Investing in Multifamily Income Property – Focusing on the Fundamentals

Getting involved in multifamily real estate investment can be very lucrative and rewarding, but it’s easy to make costly mistakes by getting caught up in the excitement of chasing real estate riches. For now, forget all the stories you’ve read about buying, fixing and flipping for huge profits. Focusing on some basic fundamentals could save you a lot of time and money in the long run.

To begin with, meeting with a bank or mortgage broker is a must. This is the first step I recommend to everyone I consult with. Unless you know how much you can afford and what the costs associated with financing the purchase will be, you can’t accurately analyze any real estate investment. Local and regional banks are a good place to start as many are still actively lending even in the current constrained economic environment. Freddie Mac has several programs available for multifamily lending and recently set a 2008 record in volume for its multifamily whole loan and bond guarantee business, up 10% from 2007.

If you plan on finding the best buying opportunities in your market, I would suggest working with a local real estate agent. The relationships and networks the top agents in your market have established will be difficult for you to replicate by sorting through internet listings on a part time basis. Take advantage of their experience, knowledge and professional networks, specifically those related to finance, law, property inspection, and construction.

When choosing to work with an agent, make sure to find someone who specializes in buying and selling investment property whether it’s residential or commercial. You want an agent who understands how to evaluate different types of income property for two reasons; one, this will increase the odds that you make a good buy and two; you won’t waste your time looking at property that does not meet your investment criteria.

Now that you are pre-qualified and have a professional working for you, the fun is ready to begin. Clearly define your buying criteria and investment strategy. If you don’t have specific buying criteria or an investment strategy, work with a trusted professional to help determine what it is you are trying to achieve through this investment.

Maybe you are looking for a small building where you plan to live in one unit and rent the others to help cover the mortgage. Or maybe you want to buy strictly on a cash flow basis and demand a specific return. Whatever it is, spell it out and focus on finding it. You may eventually determine that you don’t want to live in the same building as your tenants or that the neighborhood you would like to buy in is out of your price range. It’s OK to adjust your strategy as you go. The important thing is to stay focused on your goals.

When it comes to analyzing income property, there are several common methods to utilize. Real estate markets are generally inefficient and each approach has distinct advantages and disadvantages, so it’s important to use multiple approaches when valuing a real estate asset. You will want to become familiar with how to determine the Capitalization Rate (CAP rate), the Gross Rent Multiplier (GRM) and how to extrapolate information for use in the Sales Comparison Approach. Many investors also prefer to determine the Cash on Cash return as well as the Internal Rate of Return for the investment period. Generally, the larger the property, the more you need to drill down through the numbers and apply different approaches.

Depending on the type and size of the property, the expenses could play a significant part in the evaluation process. Familiarize yourself with common expenses associated with the specific property type you are interested in. Sellers will often times understate expenses to make the asset appear more profitable. Your agent should be able to explain to you what expenses are typical. Expenses that are often understated or completely overlooked by many sellers include those for management, maintenance, leasing commissions, cleaning, decorating, supplies, landscaping, accounting and legal.

Remember, even if you plan to be an owner operator of the property, you still need to pay yourself for the work you do. Not necessarily in cash, but in the overall return on the investment. If you are managing the property and handling several maintenance and janitorial tasks and operating at a break even point, a slight gain or even a loss, then you need to consider that your money could provide a better return in other investment vehicles that don’t require additional work on your part.

Now that you’ve got some of the basic tools you’ll need to lay the fundamental ground work for successful investing in multifamily income property, take the time to read up on management, tenant and property maintenance topics. This is the unglamorous side of investing in real estate. If that doesn’t scare you away, then it might just be time for you to jump in and get started on the road to real estate riches.

Caring For A Vacant Building

In a sense, a building is a living, breathing organism. Systems go on and off, regular maintenance is required, and security and protection are a must. It would not be wise to completely abandon the building, if for no other reason than creating a good impression with potential buyers. The “care and feeding” of your property is essential, whether by a member of your staff (preferably the person who handled the maintenance while you occupied the building) or a professional manager. When we are hired as a property manager for a vacant building, we use extensive checklists.

We start with the exterior, and probably, at least, a once a week inspection: What is the status of the landscaping and irrigation system? Is there illegally dumped debris, or paper litter? We are also looking for problems like pest control, graffiti, potholes and unauthorized trucks. In the winter, we recommend snow plowing, at a minimum to allow full access to the building by fire trucks. In the spring and summer, grass needs to be cut and beds cleaned.

In general, you want to make the building look as occupied as possible. We highly recommend motion-detecting exterior lighting, as well as internet cameras (which are very reasonably priced today), both of which will discourage illegal dumping and abandoned vehicles, a very major headache for property managers today! If feasible, chains or fences at ingress and egress points of the property will also discourage this activity.

