SS213: How I Have Adjusted My Multifamily Investment Criteria

SS213: How I Have Adjusted My Multifamily Investment Criteria

As a multifamily investor since 2006, Charles consistently fine-tunes his investment criteria, typically after every acquisition or disposition. In this episode, Charles discusses the main adjustments he has made over the years and why it is important for investors to change their investment strategy to better fit their goals.

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Talking Points:

  • I began investing in multifamily real estate in 2006 with a 3-family house where I lived on one floor and rented out the other two. Two years later, I purchased another 3-family house, literally a few hundred yards away from the first, and it always performed better than the first.
  • I remember speaking to my father about the dramatic difference in the time I spent on one property versus the other and how the second one always kept better tenants for longer. He suggested that maybe I should replicate what I did with the second property for future investments.
  • The main difference between these properties was that the second one was in better condition, had better parking, and bigger units. It was an overall better property. This attracted better tenants, who lived there longer.
  • Over the years, as I have been involved in more real estate deals and spoken to more investors, the overall theme of my investment criteria has been to invest in better properties in better areas. In 2020, we purchased our last C-class property, which was sold in 2023, and now my holdings are exclusively B-class properties. I am not opposed to C-class deals if I buy them myself; however, we do not purchase them with passive investors.
  • I have two multifamily investment criteria: one for the syndication deals and one for the joint venture (JV) deals we do. I will not go through how we choose markets in this episode; you can check out episodes SS1 and SS2 to learn more about choosing markets.
    • The main difference between the two is the minimum units. For syndications, they need to be 80+ units, preferably 100 or more units. The reason is that it allows us to have a team of full-time people on-site. This makes management much easier while also making it less expensive on a per-door basis. For joint venture deals, I am preferring 15 – 30 units. It might go down to 12 units if one of the partners has another deal in the area with a good management company, but that 15/18 – 30-unit range allows you to speak directly to owners, and most of them are mom-and-pop investors. You are also not dealing with syndication firms bidding alongside you.
    • Breaking down the acquisition criteria we like to see:
      • B properties for syndications – possibly C+ properties for joint ventures
      • 1985 vintage properties are the oldest – preferably 1990s or newer – if it is a longer-term hold, I might be looking for a 1995 or 2000 or newer property.
      • 2-bedroom units; 50% or more of the units are always preferred to be 2 bedrooms.
      • For 1-bedroom units, a minimum of 600 sq ft, and for 2-bedroom units, a minimum of 800 sq ft.
      • Block and brick construction with pitched roofs are preferred.
    • Our acquisition criteria worksheets always have a deal killer section. Some of our deal killers include:
      • High crime areas
      • Areas where the median household income is less than 3x what we project as our target rents in our underwriting.
      • Areas with a declining population.
      • Polybutylene piping, aluminum wiring, galvanized or cast-iron supply lines
      • Ceilings under 8 feet
      • No in-unit laundry or the ability to add connections (on-site laundry facilities are ok for JV deals).
  • I highly suggest all real estate investors create one-page acquisition criteria for the properties they want to purchase. Showing this to a potential investor or a broker goes a long way toward building your credibility since most tire kicker investors will have very general acquisition criteria. I have left out the markets you want to invest in. Make sure to list these, and for syndication, you can have a larger area since the properties will have on-site management, but if you are building a portfolio or smaller properties in one area of a city, clearly note that because once a broker has a deal in or near that area, they are going to reach out to you because they know that this is your specialty.

Transcript:

Charles:
Back in 2006 and 2008, I bought two almost identical multi-family properties, but one completely outperformed the other. Why stick around? Because what I learned might surprise you. I spent nearly two decades buying, managing, and refining my multi-family real estate investment strategy. After owing and investing in thousands of units, speaking with countless investors, I’ve developed a blueprint that works and I’m sharing it with you today. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re discussing how I adjusted my multi-family investment criteria over the years to improve tenant retention, reduce headaches, and increase returns. If you’re a real estate investor or thinking about becoming one, you’re in the right place. I began investing in multi-family real estate in 2006 with a three-family house where I lived on one floor and rented out the other. Two, two years later, I purchased another three family house, literally a few hundred yards away from the first, and it always performed better than the first.

