Owning one property is manageable for most investors. One problem, one unique solution. However, for true wealth, multiple units are the goal. To accomplish this without going crazy, or broke, you need systems for success.
Systems provide direction, a playbook, for what to do when you or your staff face a situation. Knowing what to do, how to do it and who to call when a crisis shows up, gives you the confidence to have a predictable outcome and freedom to focus on other matters like growth.
We spoke with Matt Faircloth from The Derosa Group about systems for success. Matt is an investor, flipper and multifamily syndicator. In order to grow, he developed systems that are written in pencil because he recognizes that if a better solution is recognized, he wants to use it.
System for Success in Property Acquisition:
1) The first step is to do a Market Analysis. If it is your local market, it is easy to know the different areas of town and their reputation.
If you are not familiar with the area, you need to find the answers to the things you cannot change:
- Crime statistics: the type and frequency of crime committed in the neighborhood.
- Local area median income: Can your potential renters afford the rent you need to get?
- Affordability index: Are there enough potential residents that can afford the rents you want to charge?
- What are the market rents for similar units in the area?
Additionally, answers to these questions will tell you if the area is on the upswing:
- Is the population growing? Is there growing demand for housing?
- What is the unemployment and employment outlook?
- How many major employers are there in the area?
2) Evaluate the Property:
If the area checks out, it’s time to evaluate the property:
Do the numbers work? This is where you go line by line with the information available in the offer. (Click here to get a FREE DEAL WORKBOOK)
- Actual Rents: it is good to know the market, but start with actual rents.
- All Expenses: Line by line, what will it cost you to operate the property?
If the numbers work, it's time to do the physical inspection.
3) Physical inspection: The key to the inspection, don’t start inside the units. Start with the systems. What is lurking that is going to cost you money:
- Roof System?
- Electrical system?
- Heating System?
If you have a major expense and the seller is not willing to work on the price, move on.
Bonus: If you can, ask tenants you see what do they think of the property.
Then look in the units. What can you do to add value?
- Remember, if there is a tenant in the unit paying close to market rent, the unit is fine!
- What is your competition doing? You may need to do some undercover work to see what are your potential tenants looking at when considering renting your property?
- What is the benefit to doing small improvements?
- How attractive is the property, what can you do for minimal to approve the curb appeal?
If everything looks good, you are ready to make an offer.
4) Make the offer
- Use a Letter of Intent. This allows you to present your offer without the contract back and forth. Once you have an agreement on the the basics, you can go to the contract.
- Include with your Letter of Intent a list of the issues you found during your inspection that will need to be overcome. If the roof has five years left, identify the cost of a new roof in five years.
- Prove to the seller that you can close. A letter from your lender with a commitment to lend really helps.
Now the clock is ticking.
5) Due Diligence: You have thirty days to confirm everything you believe to be true now.
- Financing: Where are you getting your funds?
- Bring in your team to verify what you think is the case:
- Contractors for roof, heating, electrical, plumbing.
- Get a copy of all the contracts that stay with the property:
- Certificate of occupancy
Usually there will be something that comes up. This is your chance to address the seller to renegotiate if needed. If everything comes together, you will be the owner of a property.
6) Operation: Now you need systems that cover the day to day operation including:
- Management: What are the daily, weekly and monthly tasks management needs to perform?
- Property Management walk through frequency
- Bringing the property up to market rents:
- Get to know the property and the residents personally. Let them know you care.
- If you have any bad apples, this is the time to identify and get them to move along.
- Tenants: What is your tenant selection process? What are the minimum standards?
- Having unit standards will simplify the turn process when tenants move out, including:
- Color of paint
- Floor coverings
7) Refinance: If you are in a syndicate, this is the time to pay your investors.
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