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Asset Management vs Property Management with John Wilhoit – CREPN #196

Asset Management versus Property Management, what is the difference?

John Wilhoit is an experienced real estate investor, multifamily asset manager, author and returning guest to CREPN Radio.  His true expertise is Multifamily Asset Management.  In this interview John makes the distinction between Asset Management and Property Management.   

In every real estate deal, there are three components.  The property, people and paper. Knowing and understanding each are key to the successful operation of any property.  Following is a description of each and their relation to the deal.

Property

Every property has a specific street address.  In addition it is a part of the ecosystem for that neighborhood, market, city, and submarket.  Additionally, it has a relation with area comparative assets and competitive assets.

People

The people are most important part.  People include Asset Management, Property Management and Ownership which make up the investor people.  Additionally, there are the Residents who live at the property.

Paper

The Paper that wraps around the property includes Mortgages, Leases, and Insurance Policies which are required to make the property run.  

Asset Management vs Property Management

Asset Management vs Property Management, what is the relationship between them?  

Asset Management

Asset Management acts a controlling feature for these three aspects; property, people and paper.  By controlling these three aspects they make certain the property runs smoothly.

As the owner representative, Asset management has a role in selecting the Property Management and to assure that Property Management is doing their job properly.  Asset Management will plan for, manage and monitor all properties in the owners portfolio.

Property Management

Property Management is charged with carrying out the plan set by Ownership & Asset Management.  Their focus is for a specific property.

Property Management engages with the operation of the property on a day to day basis.  They are there to operate the business of the multifamily asset. Responsibilities include daily maintenance, leasing, and renewals.  All the things that have to occur for the property to operate optimally on a day to day basis fall under the responsibility of Property Management.

When to Hire an Asset Manager vs Property Manager

Asset Manager

The need for a professional Asset Manager becomes necessary as the portfolio grows.  Their value shows up when dealing with insurance coverage, accounting, financing, capital expenditure planning and assuring the appropriate property management is on site.  

If property management is not performing, it is up to the asset manager to help bring them up to speed.  Too often, owners think to fire property management. If an asset manager recognizes what is missing, they can likely help get the property manager correct so that they execute ownerships plan.  This is usually more efficient and less disruptive to a property as opposed to firing and starting with a new manager.

For larger value add or long term construction projects, an Asset Manager is invaluable.  These projects go above and beyond the normal day to day operation of what should be handled by a property manager.  If the Property Manager is assigned to manage these task, their focus on the day to day operation is compromised and can create operational problems, like delayed maintenance, turning of units, and extended vacancies.  

Property Manager

For assets under $3M, the owner may be tempted to wear all three hats, Owner, Asset Manager & Property Manager.  Unfortunately, for the inexperienced owner who is acting as all three roles, there is going to be trouble. As the portfolio grows so do roles become more defined.

For a property to operate at its optimal level, it is so important for the roles to be filled by professionals that know what they are doing.  Multifamily is a 24 hour, 7 days a week business. It doesn’t close for holidays or weekends. It is always in operation.

If you are attempting to do this as a side gig, consider hiring a professional Property Manager.  This alone will allow you to act more as an Asset Manager, where you can focus on long term business planning, capital expenditure planning, and the eventual exit from your asset.  

Communication

Asset management communicates with Property management as often as needed, typically no less than weekly under normal circumstances.  For capital projects the two managers will be in more frequent communication. This is necessary to plan and make certain the project is completed on time with few as possible interruptions to daily operation.

The Asset Manager will also communicate with ownership through monthly or quarterly reports.  These will report on the budgets to plan, rents on competitive properties, financial condition, receivables., bad debt, vacancy, turn overs, capital budgeting, progress on any capital improvement projects, as well as exceptions.  Exceptions can include reports of property damage, injuries that occur at the property and insurance claims.

Compensation

Asset Manager compensation can be structured in many different ways.  A stable asset compensation package will likely be a percentage of revenue.  While a value add property with significant construction budget and timeline may offer a percentage of equity due upon sale of the asset.

Property management is typically compensated as a percentage of collected rent.  This varies depending on the size of the property where smaller properties will demand a higher percentage and larger properties a smaller percentage.  

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The BIGGEST RISK to any asset is complacency.  Complacency is implemented by ownership when they are not engaged.  Complacency from the ownership trickles down through property management, and accumulates in a poorly performing property.

How to manage the risk:  Asset Management’s job is to rock the boat.  Their job is to make certain the property is operating at its optimal level.  They must identify and communicate with the ownership on how to better operate the property.  This includes any needed capital projects and how they can improve the property’s performance.

For more go to

Website & Podcast: http://johnwilhoit.com/

Magazine: https://www.multifamilyinsight.com/

Blog: http://multifamilyinsight.net/

Prior CREPN Episodes with John Wilhoit

Why He Sold All His Multifamily Real Estate with Jonathan Twombly – CREPN #195

Why he sold all his Multifamily Real Estate is a question Jonathan Twombly answers.  If so many are buying, why did he sell?

Jonathan Twombly is a former Wall Street attorney who specialized in corporate contract disputes between hotels and property owners.  When the Great Recession happened, his employer waited for legal activity that never materialized. Since billings were down, cost had to be cut and Jonathan was turned lose to become a real estate investor.

The Case for Buying Multifamily

During the Great Recession people were losing their jobs and homes as their mortgages came due.  Replacement financing was unavailable. What were these former homeowners to do? They still needed a place to live.  With their credit trashed, and no financing available, their only hope was to rent.

Nationwide, multifamily is one of the most affordable options for renters.  As more and more borrowers defaulted, the demand for rental housing was grew.  Multifamily is a proven business with predictable income and operating cost. For a conservative investor like Jonathan, multifamily made sense.  The growing demand for rental housing, with predictable income and expenses looked like a good low risk opportunity to make some money.

