Introduction to Multifamily Real Estate Investing

What's Coming In This Course?

1. What Is Multifamily?

2. Types of Multifamily Properties

3. Multifamily Classifications

4. Common Terms You Need to Know

5. Single Family vs. Multifamily

6. How To Get Started In Multifamily

7. Top 4 Ways To Invest In Multifamily

8. Deal Structures

9. The Closing Process

10. Next Steps

What is Multifamily?

Multifamily Property

Sometimes referred to as an apartment complex, is a type of residential housing with 5 or more units under one roof or several buildings within one complex.​

Single-Family Property

Is a type of residential housing with 4 units or less. For lending purposes, a house is categorized the same as a four-plex.

Types Of Multifamily Properties

Apartment Complex

• The traditional version of multifamily real estate. ​

• Over 37% of American live in apartments (according to NMHC) which is why they are a staple to the American economy.​

• They provide affordable housing for the working class for all age ranges. ​

• Convenient living arrangements without a large deposit, property taxes, repairs costs, maintenance, etc.

Student Housing

Student Housing refers to a subset of the residential real estate asset class. It is an apartment community for those in higher education and has several distinguishing characteristics such as:

• Ability to rent on a per bed basis​

• Roommate matching services​

• Flexible term on leases to correspond to the Academic Calendar​

• Fully furnished units​

• Student Amenities (study areas, bike-share)​

• Student Life Programming​

• Students employed as resident advisors

Mobile Home Parks

• Is a prebuilt home designed for semi-permanent use as a residence or vacation home. ​

• Typically larger than a trailer home but less permanent than a manufactured home. ​

• Tenants rent the space and are usually provided basic utilities such as water, sewer, electricity, or natural gas.​

• More popular amongst long-term, blue collar workers in lower socio-economic areas.

Senior Living

• Housing that is suitable for the needs of an aging population. ​

• It ranges from independent living to full 24-hour care for seniors. ​

• In senior housing there is an emphasis on safety, accessibility, adaptability, and longevity that many conventional housing options may lack.​

• Many seniors enjoy the social aspect of people their own age rather than a traditional apartment complex.

Multifamily Properties (A,B,C,D)

Class A

• Luxury living and high-class apartments usually less than 10 years old.

• They are often new, upscale apartment buildings with incredible amenities.

• Rents are well above average and located in desirable, high socio-economic areas.

• White-collar workers live in them and are usually renters by choice.

Class B

• Usually 10 to 25 years old.

• They are generally well maintained and have a middle-class resident base of both white and blue-collar workers.

• Above average location with a moderate amount of preferred amenities.

• Some are renters by choice, and others by necessity.

Class C

• Properties were built within the last 25 to 40 years.

• They generally have blue-collar and low/moderate income residents, and the rents are typically below market.

• This is where you’ll find many residents that are renters “for life.”

• On the other hand, some of their residents are just starting out renting. This means that as they get better jobs, they will work their way up the rental scale to A and B class properties.

Class D

• Properties are where you’ll sometimes find many Section 8 housing (government-subsidized housing) residents.

• They are generally positioned in lower socio-economic areas.

• There are typically zero amenities.

• Things you’ll find at Class D apartments include signs of abandonment, high crime, boarded up windows/doors, and generally an unsafe area.

Common Terms In Multifamily Real Estate

Syndication

Is a business partnership where investors monies are pulled together to execute a common business plan.​

Sponsor/Syndicator

A person or group that finds/funds/organizes the acquisition of a commercial property/business venture and helps develop and implement a business plan for the common interest of all the passive investors.

Passive Investor

a person that receives income benefits without actively participating in the act of trade or business. In some scenarios, passive investors may receive tax benefits.

Entity Structure

A legally created structure known as a corporation, partnership, LLC, or trust to protect the owner’s personal assets. This creates a division between personal versus business assets.

Fannie/Freddie

Created by Congress to handle a major role in the nation’s finance system for housing. They provide mortgage backed securities which help create a stable structure for the housing economy.

