When it comes to securing a multifamily investment deal, the details can make or break the investment. Evaluating each element carefully helps ensure the potential for returns, especially when navigating competitive markets and off-market deals. Here are essential considerations to guide you through the process.
On-Market vs. Off-Market Deals: Which Is Better?
On-Market Deals: If a deal is on the market, it means it’s publicly listed and widely available. This can attract competitive bidding, which could drive up the price, limiting profit margins. While still a viable option, expect high competition.
Off-Market Deals: Off-market deals aren’t publicly advertised, allowing you a direct link with the seller. This often removes the bidding war, giving you a chance to negotiate favorable terms, possibly including creative financing arrangements.
Understanding the Seller’s Motivation
The seller’s reason for selling might not always be clear. Sellers often share their perspective, but by asking the same question repeatedly, you’ll start to notice patterns that hint at the real reason for selling. Knowing the true motivation can give you a negotiation edge.
Essential Documents for Deal Evaluation
To make an informed decision, gather these critical documents:
Trailing 12-Month Financials (or 24 months if possible): This profit and loss (P&L) statement details the property’s financial health.
Rent Roll: This document provides current rental information, including tenants and rent amounts.
Offering Memorandum (if on-market): Prepared by brokers, this package includes essential deal information for an in-depth evaluation.
Without these, you may miss key financial insights that could impact the deal’s profitability.
Assessing the Deal’s Potential Upside
Understanding the potential to increase property value and rental income is essential. Many investors target value-add opportunities to enhance a property’s worth and force appreciation. For example, if you plan to invest $5,000 per unit to increase rents by $75, confirm that market conditions support this increase and determine the renovations needed to justify it.
Net Operating Income (NOI) Through Your Lens
Calculate the NOI yourself instead of relying solely on the broker’s estimates. This will ensure your projections align with reality and market trends. A property manager’s input on the NOI is invaluable, as they bring experience and knowledge specific to the market.
Determining Market Cap Rate
The cap rate is crucial in establishing whether you’re buying at a fair price. Knowing both the entry and projected exit cap rates provides insights into your exit strategy and profit potential.
Calculating Property Value
Once you have the NOI and the cap rate, calculate the property value using this simple formula:
Property Value = NOI / Cap Rate
This metric indicates whether the property aligns with your financial goals.
Meeting Investor Goals
If you have investors, analyze whether the property’s potential returns meet or exceed their expectations while ensuring your compensation remains fair. If no investors are involved, ask if the deal will surpass your own financial targets.
Knowledge of the Sub-Market
Familiarity with the sub-market can influence the deal’s success. Understanding demographics, school quality, and other local factors will provide a well-rounded view of the property’s potential within the area.
Local Team Support in the Market
Having an experienced local team can help you navigate the area’s market dynamics effectively. Assess whether they’ve previously implemented similar business models in the sub-market.
Financing Structure of the Deal
Examine whether the seller’s loan is assumable, including the terms, or if you’ll need new financing. This decision affects your long-term plans and determines the type of loan (bridge or long-term financing) required.
Source: Qualify a multifamily deal: Bestevercre. Passive Real Estate Investing. (n.d.). https://www.bestevercre.com/blog/11-questions-qualify-multifamily-deal#:~:text=At%20the%20very%20least%2C%20the,an%20on%2Dmarket%20deal%2C%20the
Dear reader,
Investing in a multifamily project has many advantages as, on balance, real estate offers lower economic and inflationary risks than stocks.
Of course, the decision to invest in real estate or invest in stocks or bonds or other asset classes, which offer different risks and opportunities, is a choice which depends on an investor's risk tolerance, objectives, financial status and investment style.
If you’d like to know more about multifamily investing please feel free to contact us for a no obligation chat or subscribe to our upcoming newsletters.
Yours sincerely,
Anna & Peter Tan
SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 under management (900+ doors). The company also operates a property management company which handles a portfolio of single family homes. SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.
Comments