MFH is the obvious choice when it comes to jumping into syndications because it is the shorted logical leap for a single family home investor.

Here are some other reasons:

1. We need more housing for class-C and class-B renters due to population increasing and rising interest rates
2. Inflation favor hard assets
3. We are no longer a buying nation we rent (think millennials)

   [This is the millennial version… cause they can’t seem to afford (or want) to own anything]

   

4. The government is trying their best to incentive investors – Follow the money people!
5. 2018 tax changes with bonus depreciation make it better for projects like large apartments to get better tax treatment than ever before via a cost segregation.
6. The country needs 4.6m new apartments by 2030 (Source). We need more class C and B housing. Our country is becoming more like Asian Countries where the is a bigger divide in the wealth gap and need for low-income communities.

Market Indicators:

1. Large employers or job growth
2. Population increasing
3. Rent increases
4. Occupancy/Vacancy stabilized

Typical business plan:

1. 60+ units or more to get economies of scale and to have dedicated staff on site
2. 1970-1980s Class B or C buildings
3. Utilize Fannie Mae or Freddie Mac Non-Recourse debt with up to 12-year loan terms
4. Buy right – rehab units with $2,000-8,000 per unit – reposition by improving operations and stabilizing rents for exit
5. Property cashflows day one after purchase
6. Re-brand (new signage and online presence)

Value-add:

1. Poor existing property management
2. Old tired units or leasing center
3. Outdated amenities
4.  Creative improvements using best practices and technology
5. Additional opportunity for extra income

Miscellaneous ideas for thought:

• 2010 to 2015 is the golden era of Multifamily. Many rents were going up 5-10% per year (average 2-3% in a good market).
• The (Global/National) markets go in cycles, the sub-markets (physical locations) go in cycles (see below)
• Asset Classes go in cycles but hopefully, you are investing with the pros who transcend the high-level norm.

Unit Mix Discussion

When looking at the unit mix profile take notice of the mix of studio/efficiency units and 1,2,3 bedrooms. This can throw off your rent per square foot metric which is important when comparing comps. A sudio/1 bedrooms will have higher rent per square foot amounts however the tenants will be more transient.

The 2/3/4 bedroom units will yield lower revenue per square foot but will attract more of a family type renter and improve the intangible community aspect.

Headwinds

MFH is great but you need to be aware of new Class A apartments being built to put downward pressure on pricing – Source MHN

MFE 2-6-19  – 2018’s Record Deal Volume Suggests Positive Trajectory for 2019 – “driven in large part by increased interest in the student housing sector, which accounted for 17% of all deal activity in the third quarter, compared with a consistent 4% over the past 13 years” – [I don’t like student housing as I am seeing an education bubble with all the lending. It’s crazy how dorms get renovated every few years]

MFE 2-6-19 -Freddie Mac Sets Multifamily Production Record – “$78 billion in total production bests the company’s prior record of $73.2 billion set in 2017. Overall, the company financed more than 860,000 rental units, more than 90% of which are considered affordable to low- and moderate-income families making 120% of area median income (AMI) and below.” – [More more more!!!]

Past performance is no indicator of future success. Many operators in Dallas 2012-2014 were able to double investors money in just a year or two – come to find out they only implemented 20% of the rehab. It was mostly market appreciation which is out of our control and can bail out a bad operator.

Dallas Growth 2010-2018 +projections Co-star 19.02.7

Multifamily Investing Lingo

Real Estate terms:

• Pretty simple if you understand the way to utilize them and how they play together in real estate transactions
• Applies a lot in larger transactions (multifamily), but can be applied as well in smaller (single family) transactions

Income (types):

• Different ways you can make money on a property
  • Rent – not what is on the contract, but what the market would yield for the space that you have
  • Other Income
    • Pet Fees
    • Laundry
    • Reserve Parking
    • Late Fees

Gross Market Rent:

• Sum of all the different types of income you can earn from the property

Deductions that can be taken from the Income types (can also be called Efficiency deductions):

(Loss to) Lease:

• Loss of income based on the market value of the property minus the amount you are renting the property for
  • Example: You have a property you are renting out at $750/month. The current market value of the property is actually $825/month (based on listings in Craigslist, etc.) You have a $75 Loss to Lease per month on that property
  • This is money that will never be gained, as the market changes so much
  • This has to be factored in when looking at properties, and you should constantly monitor the market you’re in to see what kind of Loss to Lease you’re taking on

(Loss to) Vacancy:

• Especially on bigger properties – you will never have it leased all the time
• Normally, there is a week or two of vacancy, sometimes more (up to a month or even longer) between tenants
• A lot of people like to estimate 5% loss due to vacancy, but should be considered more scientifically than just stating a number. For example, if it’s a single family home, you’ll want to factor in at least one month’s rent, which would be equivalent to 8%. If it’s a duplex you’ll want to factor in one month’s rent for your most expensive unit. The more units you have, the more you can expect that vacancy rate to go down. But be conservative when you’re writing up a deal – the smaller the deal, the higher your vacancy rate. So start at 10 if it’s a one or two unit deal, and then drop accordingly.