Capitalization Rate (Cap Rate)

A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.

Cap Rate = (NOI) / (Purchase Price)​

• As a buyer you prefer a higher cap rate, whereas when you’re a seller you prefer a lower cap rate. ​

• A higher cap rate implies a lower price, a lower cap rate implies a higher price.​

Cash Flow

Cash generated from the operations of a company, generally defined as revenues less all operating expenses, including the mortgage payment and taxes.​

Cash-on-Cash Return (COC)

A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested.​

Annual Dollar Income Return / Total Equity Invested = Cash-on-Cash

Debt Service Coverage Ratio (DSCR)

It is the multiples of cash flow available to meet annual interest and principal payments on debt. This ratio should ideally be over 1.25, which would mean that the property is generating enough income to pay its debt obligations and an additional 25%.​

Total Return

The amount of net income returned as a percentage of shareholders equity.​

Investor Average Annual Return (excluding disposition)

The average return per year during the investment hold.​

Investor Average Annual Return (including disposition)

The average return per year including profits from disposition. This calculation does not include the return of invested capital.​

Internal Rate of Return (IRR)

The rate of return that would make the present value of future cash flows plus the final market value of an investment opportunity equal the current market price of the investment or opportunity. The higher a project’s internal rate of return, the more desirable it is to undertake the project.​

Net proceeds

The proceeds you get upon the sale of the property. What you net after all closing costs, splits, etc.

Fees in Multifamily Real Estate Transactions

Asset Management Fee

A fee syndicators charge for overseeing operations and executing the business plan by closely working with the property management company. Usually ranging between 1.5-2% of the gross collected revenue of the property’s income. ​

Acquisition Fee

A fee syndicators charge for putting together a deal and taking on the upfront risk of expenses. A normal acquisition fee will range from 1-5% of the purchase price of the property. ​

Construction Management Fee

That fee typically equates to about 10-15% of the entire construction cost. Therefore, if you take on a large construction project that costs a grand total of $100,000, then you should expect to pay the manager around $10,000 to $15,000 for his or her services.​

Disposition Fee

This is paid to the sponsor to compensate for the costs related to selling an asset. Average 1-2% of sales price.​

Refinance Fee

this fee is charged towards the end of a deal. The sponsor may earn a refinance fee as compensation for their efforts in obtaining refinancing on the property. It’s usually 0.5-1.5% of the new loan amount and is earned on the origination date of the new loan.​

Loan Guarantor Fee

for loans that require some sort of personal guarantee, this fee compensates the guarantor of the loan (regardless if they are the sponsor) between 1-3% of the loan.

Single Family VS Multifamily

Reasons Why You Should Invest in Single Family​

• Lower barriers to entry means less capital required to purchase​

• Usually more deal flow and inventory​

• Multiple exit strategies: rental, flip or BRRR​

Reasons to Avoid Investing in Single Family​

• Hard to scale​

• Expensive and inefficient management​

• Volatile asset class with market uncertainty affecting value dramatically

Reasons Why You Should Invest in Multifamily

• Can be completely passive​

• Investing with top operators​

• Less risk compared to single family ​

• The more units the better​

• Tax benefits​

• Diversification and risk is spread out

Reasons to Avoid Investing in Multifamily

• Less control ​

• Less liquid investment​

• Longer hold periods usually

Ways You Can Invest In Multifamily

Invest Passively in Someone’s Deal

• Little time but substantial tax benefits

Buy a Deal with Your Own Money

• Complete control but assumes all risk

Partner With Someone Doing a Deal

• A quicker way to get into your first deal with an experienced operator

Syndicate Your Own Deal

• More control and bigger deals

Real Estate Investment Trust (REIT)

• More liquid than investing in a syndication

Defining Partners

GP Responsibilities:

Ongoing management of property management team, investor relations, reporting, asset management, and monitoring deals.