The First Deal

How can a new investor with no experience get started in Multifamily?  The answer lies in syndication. Syndication is when individuals pool their money together to buy a large multifamily property.  As an attorney, Jonathan regularly dealt with private placement funding, which works similar to syndications. As he quickly found out, his Wall Street contacts had money and were willing to invest with him.

At first, Jonathan partnered with a syndicator.  Together they pursued a couple of deals that did not materialize, primarily due to the difficult lending environment.  After the failed partnership broke up, Jonathan considered going back to law. Fortunately, one of his investors committed to back Jonathan solo, and shortly after, he landed his first deal as detailed on CREPN Radio episode #36.

Multifamily Lessons

Baptism by fire is what happens to most first time investors.  The first deal is where you get the chance to learn all the lessons not taught in the books.  This is where all of your theories go to get tested. Simple questions like, will the property and management perform as planned?  What will you do if they do not?

Jonathan believes the following lessons are directly related to his lack of experience as an asset manager.  He uses these lessons when teaching his multifamily coaching students so that they can recognize and avoid problems like these.  

Property Management

The first lesson was due to his selection of a property management company.  He had established a relationship with a frim from out of town that wanted to break into the market where his property was located.  

To add to the management challenge, the property management company primarily dealt with subsidised housing and had no experience working with a market rate property.  On the surface, this would not seem like a big deal. However, it quickly developed into a problem that kept on giving.

The first sign that there was a problem was that occupancy dropped to 85% compared to the market rate of 95%.  Vacancies are never good, and significantly affects cash flow for investors.

On top of the increasing vacancy problem, was the persistent bad debt and numerous evictions.  Why was this happening?

Subsidised Versus Market Rate

The difference between a subsidised and a market rate property starts with demand, which reflects the way the property is managed.  

The subsidised market has limited supply and overwhelming demand.  When a manager of a subsidised property has a vacancy, they merely have to call the next person on their waiting list to offer the unit, and it is filled.   

Market rate properties are plentiful.  In order to get market rents, each property has to compete for the best available resident.  This requires the property manager to advertise and make your property and the unit appealing to your prospective resident.  Failure to do so will result in unwanted vacancies.

Bad Debt and Evictions

Bad Debt and Evictions were persistent, but why would they be so abnormally high?  There were no obvious signs to point to. Because of this, it took months of investigating to find the root cause of this problem.   What they found was hidden in the screening criteria settings used by the screening vendor selected by the property manager to screen applicants.  

Given the property management company’s experience was with subsidised housing, the screening company set the standards to the levels used for subsidised housing.  The lack of income required of applicants explained why the tenants were unable to pay the rent. Market rate properties typically require 3 times the monthly rent for monthly income to qualify and to ensure rent is affordable.

Once the problem was identified, the solution was simple.  Bring the standards up to market requirements. The screening service was instructed to level up the requirements for this one problem property.  Instead of leveling the one up, the screening company managed to lower the screening requirements for all three of Jonathan’s properties. Quickly they went from having an isolated problem to problems at all properties.  Fortunately, this error was quickly recognized and righted before it got out of control.

The Bank

The bank took issue with the vacancies when the Net Operating Income no longer met the debt service requirements.  When a lender underwrites a property for a loan, it looks for a Debt Service Cover Ratio or a minimum of 125%. This means the NOI must be at least 125% of the annual debt service.  Failure to meet this requirement triggers the loan clause requiring Cash Management.

When “Cash Management” happens, the borrower agrees to allow the lender to collect all rents, and then pay only those expenses approved in the operating budget.  This protects the banks position and ensures payment of their loan. To reverse this clause, you must improve the NOI to meet the Debt Service Ratio requirements.  

More Lessons

The property that provided all the lessons of mis-management, increasing vacancies, and bank problems, was not done teaching valuable lessons the books don’t talk about.  

The next lesson was taught courtesy of two fires at the same property.  Fortunately, insurance rebuilt the nine destroyed units, and covered the lost rent while the units were under construction.  However, as insurance companies do, they refused to offer renewal coverage when the policy expired. To replace his coverage, Jonathan had to pay significantly higher rates immediately after the fires.  This negatively affects the NOI.

The Happy Ending

Despite the fact that the one property was full of operational challenges, there is a happy ending.  The property never provided any owner distributions while it was held as an investment and provided multiple challenges, management, vacancies, bank, fire, etc.  

The happy ending is primarily due to the rising market of the past six years.  In a rising market, you can make a lot of mistakes and still come out ok. Jonathan was able to buy at a low price, and sell at a high price resulting in a handsome profit.  

Why He Sold

Why he sold, is simple.  Recognizing the market is at a high point, and not likely to go higher in the short term, he made the decision to exit all of his properties in 2019.  Due to the positive market conditions, he was able to pay all the arrears in preferred returns, management fees that had not been paid while operating the property.

Fortunately, for Jonathan, the lessons he learned only came from one property.  The other properties operated with only minimal normal issues. This one property taught him lessons he shares with his students to help them avoid making the same mistakes.

He reminds his students that while getting a deal always seems like a difficult task, the real challenge is to operate the property profitably.   If you are not properly capitalized, any one of the issues he faced can be your ruin.

Passive Investors

As for passive investors, this is a cautionary tale of the importance to know who you are getting into business with.  Do they have the experience and know how to navigate the challenging market ahead? Have they stress tested the numbers for the what if?   Have they accounted for the deferred maintenance? Are they properly reserved for capital expenses? What happens if the market changes during the value add implementation?

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The Biggest risk investors face is the Economy.  When you are at the top of the market, there is only one direction it can go.  

How to manage the risk: Be aware of the cycle, and recognize the risk you face in an economic down turn.  Understand the tenants in the class of property and how they will likely be affected in a downturn.  While real estate out performed other assets in the crash, it still got hammered.

If you buy at a premium, you have no room for any error.  When you suffer an occupancy loss, will you still be able to meet your debt service ratio requirements?

Go in with your eyes wide open.  Multifamily is a business that requires good people, and the wind at your back to make money.  If you are planning a value add, ask yourself if you can complete the renovation before the market changes.  Don’t forget that timing is important.

