All Forum Posts by: Ellie Perlman

The first step in buying real estate is evaluating the market. When evaluating a market for multifamily investments, one particularly important factor to analyze is employment trends. A strong market must have a track record for stable and diverse employment, as well as lower unemployment rates. The reason is simple – a market with strong and steady employment trends attracts more people to live in the area, a higher demand for apartments and other types of multifamily housing, a stronger tenant base, and therefore a more reliable investment. While there are, of course, several other factors that help define a strong market, make no mistake that employment trends is not one to overlook.

As COVID continues to impact our economy, there are certain industries which are less likely to be impacted. According to Newmark Knight Frank’s US Multifamily Capital Markets Report Q1 2020 industries such as education, healthcare, government, and financial are less likely to be grossly impacted, as opposed to hospitality, retail, or entertainment.

Understanding the composition of a market’s employment base is a critical factor to consider before investing in the area. Diversity is key. If there are only one or two major employers in a metroplex, and one employer closes business, the market is heavily impacted and your investment right along with it. If a local economy relies heavily on tourism, a pandemic exactly like COVID or even a natural disaster, can greatly jeopardize the stability of the employment markets. Again, diversity is key.

As of the close of Q1 2020, these are the ten most resilient employment markets in the US:

10. Salt Lake City, UT

· Top 3 Employment Industries:

o Education & Healthcare: 11.9%

o Government: 15.2%

o Financial: 7.2%

· Average 1 BR Rent: $1,235

· Renter Occupied Housing: 48%


9. Minneapolis, MN

· Top 3 Employment Industries:

o Education & Healthcare: 17%

o Government: 11.0%

o Financial: 7.4%

· Average 1 BR Rent: $1,588

· Renter Occupied Housing: 55%


8. Los Angeles, CA

· Top 3 Employment Industries:

o Education & Healthcare: 18.1%

o Government: 12.4%

o Financial: 5.0%

· Average 1 BR Rent: $2,524

· Renter Occupied Housing: 40%


7. Boston, MA

· Top 3 Employment Industries:

o Education & Healthcare: 21.2%

o Government: 10.2%

o Financial: 6.5%

· Average 1 BR Rent: $3,432

· Renter Occupied Housing: 51%


6. San Antonio, TX

· Top 3 Employment Industries:

o Education & Healthcare: 15.5%

o Government: 14.6%

o Financial: 8.2%

· Average 1 BR Rent: $1,049

· Renter Occupied Housing: 35%


5. Baltimore, MD

· Top 3 Employment Industries:

o Education & Healthcare: 19.2%

o Government: 14.8%

o Financial: 5.5%

· Average 1 BR Rent: $1,283

· Renter Occupied Housing: 47%


4. Philadelphia, PA

· Top 3 Employment Industries:

o Education & Healthcare: 22.8%

o Government: 10.1%

o Financial: 6.6%

· Average 1 BR Rent: $1,652

· Renter Occupied Housing: 45%


3. Sacramento, CA

· Top 3 Employment Industries:

o Education & Healthcare: 15.5%

o Government: 20.4%

o Financial: 5.4%

· Average 1 BR Rent: $1,579

· Renter Occupied Housing: 32%


2. New York, NY

· Top 3 Employment Industries:

o Education & Healthcare: 21.2%

o Government: 11.5%

o Financial: 10.6%

· Average 1 BR Rent: $4,208

· Renter Occupied Housing: 57%


1. Washington, D.C.

· Top 3 Employment Industries:

o Education & Healthcare: 15.1%

o Government: 28.0%

o Financial: 3.5%

· Average 1 BR Rent: $2,234

· Renter Occupied Housing: 56%

Sources:

www.ngkf.com/insights/market-report/united-states-multifamily-capital

RentCafe.com

The first step in buying real estate is evaluating the market. When evaluating a market for multifamily investments, one particularly important factor to analyze is employment trends. A strong market must have a track record for stable and diverse employment, as well as lower unemployment rates. The reason is simple – a market with strong and steady employment trends attracts more people to live in the area, a higher demand for apartments and other types of multifamily housing, a stronger tenant base, and therefore a more reliable investment. While there are, of course, several other factors that help define a strong market, make no mistake that employment trends is not one to overlook.

