Intro to the Acquisition Process

Symon He
A free video tutorial from Symon He
Author | Investor | Entrepreneur | Stanford MBA
4.4 instructor rating • 12 courses • 219,937 students

Lecture description

What part of the investment process make up the acquisitions portion?  What will be cover in this section on acquisitions?

Learn more from the full course

How to Analyze Multifamily Investment Opportunities

Learn professional techniques and use investment-grade models to analyze multifamily investment deals

09:48:39 of on-demand video • Updated July 2020

  • Confidently evaluate multifamily investment opportunities
  • Identify and address key investment considerations for multifamily deals
  • Conduct proper market analysis for multifamily deals
  • Conduct proper financial analysis for multifamily deals
  • Understand and use key multifamily investment metrics
English [Auto] Hey welcome to Section 6 now in this section we're going to talk about the acquisition process and where the analysis portion kind of fits in. But we are also going to go over how do you go from looking at the right market or identifying market and going all the way to identifying your property. Now once you identify a property that you have an interest then where do you go from there. Right so we're going to talk about the Elouise process. We're going to talk a lot about the entire acquisitions. So let's get started. All right let's first review the investment process. Now for those of you coming from my other courses this should look familiar to you. All things equal the investment process for making real estate investment for commercial real estate for multi-family is going to look something like this you have originations where you're going to source your deal and he got to run your analysis right which is the bulk of this course we're talking about how do we analyze the multifamily deal and then the due diligence to make sure that you are actually using the right information that your assumptions that you use to make your analysis are actually valid that you are getting what you think you're getting. Right. And then there's closing and financing to close the deal and if there's any rehabbing instruction that's what will happen next after closing. Right. And then there's some stabilization in the multifamily that I'd be leasing the property up to market levels and maybe raising rents to market levels getting to the point where it's Stavely making recurring cash that it's able to make. And then at some point in the future there may be an exit when you sell it. Right. So this here that acquisition process whereas the acquisition process through the acquisition process is from initially getting the potential deal to doing the analysis doing the due diligence and in closing all of this from the start to the closing of it would be considered part of acquisitions. So this section we're going to be talking about the considerations that fit into this area here. So first before anything else we got to know what you're looking for in terms of multi-family rent. So how do you go about kind of narrowing it down first before we start looking at actual properties while you want to see and decide what market you want to be in the way what region what city what neighborhood you want to start from the top down because you're not just going to be investing in a property you have a brand new completely recently built you know super beautiful high grade materials purring community that was built. But if it's in a bad area it's an area that doesn't have jobs in the area that has horrible weather it's downwind from a chilly factory. You're probably not going to be investing in that. So you want to decide you want to find the right market for you first. Right. So once you able to identify the market that you want to be in the next step is to decide on the size of the deal that you want to be able to invest and that you could invest in. Right because it deciding on the size of the project how many units and the price of it you know that ultimately determines how much money you've got to put in rates how much money you have that you want to be able to put in that you can raise is going to determine what you can look for. So the size of the deal that you can look for in those markets and then the class of the property. So something that is brand spanking new requires very little work. Once you buy it. Right. But it might be more expensive and your returns are going to be lower because there's less risk involved compared to buying something that is older 20 30 years old that may require some work but it could potentially give you better return potential. Right. So does signing on the class of the property which were going to get into a little bit more will tell you about the amount of work the amount of risk that you can expect and ultimately the amount of return that you can expect to return from your investment. Once you determine that you can narrow down your search rate you can narrow it down by age by the size of it. And in the market in the city and neighborhood that you're looking at so then it presents fewer things for you look at you can find the potentials right. The next step then is to make sure it pencils it's a quote unquote term that basically says it fulfills your analysis requirement analyzes Well it gives you the analysis that you're looking for. Right. That is based on what is given to you based on your research of the area based on the analysis you did using the financials that are given it looks like a good investment. So then then you go and make offers on it interest and ultimately do your due diligence. And if it still checks out you close on those deal that deal and able to acquire that property. So you want to start from the top down working your way all the way down to finding it so finding your market well is basically you need to pick a target market first before you can actually start looking properly. Right. And how do you go about deciding what target markets will you want to target markets that you feel confident about and during your investment timeline you're going to be investing for 30 years. You better like what you believe will happen to the area over that time period. Right. If your belief is that the area is going to see some major economic recessions in you know is based on manufacturing jobs that have pretty much moved and are continuing to move overseas or disappear. And there's no other industries coming to replace it. Well that's not a good place