For more go to:

Podcast: RealEstateLaunchPad.Net

Email: jonathan@multifamilylaunchpad.comFacebook Group:  Multifamily Investment Community  

Multifamily Value Add Rebranding with Reed Goossens – CREPN #194

Multifamily Value Add Rebranding is one way to recapture hidden value for investors looking to increase the value of their multifamily property.

Reed Goossens, an engineer by training, has put his project managing skills to work in his multifamily syndication projects.  The normal syndication hurdles include; pick a market, find the property, get it under contract, raise capital, assemble the team, manage the asset, operate the property and make a profit for the investors.  

Reed and his team at Wildhorn Capital, have employed a value add strategy where they have created additional value through rebranding their multifamily properties.  Wildhorn Capital has identified the following as its investing parameters for properties where they can add value for their investors:

  • 1980’s and newer Class B assets
  • Neighborhood Median income $50,000 – $60,000
  • Primary market with population growth  
  • In the path of progress

They have determined that properties matching this profile are the most stable housing during downturns.  

Why Rebrand

Why consider multifamily value add rebranding?  When does it make sense to invest the additional time and money to rebrand a multifamily property?  For an older, tired property in the path of progress that is competing against new construction, a rebrand can reposition the property so that it competes more favorably against its newer neighbors.  

A new name, signage, paint, and appearance really makes people notice.  The increased financial performance due to exterior improvements are less measurable than money spent to upgrade a single unit.  However, the perception lift raises the spirits of the management staff, which transfers to the residents. This energy makes rent increases easier, even for units that are not yet renovated.  

Steps to Multifamily Value Add Rebranding

The two biggest steps to a successful multifamily value add rebrand involve updating the exterior of the property and the interior units.  Prior to closing on a new property, Reed and his team will engage the services of an architect designer to come up with ideas on how the existing property can best be repositioned.  The plans are then given to his General Contractor to determine the cost. After some budget decisions, the plans are made for how to best move to get the renovations accomplished as soon as possible.  

Exterior Renovation

The primary goal is to achieve a new look and feel for a tired property.  This starts with the exterior to create curb appeal. The easiest most direct ways include: changing the accent paint on doors & trim, landscaping, leasing office update, workout facilities, pool, etc.  

The updated exterior gets prospective residents excited about living in your property before they ever step foot into a unit.  

Interior Renovation

Separate from the exterior renovation budget, is a budget dedicated for interior renovations.  To do the level of renovation needed to achieve the desired rent increase, Wildhorn budgets between $5,500-$6,000 per unit.  The older properties tend to cost more due to additional drywall work needed if opening the wall between the kitchen and living room to make the units more inviting.

The goal is never to renovate 100% of the units.  At most they will renovate 40-60% of the units.

The renovated units will get new floor coverings, appliances, paint on walls & cabinets, updated countertops, modern door pulls on cabinets and new track lighting.  The balance of units are left as the “classic” model with a lower price point.

This interior renovation strategy serves two purposes.  First, this provides the property management a smorgasbord of price point options to potential residents.  Secondly, it provides future buyers with some room to create additional value for their investors.

Additional Considerations

The following are some specific lessons learned from rebranding and renovating multifamily properties.

Be Conscious

Be conscious of where you are spending your renovation money.  It is important to recognize where more people will take note of your efforts.  Common areas with high traffic are the priority; around the pool, in the club house, parking lot, etc.  

Lighting & Ceilings

To update the lighting, they remove all “dangly” lighting and replace with modern LED lights.  A favorite light is the “slim service puck” which mounts directly into the junction box of an existing light fixture.  

One physical space characteristic they recognize is the ceiling height.  Reed and team have found that ceiling height makes an incredible difference towards your sense of space.  Older properties have 8 ft ceilings, while newer properties are 9 ft. That one foot of difference in ceiling height creates a much larger sense of space.  

In some instances, they have popcorn ceilings are in place, which is less desirable than a modern knockdown texture.  However, due to cost to removal cost and the lack of additional rent potential for replacing, they leave the popcorn ceilings in place.

Timeline

The first six months are critical to getting the exterior renovation made.  You want to get this knocked out as soon as possible. The renovations are a disruption to your residents and you have to be conscious of this.  After the exterior is complete, move to the interiors. Here you can take more time, and be strategic about how to proceed for maximum results.

General Contractor

If you are doing an involved, heavy lift, renovation, be sure to utilize a third party general contractor.  Do not expect your maintenance staff to take on this project. The general contractor can mobilize quickly, focus, and knock out the project so that your property can get back to normal operation.   

Leasing Season

Be conscious of when you are disrupting the usability of the leasing office.  Typically, summer is the busiest season. Renovating the leasing office during the summer, you can be disastrous.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Insurance Rates for properties built prior to 1990

How to manage the risk: Acquire properties built mid 1990’s and newer that have 9’ ceilings and fire sprinkler suppression, as the building codes required.  Properties with fire suppression will benefit from lower insurance premiums.

Bonus Insurance Risk: What is the age of the roof, has there been any hail damage?

How to manage the risk: Know the age of the Roof and how quickly it will need to be replaced.  If you do not have this built into your capital improvement budget, you will not be able to accomplish you have budgeted for.

BIGGEST Non Insurance Risk: Underwriting – There are so many risk.  You have to know what to look for when investing in a property.  

How to manage the risk:  Find the right deal.  Underwrite it correctly.  Know what assumptions have you put into your underwriting to protect your investors.  

As the market cap rates compress, we look for newer properties because we can buy them for the same cap rate as older properties that have more skeletons in the closet.  Properties built since 1990 will have individual utility meters, 9 ft ceilings, sprinklers, individual heaters and are less likely to have potential construction risk that can bite you in the ass.

Know where are you buying.  Be in the path of progress. Core markets with population growth and multiple employers are where we are investing.  We are not looking in tertiary markets.

