Finding value in multifamily where others cannot is key to your success in a competitive market.
JP Albano is a computer hard drive equipment sales turned multifamily real estate investor / multifamily syndicator. In a little under two years, he has invested in 230 plus units spread over 5 properties.
Finding value in today’s competitive multifamily market is difficult. JP’s most recent deal is a 60 unit property. It took almost 4 months of courting the seller, who was the original owner, and had operated the property for 60 years with no systems. Originally set up as a weekly rental for men, the current rents were less than half of the average market monthly rent.
A poorly operated property with 24% vacancy, in a market with no vacancies, and market rents that are twice what is being charged, that sounds like an opportunity.
The condition of the property lent itself to the listing land broker as a redevelopment opportunity. Local code violations made other potential buyers look past this property. If you had no imagination, you too would drive right past. It was only through looking at the business and pulling the numbers together that JP and his team were able to realize the potential.
Time lingered on, and the seller had become desperate.
A Willing Seller
The seller was willing and ready to sell. Recent sales comps for area apartments were $64,000 per door. JP was able to negotiate a price based on the seller’s numbers about $17,000 per door. For a down payment of $400,000, and seller financing of the balance with 0% interest for 18 months. Additional opportunity, is the billboard on the property for which the seller has not enforced the lease for multiple years.
Preparing for Opportunity
In order to know a market, you have to do the footwork. JP was underwriting multiple deals per week, making offers on a fraction of those, and losing each time. The multiple reps helped fine tune his understanding of the market, and expand the search to additional markets.
The process can be frustrating. For each offer, you are emotionally invested. Losing multiple times, takes a toll. The antidote to loss, is making sure you have options. Focus on the number, and remember this is business.
If you only have one option and lose, it hurts. When you have four options and get one, it’s a win. Today, his team is underwriting in 12 markets, submitting letters of intent, raising money and closing deals.
Meeting brokers face to face is where it all begins. If they present you a deal, you absolutely have to respond. Even if the deal does not work for you, you have to respond to the broker and give input as to why it does not work. This will give the broker additional direction for what you are looking for.
When you close your first deal it proves to the area commercial real estate brokers and lenders that you are a closer. This is the proof that makes others take notice. Once you are recognized, the deals start to present themself. The shortcut is to go into a smaller market, or partner up with a proven closer.
Multifamily is a team sport. When selecting your teammates, it’s important to find out if you are on the same page. To do so, JP recommends you underwrite a couple deals and see if you both recognize the same opportunity. If not, there is no harm. When you find a good fit, the opportunity to run will propel your growth.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: So one of the BIGGEST RISKS that we were unaware of that we’ve since become aware of is one of my properties in Texas, a small property, 28 units. I guess I’ll start with the summary and then I’ll go into the story. If you’re going to get started as an investor in smaller properties just because it’s easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you’re going to be a GP and even if you hire third party property management, there’s work to do.
In my experience there aren’t, I haven’t run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had an underperforming, when all came down to it, property manager for our property and it was hurting our numbers.
Fortunately we were in a position where one of the partners is local to the property. So making sure that one of the partners is physically close to it, take over property manager roles. And, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.
And then one day he called us and said, Hey, I’m letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let’s just take over self-management for now. And it worked out, still working out really well. Um, because we’ve been kicking butt. But we didn’t, we didn’t expect to find ourselves in a situation where, oh my gosh, who are we going to find to manage it?
The smaller property sizes you’ll find there’s a lot of single family property managers, which is cool, but they’re not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it’s also too small for the bigger players. You know, they want 50 units or 60 units and above. So there’s this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that’s critical to the success of your investment. Now that’s an execution risk right there.
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