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Commercial Real Estate Pro Network

Commercial Real Estate Professionals who work with Investors, Buyers and Sellers of Commercial Real Estate. We discuss todays opportunities, problems & solutions in Commercial Real Estate.
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Now displaying: May, 2019
May 30, 2019

A digital marketing growth strategy is needed for any real estate professional looking for more clients and sales.  If you have no web presence, you are invisible to your prospective clients looking for you.

Prior to the internet, Sales and Marketing were lumped into one sentence.  In many companies, they were the same department. The internet provided separation.  Now your marketing efforts can be tracked and measured while you attract and nurture prospective clients. Sales is measured by sales presentations and closings.  

Lael Sturm founded LPSS Digital Marketing to deliver effective growth strategies and tactics to real estate professionals and other profitable businesses.  Below he shares some strategies & tactics that you can implement in your business to attract new clients.

Digital Marketing Growth Strategies

Digital Marketing channels are invaluable for Real Estate professionals who market to individuals.  Whether you sell single family homes, commercial buildings or you seek investors to participate in your syndication, it makes no difference, you need a digital marketing strategy.  You are no longer limited by the words on a written page. Today, the investors expects more.

The great news is that you no longer need a huge budget to get found.  The internet has given the same tools to the entrepreneur as the fortune 100 company.  Each have the opportunity to demonstrate their worth and let the consumer decide which option they want to satisfy their need.

Your prospects will look for you online before or after a meeting to determine your qualifications and ability to meet their needs.  To demonstrate your expertise, you can use all forms of media; written words, photos and video.

Your ability provide instant pictures and videos to a potential buyer, located anywhere in the world is normal.  Theses same potential buyers expect to be able to google you and learn about you without having to call you. If you do not have the information they are seeking, they will find your competitor who does.  

This level of marketing used to be the exception.  However, in 2019, this is the expected. This is the time for developing digital marketing growth strategies to propel your business forward.   

Developing Your Social Media Strategy

The social media options available are numerous  In order to be effective, you first have to develop a strategy.  This is achieved by first knowing what you are trying to do. Are you trying to be informative, capture leads, or make sales.  

Where do you need to be?  Website, social media, or email newsletter?  Lael says the answer is, “yes”. You may want to buy ads on Facebook or Google.  To determine where and how to deploy your marketing dollars, it is important to determine first  set some goals so you have measurable goals.

Who is your target audience?

Where are they online, and how can you best reach them?

Set up a step process, where you can build out your presence and add to it as you go.

Having an effective website is critical to being found in the digital age.  On your website, you need to have content that speaks to the key search words people are looking for.  To refine your website’s effectiveness, there are website tools available to measure how you rank for your key search words.  To improve your ranking, you can employ search engine optimization, “SEO” strategies to fine tune your content and raise your online rank.

Social Medial

For businesses, LinkedIn is the preferred platform.  You should have both an individual page and separate page for your business that describes your business and how long you have been in business.  That said, don’t forget Facebook. These are the two most used platforms for business.

The setup is easy to do, but you need to be thoughtful.  Look at what your competition is doing for some ideas.

Social Media Curve Balls

While Linkedin and Facebook are the standards, there are always new platforms.  

Instagram

The  current most influential platform is Instagram.  For a real estate professional, with great pictures of the property you are selling or leasing, this is a great place to show off.  Posting regularly online is necessary to stay top of mind. For Instagram, posting 4 - 7 times per week is a great goal.

Facebook powerful tools

In the past, people would purchase and develop specific websites for a specific property.  This is involved and expensive. Facebook allows you to post to your Facebook page each new listing, which eliminates the requirement of building new sites for each property.  By utilizing Facebook, you have access to all of Facebook’s features to drive qualified prospects to your site.

Frequency of Sharing New Content

Fresh and new content is key when trying to rank in the Google algorithm.  For a site that has not had a new post in 5 years, Google will not look upon your site favorably.  Your website needs to be current. You can add new posts as little as monthly.

For maximum effectiveness on social media, it is best to try and post every week day.  For the most effective use of your content, it is advisable that you tailor the same content to the platform rather than wholesale post the same to each platform.  

Email Newsletter should be sent at a minimum of once per month.  Newsletters need to provide value, and cannot just be a sales letter.  What can you share with your community that will be informative and inspirational that keeps you top of mind and makes them reach out to you when they are in need of your services?

Results

In order to measure your results, you first need to know what your goals are.  Are you looking for likes and follows? Or are you looking for new emails and sales?  Each platform will have different results. It takes time, but if done properly, you will be able to grow your following and determine your effectiveness based on your connections with people who want to do business with you.  