For more go to:

reedgoossens.com

Email: info@reedgoossens.com

Commercial Real Estate Due Diligence with Brian Hennessey – CREPN # 193

Commercial Real Estate Due Diligence is the key to buying right.  If you fail to underwrite properly, you will learn the hard way.

Brian Hennessey, is a 30 year commercial real estate veteran.  He has learned and authored multiple books on commercial real estate, including, “The Due Diligence Handbook For Commercial Real Estate”.

FREE 14 Page Comprehensive Due Diligence Checklist for Real Estate Investments

TEXT “CRE” to 444999

After  18 years as a commercial real estate broker, Brian took a position as VP of acquisitions for one of his clients.  How different could it be from the broker role versus working for the investor making acquisitions?

The first large office deal almost got Brian fired.  The seller quickly realized Brian did not know what he was doing and took advantage of Brian’s lack of experience.  The steps Brian missed during due diligence his boss dearly and almost cost Brian his job.

Brian had a choice to make.  He could either walk away and go back to the broker side, or he could create systems to make certain he never made these mistakes again.

From this point, he created a reference manual.  He included questions to ask, issues to be aware of and checklist so that he would not miss these items again.  For the next 6 years, he used, and added to his reference manual while he oversaw the acquisition of over 9 million sq feet.

Back to Broker

When he returned to the broker side, he made his reference manual available to clients and prospective clients as a tool to help differentiate himself and his expertise from other brokers.  His clients loved it.

This is when he decided to spend the money to properly publish it on Amazon, where it remains a best seller for commercial real estate due diligence.

Old school brokers did not want to show up at physical inspections.  They felt it opened themselves up to problems. So, to avoid problems, they left due diligence up to their clients.

Now, a good broker has to be present at the inspection.  If your broker doesn’t know something, a responsible broker needs to find professionals that do.  There is too much at risk. If the broker ends up in court and the judge ask if he was going to be compensated for the sale, the broker will be held responsible.  

Top commercial real estate brokers are making due diligence a priority.  They are bringing professionals onto their team; attorneys & cpa’s, etc.

Due Diligence Mistakes

Due diligence without a process or system is a recipe for disaster.  To avoid common simple mistakes, create a process & system will help you make an informed decision and avoid the deals you should never do.

Remember, the seller will not come to you with a list of things that are wrong.  They hope you don’t find anything wrong. They want to get the deal done.

Common Due Diligence Mistakes:

Mis-value the property.  There are two values to consider when buying a property.  The “pre” due diligence value versus “post” due diligence value.  One reflects the value with no adjustment to fix the needed capital improvements, the other has been adjusted to reflect the cost of the work needed to operate the property profitably.   

Lender underwriting requirements.  Pick up the phone and talk to a lender about what they can do for you and what they need from you.  Do this before you sign a purchase agreement. Otherwise, you are wasting everyone’s time.

Local compliance.  Take the time to personally go to the city or county that governs the building codes for the property. Find out if codes are coming that will affect you and your operation of the property.  It’s one easy conversation that can alert you to any coming issues the seller may not be aware of.

Tenant leases.  When you buy commercial real estate, you are buying the income stream.  If you do not know the quality of your tenants, and their ability to pay, you can end up with unnecessary vacancies and collection problems that will not help your bottom line.  

Third party reports.  Every lender requires various third party reports; inspections, soil, appraisal, etc.  Most lenders are limited to using reports provided from their list of approved providers.  Make certain you know who is on the list before you order any reports. Otherwise, you will likely get to pay for the report twice.  

Inspect the Closing Statement.  It takes time do all the due diligence.  The preliminary closing statement is your chance to go through all prior communications and confirm that everything is as it is supposed to be.  Professional sellers are notorious at adding fees to the closing statement. If you do not ask for the closing statement in advance of the closing and review the numbers line by line, you will not get the deal you planned for.  Get a second set of eyes to check the numbers. Ask questions, get proof.

Walk the entire property.  Inspect what you expect.  Once the deal is final, every defect is yours.  Even if you have a claim against the seller, you will be tied up in costly litigation to get your correction.  Inspect everything,

Talk to vendors.  Vendors that service the property know the condition and quirks of the property.  If you don’t ask, the answer is always no.

Spend time at the property.  What is the property like in the evenings, on the weekends, in the morning and middle of the day.  If there are issues, these will become your issues. Know what you are buying.

Once you learn how to do Due Diligence properly, brokers and sellers will know and will be forthright with the information.  Learn how and create your process and systems to do it right everytime.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK:  Assume everything is ok.  
How to manage the risk?:   Assume Nothing, If you assume anything, you have to assume there are problems everywhere.  When you know how to do the deep dive on due diligence properly it will minimize the risk.

Commercial Real Estate Due Diligence is the key to buying right.  If you fail to underwrite properly, you will learn the hard way.

For More go to:

impactcoachingsystems.com/

FREE 14 Page Comprehensive Due Diligence Checklist for Real Estate Investments

TEXT “CRE” to 444999

How to Underwrite a Multifamily Market with Anna Myers – CREPN # 192

Underwrite a Multifamily Market before you invest in a property.  Before you fall in love with a property, you have to learn what is driving the market.  

Anna Myers, Vice President of GroCapitus, identifies key indicators of a healthy housing market.   When these are present, you protect yourself and your investors from financial loss.  

Since 2006, Anna has been a long distance real estate investor.  She invested in single family and land before focusing on the benefits of multifamily. Today, she and her investors focus on class C properties where they can do value add improvements and force appreciation.

The Multifamily Market

First things first; there is not a national multifamily market.  Every Metro Statistical Area, MSA, is its own market and must be underwritten separately.  Each market has its own economy which are influenced by geography, resources, area businesses and population.

Population size

Population size reflects potential number of renters.  While it is best to be in a larger market with multiple large employers and well paid employees, don’t overlook the surrounding markets within a 30 minute drive that allows workers to commute. These markets can provide excellent opportunities to take advantage of the strong job market and create a strong value add opportunity.

