Multi-family buildings come in many shapes and sizes from 6 units to 600+ units. However, no matter what the size, success falls into a 4 step system to successfully buy, own and profitably exit a Multi-Family property.
It is true – you can make Multi-Family investing more complicated than it needs to be, but if you do, you will miss out on the best deals and frustration levels could be even bigger than the buildings you’re looking to buy. The key factor to making Multi-Family investing a success is to take complex subjects and follow a proven system. After you learn the system, you may well still say “It Must Be More Complicated Than That!” when in reality it is not.
The 4- Step System to Successfully Investing in Multi-Family properties:
Step #1 – Find The Figures & Run The Formulas
Multi-Family Investing is all about the numbers. You will need to learn how to take a quick glance at a property listing sheet and be able to run a few calculations to tell if the property is priced correctly or if you have to adjust your offer to better suit your goal. As a quick reference, here are the numbers and filters you will be focusing on in the initial due diligence stages:
- Building Size
- Suite Mix
- Net Income Multiplier
- Deferred Maintenance Costs
- Effective Gross Income
- Operating Expense Ratio
- Capitalization Rate
- Cash-on-Cash PLUS™
- Closing Costs
Once you have reviewed all these numbers and filters, you will be well equipped to submit a sophisticated offer and apply for financing.
This leads you into Step #2…
Step #2 – Finance With Sophistication
Multi-family financing is quite different from single family financing. In single family investing, the majority of the decisions made by the bank are made based on you and your credit. This means if personal credit does not qualify, you could be left out in the cold. In multi-family investing, the majority of the bank’s decision hedges on the building with your information being considered secondary. Getting proper financing in place will make the difference between a winning property and an average property.
The type and length of funding you choose on your multi-family property is one of the most critical decisions you’ll make when you invest. Choosing the option that matches your investment strategy will make the difference between having a huge winner as an investment or having just an average one. Doing this careful homework could be a difference of thousands of dollars in profit.
Many factors come in to play in this decision but it should revolve around 4 key items:
- Your plans for the property
- Condition of the building
- The value you add to the property
- Your relationship with your banker
Once you have your financing firmly committed and all your Due Diligence complete, the real (and most profitable) work begins. If you’d like to hear an audio interview with and investor who has seen these profits by building a portfolio of over 1,200 properties, click here.
Step #3– Fix The Cashflow & The Building
After you’ve purchased the property, you’ll want to ‘Financially Fix’ what the previous owner missed. Fixing the figures is not about making random ‘Enron-like’ accounting changes – that would be reckless speculation… Fixing the figures is all about increasing the operating profits from your building, maximizing your cash flow, and maximizing the building’s value.
During this step you need to have 3 very clear goals in mind…
- Increase the cash flow
- Increase the value
- Build a long-term business model (duplication)
After building a successful business model and owning the property for a number of years, you may decide that you wish to hold for a long period of time or cash-out and move on, which leads us Step #4…
Step #4 – Farm Out And Move On
Simply stated, this is where you have completed the purchase, the financing, and the ‘cash flow upgrades.’ In other words, the creative work is done.
This step is the key to adding many multi-family properties to your portfolio. By ‘Farming Out’ the property management to a quality management company, you will free your time to focus on the keys:
a) Maximizing Cash Flow from your current properties
b) Managing the Property Managers, and
c) Adding new properties to your portfolio
However, that describes the perfect world, and sadly we don’t live in the perfect world. Even though you have delegated your management to a Property Manager, you are 100% responsible for the operations and profitability of the building. You will be continually analyzing the building’s financial results, which also means you will be looking to constantly improve its operations. Rome wasn’t built in a day, and neither will your portfolio be; with serious attention to detail and hard work, you can achieve your investing goals.
Once you become a director of managers, you can start buying back your time and enhancing your lifestyle. That is one of our goals as investors, is it not?
Investing in Multi-Family properties the right way can turn one well-sought-out property into situation that can potentially set you and your family up with an income stream that will last for many generations to follow.
If you’re looking for a safe, proven way to make Real Estate Investing work for you, or you are worried about how the recent changes in Canadian mortgage rules will impact your real estate investing… or even just ready to take your game to the next level…
Then it’s time to consider a jump into Multi-Family investing.
Multi-family investing is one of the fastest, safest ways to accelerate your portfolio for huge monthly cash flow and massive profit pay-outs — even in tight lending climates like ours — if you know how to do it right. Be sure to visit the ongoing real estate discussion on Canada’s Premier Real Estate Community and Discussion forums at www.myREINspace.com.
If you think Multi-Family investing is the right means to boost your long-term wealth strategy, be sure to check out all the details on REIN™’s Multi-Family Investing Bootcamp coming up on June 18 & 19 2011 at the International Centre in Toronto. Cheers!
photo credit: Michael Cory
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