February 5, 2012

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4 Basics of Buying a Phoenix Multifamily Investment Property.

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The purchase of an apartment building can be overwhelming but once you have made the decision to either start with a multifamily building, move up via a 1031 exchange from houses or add to your portfolio of houses then it gets easier.  There is a lot of information, property and contract needs and terminology which differs from houses: it’s not that different on the one hand and its very different on the other. 

While a rental house can be small hobby or easy investment an apartment building is a business and the scale of it can quickly become a burden if mismanaged.   The same attention must first be paid to buying a property as later managing it.  There is much to review and know: the lack of understanding of certain documents or the consequences of not obtaining certain documents and not doing specific inspections and due diligence can make a good investment bad and an investor can end up in a completely different situation then intended.

For this reason a multifamily investor needs to have advisers whom know the multifamily market, the properties, areas and even better an adviser, a Realtor who owns multifamily properties or has owned them in recent times.

Besides having a strong team of advisers an investor should firs start with some of the steps outlined below.

1) Educate Yourself  

It’s very important to educate yourself about the buying process, analysis process and the running or a business.  A clear understanding of how the business works will help make it a better investment or maybe even prevent you from buying if learn that it is not for you.  The vital key is to base your education on relevant information and data coming from experienced sources not a relative or friend who heard a story.  There are investment associations in many parts of the county. 

In Arizona there is AZREIA, where you can find like minded experienced persons, educational classes and support.  Don’t just reach for the first book you see.  There are plenty of gurus out there that have not practiced what they tech nor done any real estate transactions in years.

2)  Build a team including a Qualified Commercial Realtor —

You don’t need a Realtor to help you with your investment, just as you don’t need a lawyer, you don’t need to do inspections and you don’t even need to buy title insurance if you pay cash but prudence would prevent most people from being so reckless. 

A qualified Realtor, especially a commercial Realtor, especially a commercial Realtor who is a CCIM (Certified Commercial Investment Member) and especially one who has the former qualifications while also having hands on experience as an owner him or herself.   There is nothing like the hands on experience and the representation of a third party to help with making a sound investment. 

Representation will help you in multiple ways in not only educating yourself with the process and inner workings of the buying and running process of the property but being represented by a qualified person means a cleaner and smoother process.

3) Find Apartment Building Financing —

Financing! indeed.  While the property is important and unless your paying cash then the financing you obtain to secure the property is just as important and often more important then the property itself. 

It’s not only about the ability to get financing but they type.  I won’t bore you with too many details but you should explore them all before you make the purchase or even seek a property.  Analyze the financing just as much as the property, with the options cost and analysis and risk.

4) Look At Many Apartment Building Properties —

When search for properties and consider any property see your exit strategy.  Lots of things change in the time of ownership the longer you own it but you can always have an exit strategy even if it changes.  Which ever strategy you have get to know the good the bad: the prime and bad neighborhoods: where is growth in population going to help or hurt you: what is going on in a neighborhood.  It’s only buy getting into the neighborhoods and properties the you’ll get to know the business you’re about to buy.

When you have the tools and knowledge necessary to proceed with the investment and you have decided that it’s something for you: do it! 

I often see investors who are perpetually learning and analyzing but never actually put in an offer on a property or purchase one: this is sometimes after spending years and tens of thousands of dollars learning.  If you are careful and have good advisement and you don’t let your emotions decide then in more cases then not you’ll do just fine.  You should not be afraid of making as mistake: there is risk involved but at least in real estate you can control the bulk of the risk or at lease mitigate it.

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Filed Under: Investing in multifamily, Real Estate Analysis Tagged With: , ,

What Is The Rent In A Market? Where Do You Get That Information.

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A question I get quite often, mainly because I work with buyers and sellers of investment properties, including homes and multifamily, is: what are the rents in a particular area. 

A buyer needs to know this to establish the value of the property being considered: to evaluate the demand and supply in a particular neighborhood: and the gauge the ability to pursue other techniques to increase his/her return, things like repositioning.

A manager -whether an owner manager or a hired manager- needs to know the market to keep vacancy rates low but also to maximize the return and track any trends.

When a property may go up for sale or an owner needs to evaluate the investment, he/she will also need to know -that is of course if they don’t already know- what the rental market is like, what are the trends, and what affect will they have on the price and in who’s favor will the negotiations tip. In each stage the access to reliable rental data is vital.

But how to you get that data and how do you ensure it’s the best data?

There are many ways to get rental data.  Some people assume that looking through a paper is good or craigslist: others ask a Realtor: and yet others do a rental survey.

The two former data gathering sources can be used as an overall gauge but this is never as accurate as the latter: the rental survey, and it is this that I want to focus on. 

The Rental Survey.

A rental survey a concise study of the rental market -whether single family homes or multifamily apartment – which involves more then a surface view: it involves getting into the details by getting a first hand look at your competition. To get the most accurate rental data you should do as many of the following activities as possible.