Larger metro areas will have access to public transportation.  If a market has a healthy transit system, this provides renters multiple options to get to their employment.  

Once you identify a market, it’s time to drill down into specific neighborhoods.  Within the specific neighborhood, you want to learn the following:

Most Important Multifamily Underwriting Criteria

It all starts with jobs.  Without jobs, you have unemployment, and unemployed tenants are not able to pay your rent.  You can find a lot of this information online from the Census or local chamber of commerce.

So, when underwriting a market, you want to first confirm the following;

Job Market

Job growth: Are local employers growing?  If so, are they hiring? Do they need to employ more people to accomplish their growth?

Number and type of employers: You need to find out who the major employers are in the area.  A healthy market will have multiple larger employers. You don’t want to find that there is only a couple of major employers in the market.  If there are are not multiple employers who are growing, be careful.

More employment sectors is better.  If the market has only a couple of major sectors it can become problematic if there is a downturn.  A few sectors to be aware of because of their cyclical nature include; military & construction. Sectors that are always in demand include health care, which provides a lot of high quality jobs.

Median household income –  You need strong wages. Anna and her team set a minimum median household income of $40,000 for their investment criteria.  If you want to collect rent you need people with good paying jobs. If you underwrite and rent to tenants with at least 3 times the monthly rent for income, collecting rent is easier.

Unemployment: it is best have no more than 8% unemployment in your neighborhood.

Housing Supply:

How many units have been built in the last 3 years?  If there is more demand than supply, this is good for an investor,  in that you are less likely to have vacancies. When you underwrite a multifamily market, it is important to recognize how much new construction has recently occurred and how much is in the pipeline.  When supply suddenly grows and exceeds the demand, the newer properties will likely be more attractive to prospective tenants.

To fill the newer class A properties, management & owners will utilize promotions, concessions and rent discounts.  The B class tenant will be attracted to a nicer newer property that cost the same or a little more than their current rent cost.  This will cause rising vacancies in the B class properties.

This same conditions will be employed between the B & C class property tenants.  This is why you have to understand the area development projections and how it will affect your property.  

Price to Rent Ratio

Anna and her team recognize the price to rent ratio range they refer to as the “goldilocks range” of 14-22 as the ideal range.  If the ratio is lower than 14, it is easier for the tenant to buy a home. When the ratio is above 22, it is more difficult for the tenant to buy and for the multifamily property to produce cash flow.  

Price to Rent Ratio calculation:

Median value of owner occupied home / Annual median gross rent.

Rent Growth

Forecasted rent growth: Find out the most recent rent growth statistics for both annual and the most recent quarter.  Ask local brokers what the rent growth forecast is for the next 12 months. While projections may be substantial, Anna uses a conservative rent growth cap of 4% rent for the first year.  If you get more, great, but don’t over estimate.

Median Monthly Rent

Anna’s team has found the minimum median rent of property needs to be not less than $800.  Markets with a lower median rent makes it difficult to collect rent.

Path of Progress

Look for areas where the median income has increased, but the median price of housing has not yet increased.  This is a sign of rising housing prices.

City Data is a free website that allows you to see a map of the neighborhoods and the census data associated with it.  This allows you to recognize where the price of housing will increase.

Emerging markets – when you find a city or neighborhood with positive indicators, study the surrounding areas and you may find a web of supporting markets.  Is there a trend that suggest where progress is moving?

Laws

What are the landlord tenant laws in the market?  Are the laws pro landlord or pro tenant. Cities and states that overly protect the tenant should be avoided.  In these markets, there are tenants that know how to work the system, and can create real havoc for a landlord.  Learn the laws regarding notice to evict before you invest in a market.

Occupancy Rate

There are two calculations to consider.  Physical & Economic occupancy. As a rule, occupancy under 95% will likely be a challenge to collect rent from your tenants.  

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Not understanding your market.  Not understanding the data.

How to manage the risk?:  Know the data, it does not lie.  This is especially important when you are entrusted to invest others money.  

To learn more goto:

Grocapitus.com

Multifamilyu.com

Text: “RETOOLKIT” To 44222

Email: anna@grocapitus.com

Seller Financing with Larry Goins – CREPN #191

Seller financing is a viable strategy for real estate buyers and sellers.

Since 1986, Larry Goins has been buying and selling real estate.  He has bought and sold residential, multifamily, commercial, developed subdivisions, mobile home parks and more.  For financing, he has utilized multiple methods including traditional banks, partners, hard money, lease options and seller financing.

Generating Prospects – Sellers

To generate multiple leads, requires a sophisticated marketing campaign utilizing postcards, Facebook, and pay per click Google Ads.  This is all in an effort to make the phone ring. When the phone rings, a screener will qualify the opportunity. If it sounds plausible, Larry makes a call and offers a full price cash offer.  

The typical marketing campaign numbers look like this:

  • Postcards mailed to identified suspects: 25,000 per month
  • Inbound calls from postcards: 200 per week / 800 per month
  • Average response: 3%
  • Results: 5 – 20 deals per month

Developing a Buyers List

Developing a large buyers list is key to your success as a wholesaler.  More potential buyers means more success. Larry and his team utilize the following methods of marketing:

  • Bandit signs: 25-30 around the neighborhood where the property is located.
  • Local Facebook groups
  • Craigslist
  • Website
  • Bigger Pockets

For each method, they collect emails and grow their email list for the next property they have for sale.

Wholesaling

Wholesaling is an simple way to make money without the need for a lot of capital.  Larry authored the book, Getting Started in Real Estate Day Trading and has students from around the world employing his system.

The ideal property will be purchased well below market, but that is because the seller has problems.  When you find the person with a problem who is willing to part with their property for very little, you have the first ingredient necessary to make a profit.

As soon as a property is put under contract, the marketing team takes over.  First they go to the property and take numerous photos of the property including all interior, exterior and building systems.   Next they market the property to their buyers list.