As COVID continues to impact our economy, there are certain industries which are less likely to be impacted. According to Newmark Knight Frank’s US Multifamily Capital Markets Report Q1 2020 industries such as education, healthcare, government, and financial are less likely to be grossly impacted, as opposed to hospitality, retail, or entertainment.

Understanding the composition of a market’s employment base is a critical factor to consider before investing in the area. Diversity is key. If there are only one or two major employers in a metroplex, and one employer closes business, the market is heavily impacted and your investment right along with it. If a local economy relies heavily on tourism, a pandemic exactly like COVID or even a natural disaster, can greatly jeopardize the stability of the employment markets. Again, diversity is key.

As of the close of Q1 2020, these are the ten most resilient employment markets in the US:

10. Salt Lake City, UT

· Top 3 Employment Industries:

o Education & Healthcare: 11.9%

o Government: 15.2%

o Financial: 7.2%

· Average 1 BR Rent: $1,235

· Renter Occupied Housing: 48%


9. Minneapolis, MN

· Top 3 Employment Industries:

o Education & Healthcare: 17%

o Government: 11.0%

o Financial: 7.4%

· Average 1 BR Rent: $1,588

· Renter Occupied Housing: 55%


8. Los Angeles, CA

· Top 3 Employment Industries:

o Education & Healthcare: 18.1%

o Government: 12.4%

o Financial: 5.0%

· Average 1 BR Rent: $2,524

· Renter Occupied Housing: 40%


7. Boston, MA

· Top 3 Employment Industries:

o Education & Healthcare: 21.2%

o Government: 10.2%

o Financial: 6.5%

· Average 1 BR Rent: $3,432

· Renter Occupied Housing: 51%


6. San Antonio, TX

· Top 3 Employment Industries:

o Education & Healthcare: 15.5%

o Government: 14.6%

o Financial: 8.2%

· Average 1 BR Rent: $1,049

· Renter Occupied Housing: 35%


5. Baltimore, MD

· Top 3 Employment Industries:

o Education & Healthcare: 19.2%

o Government: 14.8%

o Financial: 5.5%

· Average 1 BR Rent: $1,283

· Renter Occupied Housing: 47%


4. Philadelphia, PA

· Top 3 Employment Industries:

o Education & Healthcare: 22.8%

o Government: 10.1%

o Financial: 6.6%

· Average 1 BR Rent: $1,652

· Renter Occupied Housing: 45%


3. Sacramento, CA

· Top 3 Employment Industries:

o Education & Healthcare: 15.5%

o Government: 20.4%

o Financial: 5.4%

· Average 1 BR Rent: $1,579

· Renter Occupied Housing: 32%


2. New York, NY

· Top 3 Employment Industries:

o Education & Healthcare: 21.2%

o Government: 11.5%

o Financial: 10.6%

· Average 1 BR Rent: $4,208

· Renter Occupied Housing: 57%


1. Washington, D.C.

· Top 3 Employment Industries:

o Education & Healthcare: 15.1%

o Government: 28.0%

o Financial: 3.5%

· Average 1 BR Rent: $2,234

· Renter Occupied Housing: 56%

Sources:

www.ngkf.com/insights/market-report/united-states-multifamily-capital

RentCafe.com

As a value-add syndicator, we've all had to face some very tough decisions with the impact of COVID. I've noticed that there are basically 3 main concerns we've all shared in trying to navigate our investment properties through this:

1. We want to preserve our current tenants. I've seen many sponsors offer 0% rent increases for renewals, which I understand, but it doesn't help to continue to make the business more profitable.

2. Stopping renovations. With the concerns of finding new tenants, many of us have considered stopping renovations when we don't have as much confidence or assurances that foot traffic and new leases will be coming in at the normal rate of pre-COVID. If renovated units remain open on the market for an extended period of time, it becomes a loss on our books.

3. As sponsors, we need to maintain capital. Stopping renovations allows us to hold onto capital we may need to reallocate for operations or the mortgage as the economy continues to work our way through all this. 

So, in spite of these challenges, how did we manage to increase our rents by nearly 30%? I am happy to share with you the lesson we learned and the strategy we've implemented that turned things around considerably.

We stopped making assumptions. When COVID first hit, we assumed collections would begin to suffer. We assumed renewals might fall, as people moved to lower cost housing. We assumed the economic impact would deter new tenants from premium units at a higher cost. 