Charles:
And I remember speaking to my father about the traumatic difference in time I spent on one property versus the other property, and how the second one always kept better attendance for longer, which is the key to success in multifamily investing. And he suggested that maybe I should replicate what I did with the second property for future investments. So the main differences between these properties was that the second property was in a better condition, had better parking and bigger units. It was in overall better property and this attracted better tenants who lived there longer. Over the years as I have been involved in more real estate deals and spoken to more investors, the overall theme of my investment criteria has been to invest in better properties, in better areas. In 2020, we purchased our last C class property. It was in the syndication, which was sold in 2023, and now my holdings are exclusively the B class properties.

Charles:
I’m not opposed to C class deals if I buy them myself. However, we do not purchase them with passive investors. So I have two multifamily investment criteria, one for syndication deals, so that’s deals that we’re doing with passive investors, and one is a joint venture, one, which is what I do with maybe one or two other active investors that we work with. We buy properties, and I’ll not go into how we pick markets in be in this episode, but you can check out episodes, SS one and SS two to learn more about choosing markets. But the main difference between the two different criteria is the minimum units for syndications, they need to be 80 plus units, preferably a hundred or more. And the reason is that allows us to have a full team of people on site. This makes management much easier while also making it less expensive on a per order basis.

Charles:
Also, if you’re raising money for syndication with all the legal fees that go within all the house logos with it, you wanna make sure it’s actually worth it. You don’t wanna do just a small syndication deal. For joint venture deals, I’m preferring 15 to 30 units. I might go down to 12 units if one of my partners has another deal in the area with a good management company. But that 15 to 18 to 30 unit kind of range there. You speak directly to the owners and most of them are mom and pop investors. So you are also not dealing with syndication firms bidding alongside you, and that is a huge benefit. Being able to speak directly to the owners and see exactly what they’re trying to accomplish, you can assist ’em with that while also buying the property yourself making it a win-win.

Charles:
So breaking down the acquisition criteria, we’ll see B class properties for syndications and b class areas and possibly c plus properties for joint ventures. So I’ll go down a little bit with that. And the reason really with c class properties is that first of all, they’re older, so sometimes they’re a little bit more management intensive, and that could be on repairs, like on the bones of the property. It can be with the tenant base. I think it could be a little bit more volatile with how the rents come in. They might not be consistently even every month, whereas when you get into better properties, the cash flows are much stronger. The other thing too with c class properties that you’ll get is that it’s gonna be a little bit more time sensitive and time urgent certain things. So that’s something that you have to have the right team that you’re working with the right property manager, and that’s with anything.

Charles:
But C-Class properties are a little bit more time intensive. 1985 vintage properties are the oldest, preferably 1990s or newer. If it is a longer term hold, it might be looking for a 1995 or 2000 or newer property. And when we’re getting down to kind of the mix of units, it’s two bedroom units. I’d like to see 50% or more of the units are always preferred to be two bedrooms. And for one bedroom units, I wanna see a minimum of 600 square feet. And for two bedroom units, a minimum of 800 square feet. For construction, it’s block and brick construction with pitch roofs are always preferred. Now, our acquisition criteria, worksheets always have a deal killer section, and some of the deal killers are high crime areas. Obviously people don’t wanna live there that or they don’t wanna live there for long periods of time. You can’t fix it.

Charles:
And your property’s always gonna be stuck at one level if you’re buying better areas. It allows you more flexibility with growing the property doing work to the property and actually achieving higher rents and a higher net operating income. Now, areas where the medium household income is less than three x, what we project as our target rents and our underwriting, because if where we’re looking at doing work to a property and doing renovations, if the medium household income in that area doesn’t isn’t three times that what we’re gonna be renting ’em for, that means people living in the area can’t afford to live there, which really kills the whole idea of renting the property. Now, areas with declining population, we always avoid anything with polybutylene piping, which was a piping that was used like in the eighties and nineties, which you know, doesn’t, it explodes, it’s not safe, you can’t get insurance for it.

