If you are thinking of flipping MULTIFAMILY read this!

[Joel Owens]

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.

[Albert Bui]

@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)?