The strategy we took was simple, and what I'm simply now calling "renovation on demand". As prospective tenants have come in, or renewals that are upcoming, we stopped assuming what people would want and simply started presenting the options. We show them both the classic (non-renovated) units and a premium unit. MUCH to our surprise, nearly 70% of our new leases are opting for the premium units. Once they've signed the contract, we then begin the renovations with a 7-10 day turn around time. This has not only helped to mitigate risks, but has worked so well this is how we've increased our rents by 29% in the middle of a pandemic.

I hope you find this tip helpful and strongly suggest implementing it at your properties as well. For even more info about it, I did publish a podcast and youtube video if you'd like to hear every last detail, but this should give you enough insight to effectively help you increase rents even in the most challenging of times.

Cheers!

Since we're seeing deal flow pick up at my company, I thought it might be helpful to breakdown the acquisition process for anyone that is just beginning to build their portfolio. 

Every syndicator has a different process in which they manage their acquisitions. The main thing to remember is that building a defined process and sticking to it will help you run an efficient company and help you win more deals and scale quickly. In this document I will lay out the acquisitions process that I’ve been using in my company. You can make amendments to your process the way you see fit. However, it’s important to understand how the acquisitions process work from the brokers point of view.

Brokers upload deal information to their websites and send emails to their buyer list. On the websites/emails, the may or may not include the price and the deadline to submit offers. If they don’t – you’ll need to reach out to them and inquire about them.

After the information is out, there is a set date for all potential buyers to submit a letter of intent ("LOI" in short). Usually, it takes 3-4 weeks between initial information release to the LOI dead line. In most cases, brokers hold property tours with potential buyers starting the day they release the information and until the last day to submit the Best and Final offers (more about that stage below).

After all offers are submitted, the broker reviews them and sends a summary to the seller, along with their recommendations on who to proceed with.

The next step is a Best and Final round. The seller chooses the groups they wish to continue with, and the broker reaches out to those groups and invites them for the Best and Final round. Usually the highest bidders make it to the best and final, but it’s not always the case. Buyers have 5-7 days to sharpen their pencils and submit an amended offer.

After the selected buyers who have made it to the Best and Final round submit their final offer, the broker invites a few of the buyers to a Seller Call, based on the seller’s selection. The seller holds calls with 3-5 groups and interviews them.

After the seller speaks with all buyers, they choose the winning buyer and the official negotiation starts.

During that period, the buyer and seller sign a Purchase Sale Agreement (“PSA”), and begin the Due Diligence period, where the seller discloses information on the property based on the buyer’s request. If there is any deposit, it is paid most often when the PSA is signed, or a few days after. During that time, the buyer signs a loan agreement with their lender.

After the Due Diligence period is over, and assuming everything went well, the buyer completes the purchase and the money is sent to the seller. If, however, the buyer found things they were not aware of, and are significant enough, they might try to renegotiate the price or the terms, or both.

I added a resource to my company (Blue Lake Capital) profile page that has more information on how to build out an internal process for this if you'd like more information. 

Happy Huntings! 

As we continue to navigate through these recent economic changes, there’s been a multitude of speculation on what the impact will be on real estate investing. Granted, being a multifamily syndicator and investor myself, I am biased; yet, when it comes to real estate investing, multifamily continues to live up to its reputation of being one of the historically safest and most reliable asset classes there is.

According to the Newmark Knight Frank 1Q2020 US Multifamily Capital Markets Report, multifamily total returns averaged 5.10% in the last year. The key to capitalizing on this is selecting the strongest and highest performing markets. I personally focus on opportunities in Texas, Florida, and Georgia, where average returns can commonly range from 7%-9% or more. When a strategy for maximizing returns is effectively implemented, a multifamily investment can prove profitable even through economic shifts, as we are seeing in our current portfolio.

