How To Ensure Your Success With Multifamily Apartment House Investing
What have you heard from all the real estate gurus about being a success in the multi-family business? How about "Never deal with tenants, toilets or trash again in your life"? Or what about "Buy real estate with no money down"? Or my all time favorite, "Just hire a management company and let the checks roll in every month".
If this is your approach to multi-family, here is a dime, please go to the nearest pay phone and call your mother and let her know that it is highly unlikely that you will ever be a success in multi-family.
Let's look at the facts.
No Money Down What business works without any money? If you think for a second that real estate is it, see my comment above about calling your mom.
You can definitely take control of real estate with no money down but then you will need lots of cash to make it work.
The less desirable the property (read C-class property) the more cash you will need.
Also, the less desirable the property, the easier it will be to buy with little or no money down.
The current owner will cut any deal you want so that he can stop the bleeding from his wallet and transfer those obligations over to you.
If you have never managed a property in your life, starting with a C-class property will definitely result in a very short career for you.
Go into these deals with your eyes wide open! Management Companies The risk/reward formula for property management companies is an inherently flawed business model.
As the economy got worse and it became harder and more labor intensive to successfully manage properties, especially C-class assets, the shortcomings of the "percentage-of-rent-revenue" compensation model became clearly evident.
Let's look at it from a new property-owner's point of view.
In this example assume that 100% occupancy equals $100,000.
If you just purchased a property at 93% occupancy, you should be anticipating gross revenues of $93,000 but you only collect $85,000.
The difference is due to delinquent rents or residents who have "skipped" on you.
This means that in addition to the 7% physical vacancy, you also have 8% economic vacancy for a total vacancy of 15%.
Wow, in less than thirty days, your total vacancy more than doubled.
Let's say that your contract with the management company pays them a fee of 4% of collected rents.
Therefore, you are out $15,000 but your management company's revenues are only down $600.
Let's say that this trend continues for the first quarter before you identify the problem and begin implementing steps to solve it.
By April 1, you and your investors are down $45,000.
That's real money that you will never get back.
Your management company is down $1,800 for the same time period.
Who is losing sleep now? On a C-class asset, this problem is magnified for two reasons.
First, the resident make-up of a C-property is inherently transient.
They will move if you increase the rent by $20 per month.
When they see a new sheriff in town, if they don't like the new policies, they will move.
Secondly, managing a C-class property is much more labor intensive than managing any other type of property.
If you start pushing your management company hard on results, be prepared for a battle that you will end up losing.
Why should their life be harder just because your property is so hard to manage? If the property is running at 93% or 73%, the difference in their monthly check is only $800.
That's hardly any incentive to "be all that you can be" as a management company.
C Class properties are not something a NEW investors should get into before they know the ropes and are willing to commit to the WORK involved! Multi-family ownership is a business and should always be viewed as such.
Some businesses are easier to run than others.
When deciding to buy a multi-family property, make sure you know what it takes to run that property as a business.
If you have never done this before, set yourself up for success and get into the business that works best for you.
If this is your approach to multi-family, here is a dime, please go to the nearest pay phone and call your mother and let her know that it is highly unlikely that you will ever be a success in multi-family.
Let's look at the facts.
No Money Down What business works without any money? If you think for a second that real estate is it, see my comment above about calling your mom.
You can definitely take control of real estate with no money down but then you will need lots of cash to make it work.
The less desirable the property (read C-class property) the more cash you will need.
Also, the less desirable the property, the easier it will be to buy with little or no money down.
The current owner will cut any deal you want so that he can stop the bleeding from his wallet and transfer those obligations over to you.
If you have never managed a property in your life, starting with a C-class property will definitely result in a very short career for you.
Go into these deals with your eyes wide open! Management Companies The risk/reward formula for property management companies is an inherently flawed business model.
As the economy got worse and it became harder and more labor intensive to successfully manage properties, especially C-class assets, the shortcomings of the "percentage-of-rent-revenue" compensation model became clearly evident.
Let's look at it from a new property-owner's point of view.
In this example assume that 100% occupancy equals $100,000.
If you just purchased a property at 93% occupancy, you should be anticipating gross revenues of $93,000 but you only collect $85,000.
The difference is due to delinquent rents or residents who have "skipped" on you.
This means that in addition to the 7% physical vacancy, you also have 8% economic vacancy for a total vacancy of 15%.
Wow, in less than thirty days, your total vacancy more than doubled.
Let's say that your contract with the management company pays them a fee of 4% of collected rents.
Therefore, you are out $15,000 but your management company's revenues are only down $600.
Let's say that this trend continues for the first quarter before you identify the problem and begin implementing steps to solve it.
By April 1, you and your investors are down $45,000.
That's real money that you will never get back.
Your management company is down $1,800 for the same time period.
Who is losing sleep now? On a C-class asset, this problem is magnified for two reasons.
First, the resident make-up of a C-property is inherently transient.
They will move if you increase the rent by $20 per month.
When they see a new sheriff in town, if they don't like the new policies, they will move.
Secondly, managing a C-class property is much more labor intensive than managing any other type of property.
If you start pushing your management company hard on results, be prepared for a battle that you will end up losing.
Why should their life be harder just because your property is so hard to manage? If the property is running at 93% or 73%, the difference in their monthly check is only $800.
That's hardly any incentive to "be all that you can be" as a management company.
C Class properties are not something a NEW investors should get into before they know the ropes and are willing to commit to the WORK involved! Multi-family ownership is a business and should always be viewed as such.
Some businesses are easier to run than others.
When deciding to buy a multi-family property, make sure you know what it takes to run that property as a business.
If you have never done this before, set yourself up for success and get into the business that works best for you.