The most efficient model for wholesaling provides for a purchase and sale on the same day, using none of the wholesalers money.  The net result of a successful wholesale is a profit after selling a property he never had to invest in, but found both the seller and the buyer.  

Seller Financing

There are two sides to Seller Financing.  

When you are the Buyer:

If a Seller does not agree on your offer price, but they are interested in continuing to receive monthly income, Seller Financing can work.  When negotiating with a seller, her are some key points to make with the Seller,

  • They will continue to receive monthly payments,
  • You will take care of insurance & taxes.
  • They will no longer have to deal with tenants,
  • You will help reduce their capital gains tax using an installment contract.  

From here, you can either operate the property as a rental, sell to a new buyer who will assume the loan after you collect a down payment.  For example, you buy at $35,000 and sell for $45,000 with $10,000 down and assign the mortgage to the buyer.

Another way is to utilize “wrap mortgage”.  This is when you acquire the property on terms from the seller, and then sell the property on contract to a buyer.  To make this work, you need to acquire for a low monthly payment, and then sell on a higher monthly payment. You make the money on the spread.   

When you are the Seller:  

If you have the financial ability to acquire a property, seller financing is a great way to make substantial returns.  Larry and his team try to buy a property for 30% of what they can sell it for on contract. He calls this “Flip to Riches”.  

Best outcomes:

  • If the buyer does not make their payments, you foreclose and resell the property and collect another down payment.
  • If your buyer refinances, you get paid off.
  • Buyer pays as agreed.

In all cases, you have to be transparent with the seller about what your intentions are.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Lack of education.  If you don’t know what you are doing, you will get burned.   

How to manage the risk?  Get educated. Read books, listen to podcast, get a mentor.  

For more go to:

LarryGoins.com

Call: 877-LAR-RYGO

Spendthrift Irrevocable Trust with Bruce Mack – CREPN #190

A Spendthrift Irrevocable Trust might just be the the asset protection strategy you have been looking for.  It allows you to own nothing, but control everything.

Bruce Mack is a real estate investor, Licensed Financial Advisor and student of how Trust work to provide maximum asset protection and tax benefit.  He utilizes Spendthrift Irrevocable Trust offered through Platinum Trust Group.  His primary clientele are Real Estate Investors.

When Insurance is Not Enough

Insurance is a recognized first line of defense for protecting your assets.  But when you read a policy and find the exclusions, you realize there is a potential gap in what could happen, and the coverage the policy provides.  Bruce has multiple examples of clients who found out the hard way that their insurance was not enough. And, because they had assets, the court award required that their assets be liquidated.  Here are a couple of examples:

  • Client owned rental homes.  When their son was at fault in an ATV accident, they were forced to liquidate their assets to pay for the damages beyond what their insurance provided.  They loss 20 residential houses.
  • A real estate investor managed his own properties. When he was found guilty in a wrongful eviction lawsuit, his liability insurance was limited in its response.  He lost 150 rental houses and 2 apartment buildings.

But I Have an LLC

That does not affect me because, I have an LLC.  When you use an LLC, C-Corp or S-Corp to hold title of your real estate, you separate you, the individual, from your business that owns the real estate.  This is referred to as the “corporate veil”.

This is a fairly straight forward strategy. If you own multiple properties, for additional asset protection, you may be advised to create multiple separate entities for each property,  In theory, this makes sense, however, the cost to maintain and operate multiple entities is not cheap.

For each entity you create, you are required to pay separate state business filing fees.  This is in addition to the tax return required for each entity. Multiple state fees and tax returns add another level of expense that reduce your profits.

On top of the fees, you must follow the formalities outlined in the corporate operating agreement and bylaws.  Failure to follow these can blur and lessen the the distinction between you and the entity. When opposing counsel has been able to prove the lack of structure and record keeping, they have been able to pierce the corporate veil and hold the individuals personally responsible.  This opposing counsel strategy is referred to as the “alter ego”.

Protection Provided in a Spendthrift Irrevocable Trust

Bulletproof asset protection.  Your assets are protected when placed in a properly structured Spendthrift Irrevocable Trust.  This deters opposing counsel from suing. If the opposing counsel were to sue and win a judgement, they would place a lien against the trust.  This lien would be satisfied when the trust is liquidated. That happens 21 years after the last beneficiary dies.

Tax advantages for the trust.  When your assets are placed in an irrevocable trust, all ordinary and capital gain income from rental properties go into the trust. Tax is due when one of two things happens:

  1. Beneficiaries receive distributions.  The beneficiaries are required to pay income tax on the income they receive from the trust.
  2. When the trust is liquidated.  The Spendthrift Irrevocable Trust states that this happens twenty-one years after the last beneficiary has passed away.  At that time, the trust dissolved and any liens are settled and taxes paid.

Property held in a irrevocable trust can prevent the need for a 1031 exchange to avoid the taxable event.  A trust can hold assets, receive income from those assets and pay the operating expenses required to maintain the trust.  Only the distributions paid to the beneficiaries are taxed at the ordinary income level of the receiving beneficiary.

Who is the Spendthrift Irrevocable Trust for?

If you are selling an asset, or buying additional real estate, you should look at the protection provided through an Spendthrift Irrevocable Trust.  Both asset protection and tax savings are reasons to look into the benefits of irrevocable trust.

For more go to:

www.platinumtrustgroup.com/crepn

www.platinumtrustgroup.com

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The chance of being completely wiped out due to an unforeseen event.

How to manage the risk?: Follow the advice I give my clients.  I have placed all my assets in an Spendthrift Irrevocable Trust.  

Multifamily Asset Management with Vinney Chopra – CREPN #189

Multifamily Asset Management is the rarely talked about, but vitally important, required aspect of multifamily investing success.  It is key to realizing the profits investors expect.

Vinney Chopra shares some of the critical steps successful operators take to  make their multifamily investment operate to achieve peak performance and maximum returns for their investors.  