1.  Drive the neighborhood and see how many signs are up? Are they individual owners or management companies.  If you see signs over and over the same location it could mean multiple things but higher vacancies are one of them: this could also signify a very transient neighborhood and tenants that move often lower your income and increase risk.

2.  View the apartments or homes if possible.  It’s not the rates themselves that are singularly important.  What is a tenant getting for the rent.  Which utilities are included or not and who is responsible for what.  In addition the condition of the property is very important: flooring, paint, state of the kitchen and cleanliness are very important and have a large affect on the rental rate.

3.  Speak with the owners or management companies to see how long the property has been available  and are there any concessions offered.  Each is a good source of information but you need to vet it as well as you may not get the whole story.

4.  Talk to a management company of Realtor who does management in the area.  Some Realtors do management and some -though few- do a rental survey themselves.  You may want to talk to someone like that but be courteous about requesting free information if you’re not a client.  It takes a lot of work to do a proper survey.

5.  Talk to fellow investors who do work in the area.  Some real estate investment clubs and organizations have enough members that you’re bound to find someone who is in the know.  In Greater Phoenix there are several clubs but AZREIA is the larges and the meeting are a great source first hand information.

6.  Then compare to active listing in the various sources available to see any discrepancies between what is being offered and what is actually happening; You can also compare what you have found to a general survey of rental rates in Phoenix, like this one to see if there are any trends.

Just as you would want to know where you customers will come from, how much they earn, and spend before you open any sort of business you want to know the same for an investment property because this is where your cash flow will come from and you want to know the quality and value of that cash flow. 

Even small discrepancies can affect values greatly.  Over time an owner can lose lots of income due to improper rental pricing or loss of value when selling.  A buyer can be in a much stronger negotiating position if he/she knows the strength of the income and any market pressures on it.

A rental survey should be part of any due diligence for a buyer and seller and a regular activity for managers/owners of a property. 

Part of our service for our clients is a rental survey when buying or selling an investment property.

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Filed Under: Investing in multifamily, Management, Real Estate Analysis Tagged With: , , ,

Phoenix Small Multifamily: Where’s The Value Is Hidden

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The value of separate meters on a property cannot be underestimated.  Most multifamily properties have one meter for water and maybe separate meters for electricity: in small multifamily properties is normal to have individual electric meters but it’s uncommon to have the same with water: that’s probably why its often missed.

Below we’ll compare two similar properties: one with separate water meters and one with a master water meter and the affects on income and the property value using a cap rate for evaluation.  This is just a simple evaluation to make a point. 

The properties are very similar: the rents collected from the tenants are the within 5 dollars of each other on average so we’ll just use the same rents for the sake of being clear.  Also, since other expenses vary like taxes, insurance, maintenance and landscaping we’ll reduce the analysis to the water, sewer and trash expenses since the other expenses have no bearing on our topic.


Property One:  4 plex with total rental income of $2,808.00 per month.  The units have washers and dryers in each unit and one master water meter.

  Monthly Annually
Potential Income $2,808 $33,696
Water/Sewer $245 $2,940
Trash $60 $720
Total W/S/T expense $305 $3,660


Property Two: fourplex with total rental income of $2,808.00 per month.  Similar to the property above the units have a washer and dryer.  In this case the builder put in individual water meters for each units.  There is an additional expense to do this when the property was built: in fact its quite a substantial expense but its of great value to the former and current owners.

  Monthly Annual
Potential Income $2,808 $33,696
Water/Sewer 0 0
Trash 0 0
Total W/S/T expense $0.00 $0.00


what does that mean to the bottom line in the pocket money?

On a monthly basis the owner gains $305.00 additional dollars of income and $3,660.00 yearly.  While this is not a lot of money in itself if you compare the total potential income of the property it translates to 11%. 

What does it mean for the property values?

At current cap rate of 7.75 it’s $47,222 in additional value: and at a conservative cap rate of 9.25 it’s $39,567 in additional value.

So, if you see two very similar properties priced, each at $310,000 which is better?  Of course the property with separate water meters because your buying for the same price but the value is greater as is the income.  

Even if the property with separate water meters were to cost $25,000 more it’s of greater value then the master metered property.  In fact that $25,000 turns into a 15% return on that money and with positive leverage the return would increase.

So when looking at properties look carefully at how they are metered and consider the true value it reflects on your return, because often its substantial.

But there is actually more to it.  Separate water meters have additional benefits to the owner.  Besides the increase in income and value there are no bills to pay, it’s much easier to control expenses, and things like unreported water leaks in the toilet will not affect your wallet but the tenants.  This is important in units that have their own washers and dryers: a washer can use up a lot of water that the owner will not have to pay for.

For savvy investors this can provide a way to increase the return on the money invested at the point of purchase and/or at time of sale.

originally posted at PMT

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Filed Under: Investing in multifamily, Phoenix 4plexes, Real Estate Analysis
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