for you to look. Right. And it's got to be a place where the population and demographic trends suggest that there is some long term growth in demand for rental units. Right. And also if there's support from you know growing industries with a good long term horizon you wouldn't bet on an area that's relying on a dying and like we talked about is that has huge implications for jobs that has implications for the long term growth of area. All right so that's in terms of finding the area from the top down. You want to find a market or area where you believe in its long term potential for growth. All right. So then the size of the deal. The second thing you know one of the other things were time once you kind of narrowed down the right side of the deal was turned to how much capital you have and how much capital you want to put in a particular deal. Right. And also how much debt can you raise. So if you have access to a lender you have good relationship with you know you can get off of really high loan to value which we're talking about then you can access more deals because you have access to more funds even more so if you have access to outside capital that you can raise from other investors that could allow you to actually invests in bigger deals or more deals in a particular market. Right. And also how big of a deal should you do next that determines the size of the deal. But if you're if you've been investing in single family homes and you want to move into multifamily you've managed Foleo of you know a handful of single family homes. You don't go from that to trying to raise funds and do a 1000 unit apartment community. Right. You want to move into a deal that that makes sense that you can handle that can help be a stepping stone to the next level. You don't just make that big jump. So think about a size of a deal that actually makes sense that you can learn from your first time getting into multi-family. You may want to do something that's under 50 units to start with. All right. We talked a little bit about property class. So let me explain a little bit more about what that means. OK. If we look at a chart that measures you know on the horizontal axis that measures potential return. Okay. And the further out rate the higher the potential return from the investment and the vertical axis we're looking at risk and the skill needed to realize that return we can see the properties in terms of the class fall in like this arena where you know on the low end here this low and the high high rates is low and high potential returns on the horizontal axis low and high risk or skills needed to realize that. Okay. Now class A properties are in the fall in this category. Class properties are basically new they're fully lease there's not much to do there in you know pretty much the best locations is very little maintenance that require a has you know high income white collar tenants with great credit. Basically it's super stable in markets that are very popular which means there's a lot of people that are going to be looking to own this kind of property and you're not going to be able to get a really high return. These are tend to be investments for protection against inflation and it's not for the very risk averse. Right. So Class properties low potential return. They tend to trade a very very low cap rates and they require less risk in a lot less skill involved. Right. You basically have to be able to come up with the money to pay for it. Now class B properties you know only typically have been built within the last 20 years they're not super old you know they have a good mix of both white collar and blue collar workers. They're not in the most. You know crime like downtown real estate. But you know they're still in good areas. They're there in areas that can you know that's a good place for people to work. They have their near places that you don't have grow further in the path of growth. Right. You may see some like older heating or cooling systems and roofs that might have some wear and tear and parking lots that may need to be repaved. Generally B class properties are you know generating good cash flow they have a good occupancies and they have a good mix of potential potential for appreciation as well. So they have definitely higher return potential than Class A but they tend to be you know they need a little bit of work. There's a little bit more repair and maintenance to do than the class is. Now classes will move up from that so they tend to be at least 30 years old so these are much older. Right and they contain mostly blue collar workers and may have some Section 8 tenants and they contain a fair amount of deferred maintenance which is the big items that need to replace soon or almost immediately. Maybe like the roof or foundation or some major things is going to be pretty costly to upgrade and repair. OK. But you know these properties may also be under rented in terms of because it's older because it's not as well-maintained because it needs those things that spend to kind of spruce it up and upgrade it's not able to attract some of the best tenants maybe has a higher vacancies. Not able to charge market rent so these kinds of properties Haci properties tend to present the most potential for for growing cash flows for the higher returns but they do involve work. All right. So these properties involved have more potential for you to raise the cash flow and get a good yield on your return but they tend to be in markets that have less potential return. They're not in the best pass to grow neighborhoods that could see significant growth right. So they may be consistent they're just kind of like they did a little bit could be upgraded so it can capture more of the local the men and raise it up to rents. But there's you know if you know what you're doing if you're able to make the right kind of repairs and do it in a very cost effective way these properties present a huge opportunity for multi-family investors. So if you convert a Class D into a class B a nicer apartment but it's still in a bad neighborhood you're still not going to be able to draw tenants to want to live there. Right so oftentimes class the properties are more like this. They require a lot more risk. A lot of skilled to do it and the return for the is actually lower than classes. So for most investors out there they are looking to get into multi-family. If you're just starting out we definitely recommend that you look in you know PNC markets looking at class-B types of properties.