Charles:
Aluminum wiring has a mess of different issues. Galvan and cast iron supply lines, these are a lot of like the, the bones of the property that we don’t really want to deal with. Unless obviously there’s always a way, you know, that you would get involved with this if you got a really good deal. But the thing with these renovations is that they’re not gonna add rent. They’re not gonna add net operating income to the bottom line. People aren’t gonna pay more because they’re pipes aren’t bursting or leaking or that they are able to use the electrical in our apartment, right? So these are things that really need to be done and you need to buy ’em these properties at quite a discount if you’re gonna be doing these renovations. The next thing is ceilings under eight feet. This is not something that you’re gonna find being able to push rents really with this type of property, it’s the same thing.

Charles:
If you’re buying properties you know, older properties, let’s say or any type of properties that don’t have especially in like the south hvac like central air systems, window units, stuff like this, this or wall units. This starts to limit your, the, the amount of money in rent that you can charge. So it’s important that you know about this functional obsolescence and knowing that if you have or if you don’t, and make sure when you’re doing out your rent comps that you actually know what you’re buying. So if you are, you know, doing your rent comps with something that you know, a property with higher ceilings or with bigger units or with central air versus the property you’re buying has window units or has, you know, smaller units in general, these are all important things that you have to work out and check when you’re doing comparables.

Charles:
The last thing really is no in-unit laundry or the ability to add connections. So those are really important. If we’re doing a syndication, there has to be a way on the ability to add connections in laundry inside the unit. This is one of the easiest ways of adding of, of doing renovations and making money literally in, up, down, sideways markets. You can add laundry into a unit. You can get your money back literally in probably one year to a year and a half the return of what you spend for doing that. So it’s a great investment onsite laundry facilities are okay for JV deals. So if you have an older property, maybe there’s a you know, a storage shed out back or a storage unit or you know, if you’re up north you have a, a basement with laundry.

Charles:
We used to do that as well. Have the connections in there or have coin operate laundry, but it has to be an ability of having it on site either way. But when you’re doing syndications for doing better properties in, in that area that are gonna have higher rent increases, you want to have that stuff in the units and you wanna make sure the units are what the market has for that size units or what they’re selling for or larger, which is even better. And these little things might not sound big because people readily put in their Zillow listing the height of the, of the ceilings. However, this is what makes the units run fast and keeps attendance in there. When they’re in these better units, they go, maybe they’re checking around on their renewal and they see, oh wow, this is much more expensive, it’s not as nice and they’re gonna stay put with what you are.

Charles:
And that’s how you do it. The key is buying good properties, keeping good tenants in there. And I highly suggest for all real estate investors to create one page acquisition criteria for the properties they wanna purchase. And this doesn’t have to be intense, doesn’t have to be very detailed. It just can be quick bullet points like I just went over with you today and showing this to a potential investor or a broker goes a long way toward building your credibility. Since most tire kickers out there will have very general acquisition criteria saying, I wanna buy properties with, you know, this cap rate in this town compared to someone that says, I wanna buy properties that are 18 to 30 units built between these years with this type of construction and I’ve left out the markets you wanna invest in, that’s obviously something that you wanna make sure that you list these and for syndications you can have a larger area since properties will have onsite management.

Charles:
But if you’re building a portfolio of smaller properties in one area of a city, clearly note that because once a broker has a deal in or near that area, they’re going to reach out to you because they know this is your specialty and that’s who they wanna be selling to and it’s much easier for them to sell to the seller as well. So I hope you enjoyed. Please remember, rate review, subscribe, submit confidential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Charles:

Have you always wanted to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you? Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out investwithharborside.com. If you like the idea of investing in real estate, if you like the idea of passive income, partner with us at investwithharborside.com. That’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication superstars, LLC exclusively.

Links Mentioned In The Episode:

  • SS1: Choosing Target Markets When Investing in Multifamily Real Estate – 1 of 2
  • SS2: Choosing Target Markets When Investing in Multifamily Real Estate – 2 of 2

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