued deal flow. Only certain brokers will be able to manage to off-market deals that come up because sellers are already very open to the idea of moving some of their assets.

    Here in L.A., cap rates truthfully are tight as can be, but that means more to larger portfolio investors than to newer investors and syndicators that are looking to place money in the market. I would love to talk to anyone needing some info about this or anything regarding MFD opportunities in and around Los Angeles.

    0Reply
  • Daniel Sanchez
    Beverly Hills, CA · Member since 2014 · 67 posts · 14 votes
    12y
    Originally posted by @Account Closed:
    @Albert Bui ,
    I can only speak for my area. In general, multi-family investors tend to be more savvy than residential investors. Most investors typically ask for the moon. If they don't get their wishing price, they don't mind letting the property sit on the market while collecting their monthly rent checks. There's not much motivation. They either take the property off the market if they don't get their price, or some sucker will come along and pay their wishing price.

    The true sales are when the kids inherited the properties and decided to take the money tax-free, or husband passed away and wife is too old to deal with it, or divorce, or probate. Unfortunately, some brokers will take advantage of the clueless inheritors and buy them for great prices only to turn around and flip them. A fancy term for that is repositioning. Some properties will make it to the market and will sell for what the market is willing to pay.

    I've seen brokers passed some sweet deals to the whales hoping to get their business down the road. What they don't understand is that these whales are not going to give them any business. If these brokers are willing to bury their sellers, who would say that they are not going to bury the whales in hope to get in bed with other whales?

    Based on my observation, if you're in the network, you will get meat on the bone. If not, it's nothing but bone. The clueless ones entering this arena would likely lose their shirt. It's a brutal business because too much money is at stake. If you don't know who's the sucker in the deal, you're it. :)

    Wow, quite a 'meaty' and great post (;

    My own experience in the business is usually off-market deals are coming up during scenarios when investors are exiting or during exchanges. I'll say this, finding a solid network to work within does offer its advantages. Investors with growing portfolios like to stay specific to their regions, so it stands to reason that a broker such as myself will always be 'in the know' when searching for product. Once a deal is on the MLS or LoopNet, usually it means most investors have shopped the deal and passed on it.

    Its a value add for the bigger investors and developers to have us bringing them deals that are not readily available to everyone, and in turn, does give me continued deal flow. Only certain brokers will be able to manage to off-market deals that come up because sellers are already very open to the idea of moving some of their assets.

    Here in L.A., cap rates truthfully are tight as can be, but that means more to larger portfolio investors than to newer investors and syndicators that are looking to place money in the market. I would love to talk to anyone needing some info about this or anything regarding MFD opportunities in and around Los Angeles.

    0Reply
  • Account Closed
    Investor · Los Angeles, CA · Member since 2013 · 65 posts · 11 votes
    12y

    @Daniel Sanchez What exactly is MFD?

    0Reply
  • Daniel Sanchez
    Beverly Hills, CA · Member since 2014 · 67 posts · 14 votes
    12y
    Originally posted by @Account Closed:
    @Daniel Sanchez What exactly is MFD?

    Multi-Family Dwellings

    0Reply
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