Creating a laser focus criteria for your multifamily investment - P3

Continuing my recent posts on Creating a laser focus criteria for your multifamily investment (Part 1 here, Part 2 here) let's recap the criteria items you want to have covered:

• Area - Metro/City/Neighborhood/etc. (Covered in Part 2)
• Asset class - A/B/C/D (Covered in Part 2)
• 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

Area Class

There is only ONE THING you can't change about a property and that's its location. you can replace roofs, paint walls, turn around tenants base and even uninstall chiller systems and put in individual HVAC units in every apartment. All things that money and will can solve. 

However, there is not enough money to lift the property and put it somewhere else (well, I guess there is but if you have that kind of money you probably don't ready this blog and if you do, I just want to say I'm honored Mr. Buffet).

Just like in the asset classification areas are classified by letters A/B/C/D.

A Class represents a new or hip area of town. Usually a younger population, professional type or older empty nesters that wanted to get rid of the troubles of maintaining a house and went to live free of worries in a safe environment close to where "things are happening".

B Class represents an older A class area. Mature neighborhoods with families that have older kids or just left for colleges kids. The retail locations are close by and have the basic necessities retail. You usually won't find the hippest restaurants and bars in town in that area. These areas draw the more mature professional type, the middle class singles and divorced tenants and young families at the beginning of their joint life.

C Class represents an older neighborhood.  These areas are usually occupied by the blue collar class. The plumber, the electrician, the people that work at HomeDepot and Walmart. The friendly secretary from the tire shop and so on. These are people that work hard for a living and require a more humble living situation. The second type of tenants you will find in C class area are the social security / government housing tenants. These are tenants that get assistance from government agencies to pay for rent.

D Class represent what everyone refers to a "war zone". Drug dealers, gangs, places you won't feel comfortable going to after dark, you get the picture. Rents are usually low and hard to collect. 

Property Size

You will hear from many people that the larger the property the easier it gets. Bigger properties means bigger loans which counterintuitively are easier to get, you get to spread your risk across more units and the power of purchase is dramatically higher. 

The other side of more units is bigger capital requirements. Down payments will have to be bigger and you either need to come up with more cash out of pocket or get more partners (which is a subject we will discuss some other time)

You will need to know the price per door you are willing to pay (depending on the area) and how many doors you can afford.

Some people prefer to start small with an eight units building and some try to get as much as they can afford for their first one to reduce the risk. 

I'm out of time for today but I will post part 4 soon to continue our discussion of the laser focus criteria for your multifamily investment search.