Creating a laser focus criteria for your multifamily investment - P2

In my last post I talked about why it's critical to have a laser focus criteria for your multifamily investment search and how it can help you when talking to commercial brokers.

To be considered "laser focused criteria" you should a clear understanding and precise numbers for the following:

• Area - Metro/City/Neighborhood/etc.
• Asset class - A/B/C/D
• Area class- A/B/C/D
• Size: in units
• Budget: in USD
• Expected cap rate: percentage
• Expected COCR (Cash On Cash Return): percentage
• Expected Annualized Returns: percentage
• Stabilized vs Value Add preference
• KP availability

Now let's break it down and discuss each item:

Area

There are many things you can change about a property: you can fix roofs, add storage units, paint inside and out, change appliances even dig a pool but the one thing you cannot change about a property is the location.

I'll say that again because it's probably the most important thing I could pass on to you:

You can change everything about a property except the location!

If you tell a broker you are looking to buy "in Texas" the broker will know you didn't do your homework. Buying a multifamily property in downtown Austin is a different environment than buying an apartment building in Orange, TX. In fact these areas are SO different you wouldn't believe they are int he same country let alone the same state.

So know your state, county, city, sometime you'll even need to go down to zip codes and even neighborhoods level. West Fort Worth and East Fort Worth are very different.

Uptown Dallas vs. South Dallas are an order of magnitude different in population, median income, crime rate etc.

In the big Metroplexes, even blocks can determine if the rent for similar units is $450/mo or $950/mo or if you will get a 5% cap vs. 6% cap. 

In the secondary and tertiary markets this becomes even more important.

The critical factor in buying in smaller towns is to understand the local economy. What are the main employment opportunity and is the city on a growth path or decline?

Especially in Texas, many of these small towns are oil driven in bad times these industries lay off thousands and in good times they hire thousands in the rural areas. Make sure you understand what drives the city and underwrite your deal to accommodate for whatever risk you see.

Asset Class

Asset class is measured in letters: A/B/C/D. This classification related to the property itself and not the area it sits in. 

A Class represents a property that was built in the recent years, has great amenities such as gyms, pools, large laundry facilities, covered parking, garages, club house, stainless appliances, etc. The A class asset will be located in a good neighborhood with proximity to nice retail locations and surrounded mostly by newer homes. I mention the surrounding areas because that's the natural settings of things but you could build a class A property int he middle of a war zone (wouldn't be a good idea but hey, it's your money)

B Class represents an older A class. When the A class asset gets older (10-15 years) and so does the surrounding areas it becomes a B class. Deferred maintenance and the maturing of the neighborhoods and retail locations around it pushes an asset from A to B. Note: this does not mean all A Class assets turn to B Class. Some will go straight to C or even D class if the owner doesn't maintain the property.

C Class represents an older property. Usually 60's to early 80's build. The residents are the blue collar working people. The property condition is fair, nothing fancy. Amenities are usually very limited and maintenance usually take the majority of your budget.

D Class represent a property that needs major renovations. The owners either deferred maintenance for years or the property had been vacant for a long time. These assets represent a big project but if they are located in a good area could prove to be a great value add opportunity.

Why asset classes are important to you? This will determine your budget for maintaining the property. Any time you have a property with a class lower than the area class (we'l discuss that in the next post) you have an opportunity to get a value add project but your underwriting should have a rehab budget in it and you should be ready to take on that size of project.

In the next post I'll continue to break down the elements of your laser focus criteria for your multifamily investment search.