LP Responsibilities:

Vet sponsors track record, underwrite deal, study market, due diligence, invest, monitor passive investments, and communication with the deal sponsor.

The Closing Process

How Much Money Is Required To Invest In Multifamily?

Buy a Deal with Your Own Money

• You must provide all funding

Invest Passively in Someone’s Deal

• $50-100K+ per deal

Syndicate Your OwnDeal

• 5-10% of the equity raise + earnest money + due diligence money + lender fees + attorney fees

Typical Deal Structures

Straight Split:

Net worth split of profits and net proceeds, i.e. 80% to investors and 20% to sponsors

Preferred Return:

6-10% preferred return to LPs based on invested capital.

Waterfall Structure:

8% preferred return, 70/30 split until 18% IRR, then 50/50 split after 18% IRR.

The Closing Process – Financing

Financing:

Debt is required in almost every situation for buying large multifamily deals. Two of the most popular types of loans are agency and bridge loans.

Types of Loans Available for Multifamily:

• Fannie Mae

  • Can finance rehab

  • Pre-pay penalties

  • Supplemental loans

• Freddie Mac

  • Can’t finance rehab

  • Pre-pay penalties

  • Supplemental loans

• Bridge loans

  • Short Term Loans

  • Generally higher interest rates

  • Great tool for deep value add deals

The Closing Process – Insurance

Insurance

As a deal sponsor and passive investor, it’s important to know what coverage is needed for your investment

Things to Look for Insuring a Deal:

• Lender requirements: usually the lender dictates what insurance would be needed.

• Know what type of deductibles and coverage are available.

• Is flood (or special) insurance needed?

The Closing Process – Docs & Legal

Letter of Intent (LOI):

A non-binding document between the seller and buyer to initiate process.

Purchase & Sale Agreement (PSA):

Binding and legal contract between two parties that obligates a transaction between the buyer and the seller. The agreement finalizes the terms and agreements of the sale, and it is the culmination of negotiation between the buyer and the seller.

506(b) Offering:

Can accept accredited and non-accredited investors. Must have a substantive pre-existing relationship with investors.

506(c) Offering:

Accredited investors only. Can advertise to the general public, online, etc.

The Closing Process – Legal

Private Placement Memorandum (PPM):

A legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document.

Subscription Agreement:

An investor’s application to join a limited partnership. The company agrees to sell a certain number of shares at a specific price, and in return, the subscriber promises to buy the shares at the preset price.

Operating Agreement:

A document used by LLC’s that outlines the financial and functional decisions including rules and regulations.

The Closing Process – Due Diligence & Contractor

Due Diligence:

Checking calculations, reviewing documents, procuring insurance, walking the property, etc.

Steps in the Due Diligence Process:

• Underwriting the deal and visit the site

• Exterior inspections and unit walks

• Meeting with current and future management companies

• Lease audit

• Market Survey

General Contractor & Rehab:

• Interior unit walks & Exterior inspections

• Estimating and finalizing renovation budget

• Clear execution for renovation plan

The Post Closing Process

Post Closing – Property Management

Property Management Responsibilities:

• Handles most items during the due diligence process

• Vetting current property staff

• Lease audits

• Coordinating unit inspections for buyer and seller

• Screening prospective tenants

• Enforcing leases

• Transferring all previous deposits

Post Closing – Asset Management

Asset Management Responsibilities:

• Managing the Property Manager

• Investor Communications

• Working with your Lender on business plan and rehab

• Determining distributions

• Tracking progress on business plan

• Construction management

• Schedule K-1’s

• Coordinate cost segregation

• Protest property taxes

Getting Started!

How to Get Started in Multifamily?​

Identify what role you want to play in multifamily​

• Deal sponsor, passive investor, or both

Find people with the results you want​

• Set meetings with sponsors and passive investors​

• Go to meetups and conferences​

• Read books and watch videos on investing​

Take action​

• Invest in your first deal​

• Find a mentor​

• Join a mentorship program