Types of Multi-Family-Unit Apartments
Apartment
A dwelling unit within a multi-family structure, generally provided as rental housing. An apartment building is a structure with individual apartment units but a common entrance and hallway. Apartments may vary in size from small 1-bedroom efficiencies to large, multi-bedroom units. Apartment buildings may range from 1-story, 4- unit building to a high-rise building with hundreds of units and retail and office space included. Apartments are considered both commercial and residential properties depending on the number of units and number of tax parcels.
Condominium
A system of ownership of individual units in a multi-unit structure, combined with joint ownership of commonly used property (sidewalks, hallways, stairs, etc.). A condominium is considered a residential piece of real estate and uses residential appraisers, financing and valuation methods.
Co-op
a type of multi-unit property that has corporate ownership. Stockholders of the corporation are entitled to use a certain dwelling unit or other units of space. Special income tax laws allow the tenant stockholders to deduct interest and property taxes paid by the corporation.
Apartment buildings in some areas are occasionally converted to cooperatives. In simple terms this requires forming a corporation to own the building and selling shares to those who wish to live in the building. There has been some unique financing with co-ops over the past several years, but typically they follow the residential format. Town Homes A town home is a dwelling unit, generally having two or more floors and attached to other similar units via party walls. Town homes are often used in planned unit developments (PUDs) and condominium developments, which provide for clustered or attached housing and common open space. Town homes typically will follow the residential model for appraising and financing.
Finding Good Multi-Unit Properties
When anyone is selling a multi-unit dwelling, they have a problem that they need someone to solve.
Deals are everywhere, and the more you look and the more you gain experience, the more deals will come your way. They’ll come from family, from friends, from acquaintances and even from total strangers with whom you strike up conversations. The deals are there. You just have to look for them. Combat any concern you have over not finding deals with your own action. One basic way to act is to drive a different route to work every day. Start looking at neighborhoods, communities, and for sale signs. When you’re going to the store or running an errand, take a different route and pay attention to whatever new construction might be going up. When you see for rent signs on multi-family properties, call the number. This will: 1. Expose you, as a real estate investor, to a large market of potential properties 2. Give you a good picture of the rental market in the area you are researching. You’ll also be contacting a lot of potential sellers. The lack of a For Sale sign doesn’t necessarily mean a property isn’t for sale.
Driving neighborhoods is a fantastic way to find multi-family properties for investment. A lot of times when people face life problems they have property they need to sell. A death in the family, the loss of a job, illness, a transfer to another community, any number of reasons could be forcing a sale. That’s when you want to be educated as a real estate investor and become a problem solver. That will give you the inside track on a lot of deals because many of your competitors just aren’t equipped to solve problems.
Another way to find good properties is by talking to as many people as possible. You have a lot of opportunities to tell people what you do and what you’re looking for. You should have business cards and fliers printed up and pass them out. Leaving business cards and fliers in prominent business locations, or including them in letters you write is another way of spreading the word. It’s important to have a passion for what you are doing, and it is important that you share that passion with everyone you meet. You don’t have to be heavy handed or pushy. A simple statement that you are a real estate investor is a good start. Be sure to indicate that you are an active real estate investor. The more people you speak with the more deals you will be exposed to.
Show people that you are a problem solver. When anyone is selling a multi-unit dwelling, they have a problem that they need someone to solve. The problem could be a bad one, such as an injury or bad management skills, or it could be a positive one such as a promotion and a move to another city. Either way, there’s still a problem and a need for someone to solve it. Their problem is your opportunity. It’s your opportunity to earn income for yourself, but it’s also a great opportunity to solve a serious problem for someone else. It’s a win/win situation. And that’s what can separate you from other real estate investors.
There are six traditional ways of finding good multi-unit properties:
• Real estate brokers
• Classified ads
• Real estate publications
• Websites
• Real estate investment clubs
• Lenders realize that you have to make a lot of offers to get good properties that have real value for your investment program. For example, you might have to make 100 offers to find three or four good properties you can acquire for 75 cents or so on the dollar. The more sources you have in your business arsenal the more ways you have of finding the properties you want.
These six sources should prove to be powerful allies. They are your partners in business.
Real Estate Brokers
A good real estate broker is worth their weight in gold, and you should have at least two of them working with you. A good real estate broker can provide invaluable information at a moment’s notice. You can get a lot of information on your own, but at the expense of time, money and effort. It makes much better sense to establish sound relationships with the professionals who get this information during the course of their business day and who are willing to share it with investors who will enhance their business.
It is crucial that your brokerage team consists of true professionals; people who know the business, who know your needs, and who are willing to be a dependable member of your team. For example, many brokers focus primarily on single-family dwellings. They may be very good at their jobs, but single family and multi-family dwelling investments are very different. Being successful in one area doesn’t necessarily mean you will be successful in another.
As the investor you must do your homework and invest the time to find the very best people for your team. Multi-unit dwellings are loosely defined as properties from a four-plex to complexes with 100’s of units. Being involved in multi-unit dwelling investment is very different than single family dwellings. The experience and knowledge base is entirely different. Ask probing questions to determine which brokers have real-world experience in multi-family units. Most brokers who deal primarily with single family dwellings may not make the transition to multiunits very well.
There are two different ways to value property.
1. A comparable sales approach is used to value properties of four units or less.
2. An income approach is used to value properties with five or more units.
You will have better luck researching those professionals who deal in the world of commercial real estate. That’s because they are used to dealing with properties on an income basis rather than on a comparable basis. Comparisons are used to value properties of four units or less. This is an important distinction. A residential broker handles properties of four units or less, such as a single-family dwelling, a duplex, tri-plex or four-unit building.