Which markets are leading the charge? Here are the top 10 markets in the last 12 months for returns on multifamily investments:

10. Seattle, WA

Overall Population: 637,850

Annual Total Return: 6.02%

Average 2 BR Rent: $1,690

Mean Income: $67,365

9. Palm Beach, FL

Overall Population: 8,344

Annual Total Return: 6.04%

Average 2 BR Rent: $1,418

Mean Income: $105,700

8. Minneapolis, MN

Overall Population: 394424

Annual Total Return: 6.70%

Average 2 BR Rent: $1,150

Mean Income: $50,767

7. Atlanta, GA

Overall Population: 440,641

Annual Total Return: 6.80%

Average 2 BR Rent: $1,190

Mean Income: $46,439

6. Denver, CO

Overall Population: 633,777

Annual Total Return: 7.73%

Average 2 BR Rent: $1,350

Mean Income: $51,800

5. Charlotte, NC

Overall Population: 774,807

Annual Total Return: 8.07%

Average 2 BR Rent: $1,140

Mean Income: $53,274

4. Tampa, FL

Overall Population: 348,934

Annual Total Return: 8.24%

Average 2 BR Rent: $1,280 Mean Income: $43,740

3. Orlando, FL

Overall Population: 250,224

Annual Total Return: 8.54%

Average 2 BR Rent: $1,280

Mean Income: $41,901

2. Austin, TX

Overall Population: $864,218

Annual Total Return: 8.69%

Average 2 BR Rent: $1,461

Mean Income: $55,216

1. Phoenix, AZ

Overall Population: 1,490,758

Annual Total Return: 13.73%

Average 2 BR Rent: $1,100

Mean Income: $46,881

Sources:

Newmark Knight Frank 1Q2020 US Multifamily Capital Markets Report

http://www.usa.com/

https://www.apartmentlist.com/

Due to the fact that the country is currently in a recession due to the pandemic, financing is harder to get. The good news is that lenders are still lending money.

To begin with, there are multiple financing options available to you. In addition, there are ways to qualify for financing that you might not know about. Also, during a pandemic, like COVID-19 that we’re experiencing now, financing is different. I’m going to take you through these key points to provide you with everything you need to know about multifamily financing.

There are Three Types of Financing

Type 1: Agency Loans

For multifamily properties, there are three types of financing available to you. The first is agency loans, which include Fannie Mae and Freddie Mac. When it comes to Fannie Mae, the most popular loan is the Fannie Mae DUS. These loans start at $3 million, and there is no upper limit on how much you can borrow. For Freddie Mac, the most popular loan is the Freddie Mac SBL, which is designed for loans between $1 million and $7.5 million.

Both of these loans are popular because they offer competitive terms and are non-recourse (which means that if you default on the loan, the lender cannot take your other assets as collateral, with some exceptions). Most loans are assumable with lender approval and interest-only payment options are available. The loans feature amortizations over 30 years, and also have 45-day closings.

Pre-COVID-19 era, agencies were lending for 3%-3.7% interest rates, 65% to 75% loan-to-value (LTV) for 25-30 years, and required 1.25x DSCR (debt to coverage ratio, which is the ratio between the Net Operating Income and the loan payment). Nowadays, agencies are lending at 65%-75% loan-to-value and 3.3%-3.8% interest rates. DSCR has increased to 1.35x to 1.55x, which means that loan proceeds are much lower than they were, which impacts returns. Another change today is lenders' requirement from borrowers to allocate 12-18 months of debt payments as an upfront reserve.

Agency loans look at the investor as to their liquidity and net worth. If you’re borrowing $5 million, for example, they’re going to want to see a net worth of $5 million. As for liquidity, they want to see that you have the ability to pay 9 to 12 loan payments in order to get approved. If for some reason you don’t have the net worth and liquidity to qualify, you can partner with an individual who does have the liquidity and net worth, and they can sign on the loan.

Type 2: CMBS Loans

CMBS stands for commercial mortgage-backed securities. This type of loan is a commercial real estate loan that is backed by a first-position commercial mortgage. CMBS loans are packaged and sold by Conduit Lenders, commercial banks, investment banks, or syndicates of banks.

These loans are secondary loans to the borrower, as they are not recorded on the books of a lender. This allows the lender to maintain their liquidity. The advantage of a CMBS loan is that it is non-recourse, eliminating any personal liability to the borrower. The loans have fixed interest rates along with terms of 5 and 7 years, with 10 years being the maximum term length.

The biggest advantage of a CMBS loan is that many investors can obtain these loans even if they don't meet the typical credit parameters of local savings banks. In addition, these loans offer investors similar LTV and terms to agencies.

Type 3: Bridge Loans

The third type of loan is a bridge loan, which is funded by private money and private groups. These loans are much easier to qualify for compared to an agency loan or a CMBS loan. There is no loan minimum, and these loans usually come with a fluctuating interest rate.