For immediate results, ads are a great way to create instant results.  A properly done ad campaign will present your offer to your ideal prospects numerous times.  Normally, it takes 5 - 7 impressions, or “touches”, before the prospect identifies your solution as a remedy to their problem.  In as little as 4 - 6 weeks you should have real data to determine how the ad is performing.

DIY

Doing it yourself is not hard.  The hard part is doing it well. Many have tried, only to create a mess, and then hire the services of a firm like LPSS Digital Marketing to sift through and make things work.

Rule number one, Don’t buy followers -  lack of engagement is punitive. If you have done this, it will take time to undo the mess.  To be effective, you do not want quantity, you want quality. The most followers are not your goal.  You want followers who are inclined to do business with you.

Be Authentic

To differentiate yourself, be authentic.  Forget pictures in front of a private jet.  People with problems are looking for genuine experts who can solve their problem.  Demonstrate your expertise and value. What you do may not seem unique or sexy, your perspective is.  Share your perspective about what you have learned and you will find people who are looking for someone like you.

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 is a fear to take action.  The biggest risk is not using the tools because you fear you may break the rules and get into trouble.

How to manage the risk: Lael and LPSS recommend that clients educate themselves on 1) the rules of engagement for their industry so they do not break the rules. 2) Learn the tools that are available to help you get the word out to your effective audience.  3) Start small. The internet is not going away. You need to participate and share your perspective.

For more go to:

FREE Social Media Services Guide: https://www.lpss.co/CREPN

Website: https://www.lpss.co/

May 23, 2019

The Challenges with scaling in Multifamily faced by investors trying to grow are avoidable, if you are willing to learn from others.    

Krista Testani quit her law practice cold turkey for real estate.  Together with her firefighter husband, they started flipping single family homes on Long Island, NY, in 2007.  Initially the margins were healthy, and the number of opportunities were unlimited.

By 2011, competitors were everywhere.  The profit margins were shrinking and the supply of available properties started to dry up.  It was at this point that Krista recognized, in order to scale her real estate investment business, she needed to get into larger properties.  

Flipping single family homes does not naturally lead to multifamily.  While both flipping and multifamily are real estate, they are dramatically different.  Flipping homes is buying, fixing and selling, quickly for a profit. Multifamily is a business with ongoing operations.  It requires you to dive deep into due diligence to find the operational or physical changes you can change to improve the value over the next couple of years.  

To learn the ins and outs of multifamily, Krista worked with a mentor who showed her the possibilities in multifamily to scale her real estate business.  While she understood how multifamily worked, it was the action steps, the doing, that kept her from instant success.

Fortunately for you, she shares the lessons she learned below.  These are the specific steps that will help you propel your multifamily business and achieve the success you desire.  

Challenges with Scaling in Multifamily  

The challenges with scaling in multifamily are many.  You can either go it alone and grind your way, or you can learn from others who have gone before you.  The following are lessons recognized by Krista that she recommends doing to accelerate your growth.

Krista recognizes two levels of marketing in multifamily syndication; micro and macro.  Micro is the technical learning. Getting to know the brokers and developing your systems so you can analyze a property quickly to determine if a property is an opportunity.  To accelerate your growth curve in the micro, consider working with a mentor with success in multifamily. Then look and analyze a lot of deals.

Macro is marketing.  Marketing to potential investors.  Sharing what you are learning with others.  This is absolutely necessary when raising capital.  Too often new investors believe they can only do after they master the micro.  However, as Krista witnessed, other new investors, who started at the same time as she did, jumped into the macro.  While she waited to talk with potential investors until she mastered the micro, her peers talked and talked.

They talked with others and shared what they were learning.  The more they learned, the more they shared. This naturally created interest with potential investors, and stoked their interest.  These potential investors were investing their time, and became passengers, along for the ride.

Because they had traveled the same leaning journey, raising money was easy.  When Krista’s peers had a deal under contract, they were able to easily get financial commitments from the passengers they had been nurturing.

If you fail to nurture you potential investors, raising capital will be near impossible.    

Market Yourself - Talk to People

Marketing yourself is absolutely necessary to grow and overcome the challenges with scaling your multifamily business.  It can be a struggle if you make it difficult.  However, if you are committed to grow in Multifamily, there are some easy ways to accomplish this.  Remember, multifamily investing is a team sport. In order to close on larger properties, you need a team and willing investors.

 

Growing your investor list is much like gardening.  In order to grow a successful garden you must plant some seeds.  To make the seeds grow, you have to water, and make sure the seeds get sunlight.  Not all seeds take root.

 

For multifamily investors, the seeds are conversations.  A gardner has to scatter a lot of seeds to have a large crop.  An investor has to have a lot of conversations.