Commercial brokers deal with multi-family properties – those having five or more units. The commercial brokers group is where you want to find your brokers for multi-unit investing. These are the people who specialize in multi-family dwellings or who have at least amassed a considerable amount of knowledge and experience in the subject. Commercial brokers are often aware of good properties before those properties go on the market. They can bring you good deals before the general public becomes aware of them. This is where you will find the majority of your good deals.
Find brokers who can find you information. Think of them as your scouts. With multi-unit real estate investing, it is important to have people on your team that can help you locate properties. What beginning real estate investors may not know is that multi-family dwellings are not listed in the MLS listings. You need brokers out there scouting out good deals for you. They are your eyes and ears on the ground. You just can’t go online and find properties with five units or more. Yes, there are websites such as loopnet.com which list properties, but not all brokers list their properties on that site. There are many, many great opportunities which you just can’t access through the traditional residential approaches. That’s why you need scouts.
Another advantage of working with a commercial broker is that they often maintain extensive databases of property owners. Often, they will be aware of properties not officially for sale, but which can certainly be purchased by the right buyer at the right price. A good commercial broker is someone who will work with you in finding creative acquisitions.
Classified Ads
The classified ad section of your local newspaper can have a lot of very good deals. The problem with the classified section is its utility and therefore its popularity with other investors. Everybody looks there. Larger metropolitan area newspapers will carry a subsection of apartment buildings or commercial properties. You will find that these ads are often “teasers” in that they provide just enough information to get you to call the broker – which is the real purpose of the ad. This is an excellent way to call and meet prospects and find sources of valuable information. Consider the ads as an invitation to make a new contact.
Real Estate Publications
There are a number of real estate specific publications that you can access – some are regional and some are national in scope. The national publications tend to cater to the large investor, someone who wants to invest in very large, multi-unit properties. Such a publication may not be suitable for your more localized investing needs. Still, it may be a good idea to review these publications so you can get an idea of just how big the opportunities are in this real estate arena. Eventually, you may find yourself working into those upscale, national markets and it’s better to know something about the territory before you get there.
These advertising vehicles are great tools for recruiting your team. In them you can find brokers, appraisers, environmental engineers, lenders, surveyors and other necessary players. Consider it a basic source of information about the people you need to find. These are a great source of real estate information. For example, you can just type in “multi-family dwellings in “Dallas, Texas” and a remarkable amount of information will be at your fingertips. The most comprehensive website for multi-unit properties is www.loopnet.com, which boasts more than 130,000 listings for various types of income producing properties. These listings comprise approximately 1.5 billion square feet of property for sale. It also has the most comprehensive list of commercial properties for lease that you can find.
There’s another big advantage to using websites. Unlike the MLS, you don’t have to be a real estate agent to get access to the properties listed on www.loopnet.com. Anyone with a computer and access to the Internet can log on and acquire valuable real estate information. You can refine your search to the type of property, state, county, city, price range, minimum or maximum square feet and other criteria. It’s a very flexible and powerful research tool for the multi-unit real estate investor. The information provided isn’t all that an investor would want, but there is enough information there to do an initial evaluation and help you to decide whether or not you might pursue a given property.
Real Estate Investment Clubs
Investment clubs and associations are a very good place to find properties that will be put on the market in the near future. These clubs are a good opportunity to network with other real estate investors to acquire more information about their properties. Tax attorneys, brokers, appraisers and other real estate professionals are often active members in these groups. These groups usually meet regularly, feature informative guest speakers, and provide an opportunity to network with others in your profession and the related fields. Become an active member of some of these organizations and you will quickly experience the value of networking.
Lenders
A key point to remember when working with banks, savings and loan associations, or any lender is that just like anyone else in real estate, they have a problem that needs to be solved. Typically, those problems are associated with two areas:
• Foreclosures, and
• REO (real estate owned/bank owned real estate)
This is an area in which you can make your greatest headway in real estate investing. A good real estate investor solves their problems by taking these properties off the lender’s hands. Remember, lenders are not in the property business; they are in the money business. If you can position yourself as someone who can take properties off their hands and put money in their hands you will be a highly valued real estate investment partner. You want to approach lenders with a win/win situation.
Smaller local and regional banks are great sources that you should target because they are
1. a good source of financing for your investments
2. a good source of properties in need of a problem solver like you.
Be sure to keep the politics of the situation in mind at all times. Many lenders don’t like to admit to having made a bad loan. The last thing a bank wants to do is manage an REO property. Again, their business isn’t collecting the monthly rent. They’ll often bring in a management company to take care of such properties.
Lending institutions in such situations can be quite flexible in offering you good terms and conditions. The basis of the loan will be determined by how much money the institution has sunk into the property. The lender will want to earn a profit on the property, but its real concern is getting that property off the books as fast as possible. It is often in their best interest to take a small loss on a loan rather than hold on to the property. Consider that you may be much better equipped to creatively solve a bank’s property problem than anyone in the bank. After all, their business is money; your expertise will be buying and selling property. You’re in a perfect position to solve problems for financial institutions. Patience should be a key element in your strategy. If you have patience, you can find the right property at the right price and you will be able to acquire it at the right terms.
One of the keys to your success is to continually look at a lot of properties. Your money must work hard for you. It must always earn an acceptable return on your investment. Get in the habit of thinking about your investment dollars as employees. For example, you wouldn’t keep an employee that was not performing, would you?
Taking that thought a bit further – why would you hold on to a situation in which your money wasn’t performing? The meaning of an “acceptable rate of return” is a very individual matter. Only you can make that determination. Know who you are, where you are, what you want and what you need out of every deal. Do not lower your standards just to make a deal. It’s basic math. If you can’t make a good deal according to your established standards, then walk away. If you don’t know this now, you will know it soon – there are always good deals just around the corner.