Bridge loans are often used to quickly purchase a property when all cash isn't an option, or you can't get traditional financing (for example, if the property is not stabilized, which means it is less than 90% occupied for 90 days). Instead of looking at the income a property can generate or an analysis of the borrower's creditworthiness, bridge loans are based on the value of the property. That means a bridge loan can close more quickly than an agency loan or a CMBS loan. The downside is that the interest rates on a bridge loan can be three- or four times the market rate of conventional financing. Closing costs are also much higher than other types of loans.

Bridge loans can be helpful if you're planning to do an extensive renovation on the multifamily property. The bridge loan is used to keep the multifamily property financed while doing the value-add upgrades. Most bridge loans have a 65% LTV and a payoff that is usually less than three years.

Financing During a Pandemic

One-click of any news channel and you’ll find yourself inundated with a barrage of talk about the current COVID-19 pandemic. Right now, according to worldometer, there are over 7,941,149 coronavirus cases globally and more than 433,000 deaths. That includes over 117,670 deaths in the United States alone. With many cities and states ordering people to shelter in place, and only go out for essential purposes like grocery shopping, trips to the pharmacy, or to see a physician, it’s hard to get a grasp of what this pandemic is doing to real estate investors, syndicators, and financing multifamily property deals.

Even though lenders are still lending, as you’ve seen, they have stricter requirements and they lend lower amounts.

You probably heard the word “forbearance” quite a lot recently. There’s no question that with unemployment figures in the 20% and up range, renters are going to have a problem paying their rent on time. If enough tenants are unable to pay rent, it’s going to put a major burden on the person whose signature is on the loan documents. Another problem is that many states have issued non-eviction mandates during the pandemic, so even if you have a tenant who can’t pay his or her rent, you can’t evict them in order to lease to a tenant who can pay their rent.

Instead of facing foreclosure, many investors consider forbearance. Forbearance simply means that instead of a lender foreclosing on the loan, they will issue a reprieve on the loan amount that’s due. Lenders will issue a repayment plan, which includes an increased monthly payment that includes a portion of the overdue loan amount that will help borrowers get caught up on the past due loan amounts. If you make payments according to the lender’s repayment plan, it won’t impact your credit report.

Just remember that while payments will be postponed, the interest on the loan will still accrue during the forbearance period. If you don’t adhere to the terms of the repayment plan, the lender will report it to the credit bureaus and it will ding your credit the same way that a foreclosure would. Forbearance should be the last resort and you should use it very carefully, and try to avoid it at all costs. If you go through the forbearance path, you won’t be able to make distributions to investors or pay yourself asset management fees, as long as the forbearance payments are made, which can range between 12-18 months. Additionally, you won’t be able to evict any tenant, even those who still have a job and have not been impacted by COVID-19, for the entire period of 12-18 months.

@Jim Glover - multifamily and single family are two VERY different asset classes. I started with (large) multifamily deals and completely "skipped" single family homes. It didn't scale, too much work for 1 door, when you can buy 30 doors much faster than 30 individual homes. Limiting believes was never part of my life, and going with multifamily was one of the best investment decisions I've ever made.

I buy Class B properties in Atlanta MSA, and prefer this class over Class C for several reasons:

- class B assets usually have less deferred maintenance 

- class B assets tend to attract higher quality tenants

- During COVID, Class B collections were the highest in the U.S, following by Class A assets, then Class C (which usually attracts tenants from the service industry and low paying jobs that got hit the hardest)

The method to attract investors is the same. If the deal is here, than SEC rules (506B/506C) might still apply. If the deal is outside the US, I believe the regulations are different. I would advise you to seek legal advice to guide you through the process.

You never know when an exceptional multifamily deal will come across your desk. The truth is it could happen at any time, and when it does there are a lot of things you’ll need to do. I can tell you from firsthand experience that you’ll have more to do than you can handle.

I’ve found that many new syndicators seem to make some of the same mistakes when trying to raise capital, so I’d like to share what they are and offer you some ways you can avoid them.

Mistake #1: Raising Money Only When You Have a Deal

One of the top 5 mistakes to avoid: starting to raise money only when you have a deal. If you haven’t been actively raising money before this deal came to you, you’re going to be frantically scrambling to find investors and raise money. Unfortunately, raising money in a hurry is problematic.