What is Multifamily Asset Management

Multifamily Asset Management is not property management.  Asset managers manage and work with property managers. The asset manager is hired by and reports directly to the syndication principal / sponsor.  They are not responsible for interacting with investors.

Asset Management Duties

Asset managers engage weekly with property management to keep them focused on the immediate operational task at hand.  Additionally, they make certain progress is being made towards the end goal. These calls can occur in person, but more often is done through phone or video calls.  

Each weekly call will address specific key performance indicators including:

  • Collections
  • Utility collection and RUBS
  • Delinquencies in rent
  • Occupancy and Vacancy reports
  • Price sheet, reflecting unit rent prices
  • Budget versus actual income and expenses
  • Capital improvement projects
  • Renovation Schedules, detailing the work needed to complete so the unit can be rented.  If work cannot be performed by property management staff, subcontractor proposals are sought.  
  • Vacancies, unit turns, collected rents, delinquencies, rent increases, vendor contracts, and capital improvement work schedule for larger value add projects.

Property Management Duties

The property management team consists of the following members:

  • Community Manager: leader of the property management staff.
  • Lead Maintenance / Technician: reports to Community Manager.
  • Assistant Community Manager: is a Community Manager in training and assist the Community Manager in all aspects.
  • Porter / Helper: Assist the Lead Maintenance Technician.
  • Make Ready Person: Responsible for turning units between residents.

The number one responsibility of the Community Managers team is leasing units and rent collection.  This is achieved through regular communication with the residents so that they understand residents intention regarding the renewal of their rental agreement.  

Marketing available units using all of the social media websites that target people looking for apartments in your neighborhood.  There are several tricks management must be savy to in order to keep your property as a top offering. When these are employed, your property is featured more prominently and you receive multiple inquiries from prospective residents.

Additionally, the management team must deliver the service from their customers, the residents.  This means promptly attending to the service requests, and following up with the residents to gauge their satisfaction.  

Paying attention the physical appearance of the grounds goes a long way to communicating pride in the property.  Management must walk the property daily and recognize and correct any problems or potential problems as soon as possible.

This level of care can provide referrals from your happy residents to their family and friends who can become future happy residents. Only when you are in tune with your residents can you achieve expected rental retentions.

Additional Management Duties

Management must constantly evaluate their staff and answer the question, “Do we have the right people in place and the needed equipment to complete the job?”

When your team acquires or is working to sell your property, your management team is critical to the transition.  

Prior to acquiring a property, It is important to establish accounts with all utilities and vendors to make certain all of the services continue and there is no interruption in service.

When you are ready to sell, your property management team must make certain your rents hold steady.  Any dip in occupancy can create problems with valuations and the sale. Your property management will be the face for your property and company when dealing with open houses, and property tours for commercial real estate brokers and investors.   

Community

When Asset Management and Property Management work together, they can create an inviting community for both current and future residents.  Here are some of the physical property traits Vinney has employed that work.

  • Make the grounds as attractive as possible with well trimmed hedges and landscape lighting.
  • Four large flag poles that fly, the US, State, Property & Seasonal flag
  • Amenities and reasons that create reasons for residents to interact with staff and fellow residents.  These include: inviting club house with flat screen TV’s, cookies, water and Friday morning Breakfast on the Run.
  • Dog parks, more and more residents have dogs, and this is an inexpensive place for residents to inner act with other residents and get to know each other.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Declining Occupancy.  If occupancy goes down just a few percent, it can really hurt your

How to manage the risk?: Do not hesitate to act.  Provide incentive to property management to keep the property occupied at and above 95%.  For instance, the office is closed on Saturdays as long as the occupancy is above 95%.

BONUS RISK: Delinquencies;  Why is the rent not being paid on time.

How to manage the risk?  Pay attention to the rent as a percentage of income.  If the residents do not make enough income, they cannot easily pay the rent.

EXTRA Bonus Risk: Walkways must be free from trip hazards.

How to manage the risk?:  

Bring in someone from the outside to inspect the condition of your property.  When you are looking at your property day in and out, you can lose sight of certain conditions that need to be addressed to avoid any needless injury, claim or lawsuit.

For more, go to:

www.vinneychopra.com

vinney@vinneychopra.com

Text: LEARN to 474747

CREPN #188 – Multifamily Investor Lessons from 2 to 2400 Units with Ivan Barratt

The investor lessons learned while growing from 2 to 2400 Multifamily units are many.

Growing up, Ivan Barratt saw his father collect rent checks from renters and recognized that getting paid from renters was a great way to get paid.

After college, Ivan started his career in real estate working for an Indianapolis area developer.  While working for this developer, he learned all facets of real estate development, and made a lot of money.  His real estate fortunes seemed certain.

When the 2008 crash happened, everything stopped.  With the path to easy riches closed, Ivan had to find another way to create his real estate fortune.

Through the Wreckage

When the dust settled, Ivan found himself several hundred thousands dollars in debt.  Instead of taking the easy way out, filing bankruptcy and walking away from his pile of debt, he committed to repay all his debt.  

To survive the crash, Ivan and his family had to make some sacrifices.  Without the big paycheck, they had to reduce their living expenses. They turned their luxury condo into a rental and moved into one of their rentals.

Real Estate sales had provided him a tremendous paycheck, but it could be feast or famine.  Recognizing he needed some predictable, recurring income, Ivan got out of development and started a property management firm in a spare bedroom.    

Investor Lesson: Live within your means.

Property management gave him the chance to create recurring income, which was great.  At the time, there were lots of owners who could not sell their homes and became reluctant landlords.  They needed property management.

In addition to creating recurring income, he recognized that property management gave him contact with owners who wanted out.  These relations with frustrated owners gave Ivan first dibs on investments, sales and purchase opportunities. This additional income provided him the funds needed to pay off his debts which allowed him to keep his credit and reputation in tact.  Ivan credits much of his success to his decision to pay off his debts. Making good on his debts kept him in good graces with the local power brokers. Because he made good, these contacts rewarded him with opportunities he would have missed had he elected to not pay back the money.  