Moving to the interior, we will be inspecting for secure doors and windows are, burglar alarm keypads work, fire sprinkler requirements are met, and that HVAC equipment is maintained. We will also be checking for miscellaneous repairs that might be needed, interior lights, time-clock settings, and plumbing problems. And we also want to make sure that there are no roof leaks, stained ceiling tiles, or birds or animals in the building. We do not recommend “winterizing” a building and turning off the heat (especially with a sprinklered building, which is probably illegal anyway.) Building systems and construction are not designed for temperatures below freezing, so plan on maintaining at least minimum heat. We also suggest leaving a row of lights on in the warehouse, and some lights in the office area, once again to discourage break-ins or other illegal activity.

Some our other functions are to act as a 24/7 response (often behind security company separately hired by our client) for any emergencies at the building, as well as provide regular written reports on the property and actions taken. If requested by our client we will provide three bids from reputable contractors for any work required in excess of a specified minimum. We always obtain a written work-order from the client before proceeding with any work at the property, except in cases of time-of-the-essence emergency.

In summary, you must protect this very valuable asset. The cost of protection will be minuscule compared to the potential cost of neglect.

Building Homes for the Elderly and Disabled

Present trends show an aging Australian population. Also, there’s a push by government authorities to have elderly persons remain in their own homes for longer and thus decrease the pressure on nursing homes and hospitals. It is wise, for that reason, to look at including particular features in houses that will enable older persons to have better and safer use of their homes.

As we get older we get less agile and much less mobile. Even easy tasks like turning on a tap can be challenging. In the event you expect to be living in the home you are building throughout a period of your life when such disabilities are likely to creep up on you, then it is useful to make specific inclusions from the outset. There will undoubtedly be a financial saving if you have pre-empted your requirements and can stay in your house longer without the want for main and high priced modifications. Even in case you do not intend to spend your old age in the house it’s still advisable to make it ‘aged’ friendly since this might be an added selling point when the time comes to move. For sale signs are likely to read ‘Wide doorways and hallways, remote control fittings, easy-access bathrooms, quick grip tap and door handles, low maintenance building and gardens’. These properties will sell for a higher price.

If there will probably be a disabled person living in or visiting your home you may wish to use features which will make your home user friendly for that person.

The kind of disability will of course determine the extent of features you require. It is wise to discuss the particular wants of the disabled individual with health professionals and to acquire facts about items you’ll be able to install in your property.

House features to assist the elderly and disabled:

Single level home with no step-ups or step-downs.

Flat or quite gently graded yard and driveway.

A driveway that’s wide and simple to reverse out of.

Door handles and locks which can easily be reached.

Tap handles that can be easily gripped and which have no sharp edges. Some star-shaped tap handles are pretty dangerous and ought to not be used in shower areas where they could cause injury. Striking one’s head whilst picking up soap that has fallen on the floor is not uncommon. Flick-mixer taps may be hard to adjust for water volume and temperature. Longer, smooth operating levers are easiest to adjust.

Little rooms, for example toilets, bathrooms and shower spaces, need to be big enough so that turning or maneuvering in them is easy. Towel racks and clothes hooks make a bathroom extra convenient to use.

Window locks that will be easily reached. The latch and lock on the window over the kitchen sink and bath tub must be especially low as they have to be reached for over obstacles.

Cupboards that are accessible. Standing on a chair to reach the top shelf can end up in disaster for an older individual.

Light switches and power points which are not too high or too low.

Two-way light switches in passageways and significant rooms. You ought to not have to cross a dark room and risk tripping up just to turn off a light.

Grab-rails inside the bathroom, shower, toilet and anywhere there is a step.

Fold-down shower seats to enable the individual to sit whilst washing.

No drop to the shower recess. A 30mm step-down to the shower is sufficient.

A hand-held shower kit will be extremely helpful.

Bench heights which are appropriate for you. Tall people will have a hard time bending over low benches while high benches are difficult for short people to work at. Cooking appliances that have easy-to-read dials and easy-to-turn knobs.

Floor Coverings that are easy on the feet. Ceramic tiles will be cold in winter and not very good for people who suffer arthritic troubles whilst carpets will need be vacuumed frequently to minimise asthma and allergy troubles. Timber flooring, vinyl or cork tiles are alternatives.

Ornate cornices and picture rails should be omitted. The older an individual gets, the much less able they will be to do household chores like dusting.

The house should be built from materials that require minimum maintenance, e.g. brick, glazed roof tiles, aluminium frames and Colorbond gutters. Roof gables, exposed eaves, timber posts and rendered walls will need ongoing maintenance which, when you can’t do it yourself, will cost you cash.

People with back complications will appreciate semi-recessed hand basins inside the bathroom. These will allow the user to come in close with bent knees under the bowl and not need to lean forward creating anxiety on the lower back.

Suitable features for wheelchair access consist of:

A minimum pathway width of 1m with a non-slip surface. Access-ways should be well lit and sheltered from the weather at the front entry door.

A minimum driveway width of 4m to enable the wheelchair to come alongside the motor vehicle. The driveway gradient really should be no far more than 1:10. The section on which the vehicle is parked on needs to be flat.

The garage or carport needs to have an entry height clearance of 2.5m to allow a car-top wheelchair hoist.

There must be NO obstacles to negotiate. Weather strips at doorways and doormats will need to be 10mm or much less in height.

All doorways should be at least 820mm wide.

The entry ought to have a circulation region of 1.6m by 1.6m.