Potential investors don’t really know your track record or abilities, and it takes time to build a relationship with them. If you are new to syndication and reaching out to your network to raise money, it takes time for the people you know to see you as a syndicator and change their view of what you do now. People simply need time to digest your new business. Hence, reach out to your network and talk with them about what you do now ahead of time.

When I started syndicating, I found that some people didn’t know what syndication was and how it worked. If you reach out to people months before you have a deal, it will help to educate them and allow them time to learn about it. The time that you don’t have when you already have a deal under contract. To educate potential investors, you have to sit down with them and explain the passive investment process, how it all works, and how you make money as a syndicator. If you do all of this before you have a deal to present, then you won’t have to worry about running out of time to fund a deal.

I’ve found that it’s essential to have an online presence, including a website and a social media plan that includes posting on Facebook and other social media sites, or consider having your own podcast. This will expand your contact base and put you face-to-face with new potential investors.

Just remember to do it all before that exceptional deal crosses your desk! When you do have a deal you want to share, go back to your contacts that you’ve spent time with and share your deal. They already know you, so it will be a lot easier.

Mistake #2: Raising Only the Amount of Money Needed to Close the Deal

Let’s say your deal is for a multifamily property listed at $6,000,000. Don’t be tempted to think that you only need to raise 20%-25% of the down payment to close the deal. Yes, it will be enough to seal the deal, but what about deferred maintenance, renovation, and other projects? ( That can include large unexpected repairs, for example, like finding out you’ll need a new HVAC system or a new roof, which can cost upwards of $500k plus).

In addition, some of the investors who expressed an interest will end up backing out, and having an excess or reserve will help fill in the amount you lost. Your 20% cushion will help weather that storm.

Mistake #3: Not Knowing the Law

There’s an old expression that states “Ignorance of the law is no excuse.” Actually, it’s also part of the law, as defendants can’t use that line as an excuse for inadvertently committing a crime. There are some SEC regulations you’ll have to become familiar with before raising any money.

When you syndicate a property, you form an LLC (Limited Liability Corporation), and then sell shares in that LLC which owns the property. Because you're selling shares, which are considered securities, you have to comply with SEC regulations.

There are two kinds of investors: accredited and non-accredited. Non-accredited investors can participate if they’re considered “sophisticated investors.” Based on the SEC’s Regulation D, Rule 506, investors are considered “sophisticated” if they have experience in financial and business matters that enable them to evaluate the risks of a prospective investment. You’ll also be required to have a pre-existing relationship with each investor.

When you have a deal pending, you can’t be building that relationship. So the time to build it is long before your deal becomes available. I work with both types of investors, so I spend time building relationships with them before ever approaching them with a specific investment opportunity.

Mistake #4: Not Automating Your Process

When I started out as a syndicator and had my first deal, I repeated the same dialogue with every investor I approached. There were a lot of meetings, and I spent a lot of time repeating myself over and over again. The amount of time I wasted was staggering!

Now, I automate the process and send everyone an email with the presentation attached. This is followed by a live conference call, where over 100 investors hear me talk about the deal and I don’t have to repeat myself. Not even once! I record the call and send it later to others. It works like magic and saves an inordinate amount of time in my schedule.

My advice: automate! Time is money in this business, and the more you can save, the more you can make.

Mistake #5: Thinking That Raising Money Ends When You Close the Deal

You’ve talked to investors, you’ve raised the money needed along with an extra 20% for contingencies, and the deal closes. You’re finished, right? No! The key to success as a syndicator is to always be raising money. Every time you spend a lot of time interacting with an investor you’re raising money from him or her for your next deal.

You have to be open and honest with each investor, every time you meet - even when things don’t go as planned. The key is to communicate with each investor on a frequent basis. I send monthly emails with property updates, which include vacancies, number of units that we’ve renovated, operating income reports, and more. I also send out quarterly financials, so each investor can see how we’re doing.

This is an excellent way to stay in touch with your investors and provide key details of your investments. It helps to cement the relationship you’ve built, and it keeps you in contact with your investor base. When the next investment opportunity comes along, you’ve already done the hard work because you don’t’ have to start from scratch with your investors.

I hope you find this helpful. Cheers!