Investor Lesson: Make good on your commitments.  

Investor Lessons

Where do you start on your journey to 2400 units?  You start with the first unit. The crash of 2008 was a humbling experience for Ivan and thousands of other investors.  Once he came to terms with his predicament, he realized if he was ever going to accomplish his goal of thousands of units, he had to get the first unit.  

Investor Lesson: The next deal is the most important deal.

Ivan credits his father’s interest in motivational books and tapes for helping him with the needed mindset to stay positive.  Some that stuck with him; “The journey to 10,000 units starts with the first deal.” “Focus on what has to be done today.” “Do what others won’t today so you can do what others can’t tomorrow.”

Managing Growth

Today, his company, Barratt Asset Management, BAM, manages over $300 million assets under management of which $210 Million are owned through Syndication.  BAM is a vertically integrated company, providing property management, and syndication of multifamily properties.

The challenge of managing people and working to keep them motivated is a task much more difficult than doing a real estate deal.  Allowing the little mistakes to happen and your support staff to learn and grow from their mistakes takes a lot for an owner who is used to doing everything them self.  However, it is absolutely necessary if you want to grow.

Investor Lesson: Mistakes will happen and are necessary for learning.  Allow for mistakes.

By delegating and trusting others, Ivan is able to focus his visionary talents.  He is able to work on the business, and practice what he is truly gifted at, attracting capital and investors.

In order to become a big company, you have to first see yourself as a big business that is currently small.  This mental shift is key. You have to create a vision of where you want to go and communicate this to others, employees, investors, clients, etc.  Without a vision, you will stay small and own a job at your small company.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Debt Maturity Risk – If capital markets dry up and you cannot get financing.

How to manage the risk?:  Long term financing w/ fixed interest rates – HUD market rate loan with an interest rate lock for 35 years.  HUD provides financing up to 85% to cost including: acquisition, renovation, reserves, all in.   

For more go to:

www.ivanbarratt.com

www.ivanbarratteducation.com

www.barrattassetmanagement.com/

Ph: (317)762-2625

CREPN #187 – Technology Disrupts Multifamily Property Management with Neal Bawa

Technology is disrupting Multifamily Property Management, and the results are impressive.  

Neal Bawa, founder of Grocapitus Investments and Multifamily U is a technologist by education, who came to real estate investing out of necessity.  It was when his boss elected to purchase a building rather than continue to pay rent, that Neal was forced to learn on the fly how to make the new property ready before their lease expired and penalties ensued.

Like most of us, the lessons learned under pressure are permanent.  Having caught the bug for real estate, Neal first invested in single family homes, but soon realized the challenge to scale.   Then he found and invested in thirteen syndications as a passive investor. However, he was not getting the returns he expected.

Realizing there was a vacancy problem that was preventing him and his fellow investors from receiving distributions, he asked the syndicator if he could market for prospective residents.  Soon, he developed a system that was generating qualified prospects to managers who were able to fill the vacancies. When the property filled up, investors started receiving distributions.  The increased NOI drover the value up, and again made investors very happy.

When the asset managers asked Neal what he wanted in return, he asked for permission to participate in their weekly asset management calls.  They told him the calls were boring, full of acronyms, and he would not like them. But he did.

Over the course of 200 such calls, he got a front row seat to the inner workings of multifamily operations on a day to day basis.  He realized that each person in the operation had a particular expertise, but no one person, knew all the pieces. Except for him, the note taking technologist.  Neal realized he had learned something that not everyone else knew.

To make certain he did not forget these newly learned lessons, he started a wildly successful Meetup group in San Francisco where he shared everything he learned about multifamily investing.  Soon the members became motivated, and wanted to invest with Neal. He had the knowledge and the support to become a multifamily syndication sponsor.

Technology Disrupts Multifamily Property Management

In the 200 weekly operations meetings, Neal recognized some limitations in the existing property management system for filling vacant units.  As a technologist, he identified the choke points where it was time for technology to disrupt the status quo.

Neal developed a technology hardware and software system with virtual assistants that attract, screen, schedule, and remind prospective tenants of their scheduled tour for his properties.  For 2018, his system attracted 30,000 qualified resident prospects for properties he owns. This flood of qualified prospects accounted for 64% of all leases signed. Now, property managers are able to focus on showing units, signing leases and do more operational tasks without the distraction of marketing for empty units.  

Additional Value from Technology

Now that the units are full, Neal realized a second opportunity to leverage his technology and disrupt the income stream to add more value to the property.  There were missed sales opportunities for add ons like carports, washers & dryers, etc. Neal observed that property management income was a percentage of all rents collected.  While they were focused on a big number like the apartment rent, they did not get motivated about a little number that would pay them an additional $1.20 commission for leasing a carport for $40 per month.  

For Neal and his fellow investors this lack of focus was keeping them from realizing a significant long term value.  The $40 per month carport rent was $480 per year in income. That same $40 per month translates, at a 6 cap rate, to an additional $7,680 in property value per carport!  If you have 100 carports, that’s as much as $768,000!

So, how do you get someone to focus on something they don’t value?  You don’t. Instead, Neal again leveraged his technology and created a follow up task for his virtual assistants.  Now, the virtual assistants contact the new residents to make the additional sales. And his property managers take care of what they do, lease, collect rent and turn units.

Multifamily Lessons Applied

Since these beginnings, Neal started Multifamily U and Grocapitus Investments which are education and multifamily syndication investment platforms.  Today, he syndicates multifamily properties all over the US and continues to apply the lessons he learned, and the technology to make his properties more profitable.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Opportunity Zones.  When millions of dollars are pumped into distressed areas with no fundamentals for growth, why will these areas become successful?

How to manage the risk?:  Don’t invest as a Class C area with no growth potential solely as a strategy to avoid paying capital gains taxes.  Be wary of investing in an opportunity zone if you do not understand the fundamentals in the area.

For more go to:

Multifamily Training And Resources
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