14 Steps to Acquire Multifamily Properties

After gaining the knowledge from David Lindahl in his book Multifamily Millions, my emotions of courage led me to be persistent towards acquiring my first ever multifamily property. The problem for me was that the book was packed with so much treasure that it became difficult to find the starting line. For this reason, I decided to break down a section in his book that I found especially helpful. By taking only the key details from each step introduced by Lindahl, my goal was to reconstruct what Lindahl wrote to his audience but in a more precise fashion. Chronologically organized into 14 steps we start with Property Size.

Property Size

Whether you're expanding from a SFR or just jumping into a multifamily property the idea of multiple units may be overwhelming. This means dealing with more tenants who may bring problems along with them. For this reason, it is important to stay not too far from your comfort zone. Some people may start multifamily investing with 2-5 units while some will jump to 10+. It’s all about doing what you are comfortable with at first while building off that with your future properties.

Location

Starting in an area you’re familiar with can give you a major advantage. You also do not need to invest in a well-developed area to make good money. In fact, by knowing the area well and investing in an opportunistic subarea you can expect your wealth to “explode” as stated by author David Lindahl. A good way to project growth in a submarket is to look at the city’s master plan. If the city is planning to open new shops or upgrade the area, that might drive the local economy along with the value of your property.

Property Type

David Lindahl states, if you are looking to take a value-add approach, it is important to close down on a specific property type. By focusing on a specific type of property you will have a clearer vision during your deal hunt. Lindahl includes property type examples such properties with burned out landlords, bad management, properties that need repair, high vacancies, and low rents. Although it may be easier to spot if a property needs repair, it’s harder to spot the other scenarios. For this reason, Lindahl suggests asking the seller proper questions to find out their motive for selling. If there is a low rent or high vacancy issue, Lindahl suggests a reposition/remarketing to boost your tenant base.

Put Your Team in Place

A quote from David Lindahl that stood out to me was “Successful businesspeople surround themselves with specialists who have more knowledge than they do, at least for that specialty.” It’s important to identify that even though you may or may not have experience in real estate acquisition, by building out a team (even if it takes away from your profits) you will sail smoother in the acquisition and holding process, ultimately allowing you to close on more properties. According to Lindahl, the base of a proper team consists of a broker (as many as you can get working for you), property management company, bankers and other lenders, attorney, appraiser, property inspector, and an insurance agent. However, it isn’t necessary to have this team completely built up before your first acquisition since after a couple of deals you will have worked with different people in these positions (plus more) and will have a gage for who you might want to add to your team. *Important key: First you should hunt for brokers as they are the people who will bring you these potential deals.*

Market to Get Your Deal

Although real estate brokers are a helpful tool in finding deals, you should also have deals that come to you. This is done by using multiple marketing strategies. David Lindahl uses the saying “You can learn twenty ways to market for one deal, but you can’t learn one way to market for twenty deals.” The strategy of diversifying your marketing techniques such as direct mail, business cards, animated videos, online tours, etc. all at once will build your pipeline and you should never turn it off as it will initiate your deal flow which will drive your business.

Analyze the Deal

Lots of the deals you first cross upon may be worthless but it is important to still analyze them and see why they might not work out. Once you start working with brokers, it is common that they will test you by sending over many deals they have had in house that other investors have turned down just to see if any stick. Once you build a better relationship with that broker you will start to get some more attractive listings. The key here is to stick around for a while without losing hope of not finding a suitable deal.

Create the Offer or Letter of Intent

Whether using a standard form to make an initial offer or buying a bigger property and using a letter of intent, you are reaching the same end result of proposing a deal with the seller. By doing this you are not completely agreeing to purchasing the property, but you are offering a price which indicates that you are serious about purchasing a property and are ready to see the real details of it. The seller will likely come back with a counteroffer which leads to the next step.

Negotiate the Deal

Once you have offered a purchase price on the property and the seller responds with a counteroffer it is time to negotiate. Since you should have multiple deals to analyze due to your marketing strategy you should not be held to closing on this one deal if it means you have to overpay. For this reason, Lindahl introduces the idea of a strike price. A strike price is a price you will not pay over, this will help you walk away from a deal without being emotionally attached to it. A good negotiation strategy also introduced by Lindahl is to start negotiating at ten percent less than your strike price.