The gardener gets to harvest their crop.  For you the investor, the payoff comes when others know and trust that you know what you are doing.  Not every seed will bear fruit, but if you talk to enough people, and generate enough interested, able investors, you will have no problem getting commitments when it is time to pull the trigger and close the deal.   

How to Market Yourself:

Do you market yourself?  You have to put yourself out there and let other know what you are doing, but how?  The easiest way is to share what you are learning as you go with people you know.  This allows you to have natural conversations with people who are interested in you and what you are doing.  These conversations help you build your reputation and credibility as someone in multifamily real estate.

The more you share with others, the more comfortable you will become.  Your conversations will lead to questions that require you to find the answers.  Questions are natural for anyone who is interested in learning more. When you find the answer, you have another reason to follow up with the person so you can share the answer to their question.  All of these conversations are necessary to help you overcome the challenges with scaling in multifamily.

In a short amount of time, you will be recognized as someone who knows what they are doing.  Why? Because you had the courage to have the conversations and you took the time to find the answers.  All the while you built up your confidence and your reputation.

Now that you know what you are talking about, you can easily start talking with people you know less.  Ask them what they do. When they ask you what you do, let them know that you are a multifamily investor.

Remember this, if you don’t tell others what you do, who will.  If people do not know what you do, how will they make the decision to invest with you?

Network

Networking is one of the best ways to get to know others.  You cannot do this sitting by yourself behind your computer.  While you can do some initial networking over social media, eventually you have to meet face to face with others.  

You can join a local real estate investment association REIA, Facebook or a MeetUp Group.  If there are none in our area, start one. Again, you don’t have to be the expert. What you have to do is invest in your micro learning, and share this information with others.  

The more organic, authentic relations you can develop, the more success you will have.  Have conversations, be authentic and share the information you are learning with others.

Systems

Systems are key to developing your relationship database and overcoming the investor challenges with scaling in multifamily.  Keep it simple to begin with. Consider using Google Docs. Ultimately, you are doing all of this to develop some relationships with investors who are willing to invest with you.  To make certain they progress to the point of commitment, you need to track your conversations with them.

When you first meet them, make some notes.  Are they experienced real estate investors? What are they currently investing in?  Do they have some parameters that need to be met for them to invest? Do they have questions that you can research and get back to them with the answer?  The answers to these will be important when you are trying to take a deal down.

As you make notes, you will find some common points of interest that will help you gauge the progress of interest.  The quicker you set up a system, the faster you be able to recognize which prospects are able to commit and disqualify those who are not.  

Keep in mind, just because one is not able to commit today, does not mean they will be unable to commit to your next deal.  Follow up is key, so stay in touch.

Never Judge

Never judge people.  You never know who may be interested in your opportunity.  If you chose to not share your information, you may eliminate someone who is able to invest in your deal.  You never know who knows who, and may be looking for the deal you have.

Krista thought her Facebook friends would be the last to be interested in investing with her in real estate.  To her surprise, some of them had been interested in real estate, but did not know how to get into multifamily.  Her post about multifamily provided a friend they could contact to learn more from .

We all have so many opportunities to network and can feel overwhelmed.  If you are truly looking for some new investors, you have to be willing to share, and be willing to accept calls from strangers.  Yeah, a lot of these will not develop into anything, but you never know who they know.

 

For the dedicated, willing investor, sharing yourself is key to overcoming the challenges with scaling in multifamily.

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 Micro - Crime and the cost increase in your insurance if there is a significant crime rate in the neighborhood where your property is located.

 

The BIGGEST RISK Macro:  The next recession.

 

How to manage the risk:

Micro: Be aware of the crime statistics in the neighborhood and surrounding properties.  Are they better or worse than your property? These will affect your insurance rates. It is difficult to lower a crime rate in a neighborhood all by yourself.  

Macro: In order to be prepared for the next market correction, stress test your numbers.  Know where the rents were during the last correction. Do your numbers still work if you have to lower your rents?  Also, lock into long term interest rates. If the market changes, will you be able to continue to make your loan payments and ride out the correction?  Stay out of tertiary markets. Stay in primary markets where there will be demand for housing. If using a bridge loan, get the ability to exercise an extension so that you can complete your value add and get through the correction.  

For more go to

Website: www.sharplinequity.com

Email: krista@sharplineequity.com

Meetup: Multifamily Investing Unveiled

May 16, 2019

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 a 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.  

When to Hire an 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.  

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

May 9, 2019

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.com

Facebook Group:  Multifamily Investment Community

May 2, 2019

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:

https://www.reedgoossens.com/

Email: info@reedgoossens.com

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