(Loss to) Collections:

• Isn’t just money you will be getting back from tenants who are late on payments
• Includes loss of money from tenants who move out and are not able to pay their balance
• You need to factor it on your own in the market you are in and what the economy you are dealing in is
  • Example: If you are dealing in C or D type neighborhood, you will have to factor in [Loss to] Collections. If you’re in a B or A type neighborhood, then you can lower Collections down to zero and assume the loss will just come out of Vacancy

Effective Gross Income (EGI):

• Gross Market Rent minus whatever loss will come out during operations (Efficiency deductions)
• Real money that comes in through the property
• From your EGI, you will still need to deduct your expenses (listed below)

Expenses:

• Insurance
• Professional Services – Leasing commissions and/or other professional services you bring in (legal, accounting fees, etc.). If you’re an LLC, you will need to put in your budget the cost (tax) for the LLC every year ($400 – $500), IRS
• Regular Maintenance (landscaping, snow removal, heater service, pest control, touch-ups and minor renovations on unit before tenant moves in, fixes like clogged-up toilets, etc.)
  • Rule of thumb for Regular Maintenance: Brokers will place it 3% of your EGI, but is more effective to think it as dollars per unit.
  • Example: If property is something you bought, did a full renovation on, put tenants in, and then got it refinanced (BRRRR – Buy Rehab Rent Refinance Repeat), your maintenance should be lower because you’ve done everything and should be able to call for a warranty call at the very beginning if it’s something the contractor who did the work on your property didn’t do. If you’re very good at turning these properties over, then you should have very little maintenance going in
  • If it’s a newer rental, could be anywhere from $300 – $400 every year
  • If it’s something you’re inheriting (inheriting maintenance issues as property already has current tenants and will need to deal with it as you go), you will want to go with higher maintenance numbers: $700 – $900 per unit per year
  • Will really depend on how much you project it to be (check out the property thoroughly, and/or if there are existing tenants, ask them what are the maintenance issues) as it can really kill or make you a lot of money on your deal.

• Property Management Fee – 6%
  • Property Management means looking after the property and make sure operations is running smoothly
  • If you are managing the property, you will want to put that in your own pocket

• Asset Management Fee – 2%
  • If you are hiring a Property Manager, you will also need to hire an Asset Manager, or you can be the Asset Manager and that money will also go into your own pocket
  • Fee of managing the Property Manager
  • Asset Manager will be the one to pay mortgage, ensure real estate taxes are being paid, monitor the markets and ensure that the right rents are being charged, will also have veto power to veto work orders that might come up that you don’t want to have done because they’re too expensive, etc.
  • Asset Manager is also there to look at the real value of return on the asset

• Utilities
  • Everything from heat, water, sewer, even CCTV systems, phone lines
  • You will want to look at the prior owner’s expenses for utilities were (around 18 months’ worth), or look to see what the market or other people are paying
  • Make a good guesstimate on what your utility projections are going to be and go from there

• Real Estate Taxes

(Above the) Line:

• Term sometimes used by brokers when grouping Gross Market Rent, Efficiency deductions, EGI and Expenses (everything that gets deducted out to determine the profitability of the deal)
• Note: I don’t really talk in terms of Cap rates because you can manipulate the “above the line” assumptions to get whatever you want

Net Operating Income (NOI):

• EGI minus all the expenses that can be deducted from it
• Does not include mortgage payments or Debt Service (money you have to borrow to buy the property)

Classes:

Class A

• Built in last decade and are more luxury
• Struggle in recessions as white-collar workers drop back to Class B Assets
• People are jogging around at night

Class B

Capital Expenditures (Cap Ex):

• Also usually referred to as Below the Line expenditure but is also sometimes considered as Above the Line, depending on whether you are selling or buying a property
• Long-term improvements to your building/ property
• Major renovations to bring unit/ property up to market standard (replacing the roof, replacing the furnace, full renovation on a unit)
• Any expense that will add long-term value to your building
• You will need to set aside money for this (Cap Ex Reserve)
• Not taxable as it is just money you are earning but will be setting aside in a savings account

CAP Rate:

• NOI divided by the price you’re buying the property for
• Determines the money that the property will give you
• Example:
  • If NOI is $100k and the price of the property was $1 million, then CAP Rate would be 10%

• Intended to be used when valuing buildings (especially commercial real estate)

Cash Flow (CF):

• NOI minus Debt Service
• Also determines your Return on Investment (ROI) on the property

Debt Services Covered Ratio (DSCR):

• Looked at by the banks
• How many times the deal can cover the Debt Service
• Calculation: NOI divided by debt service
• Most banks will want to see a DSCR above 1.25%, you will want to see a DSCR of above 1.5% to get a higher ROI

Green Credits:

• Breaks in your interest rates for employing energy saving means
• Full report

Reports for your digest:

18.11.15 – 3Q18_US_Multifamily_Capital_Markets_Report

18.11.18 – Yardi Monthy Report