Create and Sign the Purchase-and-Sale Agreement

The purchase and sales agreement (P&S) outlines how you will buy the property and all the key dates. This written agreement is signed by both parties and is typically created by the attorney of either party. Pros to have the other party’s attorney create the P&S will be that you won’t have to worry about paying for it to be created. Although you might save a few bucks, keep in mind that the other party’s attorney will create it in a way that is in the best interest of his client. Either way, both party’s attorneys should review it and adjust as needed. Lindahl addresses the important of the due diligence period and suggests trying to get more time to assure the property you are buying is in fact what you think it is. Even though this will be helpful, keep in mind that the seller wants the money quicker and has incentive to choose another buyer if they are willing to close faster.

*Remember, keep track of deadlines to assure you don’t lose your down payment if you decide to pull out of the deal*

Due Diligence

In the due diligence period, you should be preforming in depth property research. Broken down into 3 parts, you should start your investigation financially, next physically, and lastly legally.

The seller is required to send you all the financial information you need in the first 14 days. A pro tip Lindahl introduces has to do with the timing of released information. If the seller waits a long time or sends the information in bits and pieces, he may either have poor records of the property or may be trying to hide something. You should make sure to receive financial information such as the last 3 years of operating statements, profit loss statement, balance sheet, and last 12 months’ rent roll. If the seller can’t prove the income you should renegotiate with the new information you now have. 

When starting your physical and legal due diligence you must hire an attorney to do the title work. He will look through different aspects about the history of the property to assure you are getting what you think you are getting. Once that is complete it’s important to hire an engineer who will check all major mechanical and structural systems such as appliances, cabinet doors, AC units, and much more.

Renegotiate the Deal

If all goes well during the inspection there is no need to push a better deal as you may be seen as someone who is difficult to do business with. However, if there is a problem, don’t be shy to renegotiate with the seller. If you came upon something problematic that the seller didn’t state, such as a broken boiler it is important to ask the seller for the money back at closing and not for a discount in the sale price. This is because if you get a refund at close, then your financing will cover this repair and you will have more money to work with.

Start Your Financing

Author David Lindahl introduces three main lenders to finance your deal starting with local banks, then national lenders, and finally conduits. The lender you chose will depend on the situation of your property and your overall goal.

If your property requires more than 3% of the purchase price in repairs, your best bet will be to go through a local bank since they tend to be better for multifamily construction loans. However, they might have higher rates than other lenders and a shorter period of amortization (typically 20 years) meaning they want their money back sooner. Although rates may be a little higher, through the construction loan you will also be able to finance your repairs.

If your property is stabilized (Over 85% occupied), you tend to get better rates through national and conduit lenders. These lenders are looking for deals that won’t require much repairs and that will cashflow sooner than later. National lenders also look for deals that have stable income growth over the past 6 months.

A key difference between national lenders and conduits are that conduits will take part in deals with more edge, meaning the numbers might not be totally complete, and they only require occupancy stability over the past 2 to 3 month. However, for allowing this, they will minimize their risk by charging higher rates.

Choose a Management Company

Lindahl stresses the importance of hiring a trustworthy management company and suggests starting the search on the IREM where you can find certified property managers (CPM’s) and accredited residential mangers (ARM’s). If a management company doesn’t have these types of credentials, it doesn’t mean they are not trustworthy, however you should screen them very closely. Lindahl suggests asking questions about their experience, how they operate their business, how they plan to keep your property occupied, and how they plan to maximize your profits.

Lindahl includes a pro tip that he learned the hard way. *NOT ANY GOOD PROPERTY MANAGER IS GOOD FOR YOUR PROPERTY* He leaves us with a story describing how he hired a management company that he got many recommendations for. After a few months and negative turn over later, he realized this management company’s expertise was in high-end multifamily properties and it did not match with his class C property type. Problems that may arise in this situation include not knowing how to attract the specific tenant base, over screening tenants, and over repairing the property

Close the Deal

Now that you have done all the hard work the next steps are very simple. You will fill out the rest of the financing paperwork either in a title/attorney’s office (for smaller deals) or the lender will mail you documentation to sign in front of a notary and send back (for larger properties). Once the paperwork is done, all that is left is for you to wire the money to the lender and hand the property over to the management company.