SS254: The 10-Step Process to Buying a Multifamily Property

SS254: The 10-Step Process to Buying a Multifamily Property

In this episode, Charles discusses step-by-step how to purchase a multifamily property, providing a wealth of information whether you are a new real estate investor or an experienced investor looking to refine your investment approach.

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Talking Points:

  • On this show, I break down a number of different specific parts of buying and managing multifamily properties that I have picked up over the years, but in this episode, I am going to break down the complete 10-step process for buying a multifamily property that you can follow to purchase your first rental property.
    • 1. Set Your Investment Criteria. Clearly define your deal parameters, such as property size, expected returns, property age, location, condition, and risk tolerance.
    • 2. Establish Broker Relationships. Start speaking with brokers who specialize in your target properties, and research some recent closings they have handled. 
    • 3. Build Your Team. Going hand in hand with establishing broker relationships is building your team. Utilize your broker and local investors to start finding team members, including lenders, property managers, inspectors, attorneys, contractors, etc.
    • 4. Initial Deal Screening and Analysis. How will you screen deals to avoid fully underwriting every deal that crosses your desk? What filters and deal metrics, like cap rates and NOI, will you utilize to assess deal feasibility?
    • 5. Due Diligence Preparation. What will you be requiring from sellers and brokers initially? T-12 and rent roll? What other key areas will you be requesting information on: physical, financial, and legal? Create a list that will allow you to efficiently underwrite the deal. What underwriting model will you use?
    • 6. Source Deals. Start sourcing deals. Start speaking to brokers regularly while attending local real estate investment networking events.
    • 7. Underwriting Deals. Start underwriting deals by initially reviewing them and then fully underwriting deals that pass the initial screening process. 
    • 8. Submitting and Negotiating Offers. Start making offers on properties that pencil and negotiate those offers with sellers.
    • 9. PSA and Final Due Diligence. Once you have an accepted offer, consult with your attorney to have them draft the purchase and sale agreement, while you begin preparing for inspections and final due diligence. 
    • 10. Closing and Initial Stabilization. Once your inspections are completed and any issues have been addressed, close on the property, notify the tenants of the new owners, and initiate the process of initial stabilization. This process includes addressing deferred maintenance, updating tenant information, registering tenants, and performing necessary renovations. 
  • In conclusion, we want to have a clear investment criteria, source deals efficiently through brokers or directly with sellers, have comprehensive underwriting that includes downside scenarios, perform thorough due diligence to reveal any hidden risks, and have reserves to ensure a smooth closing process while you work to stabilize the property.
  • If you want to learn more about the process of purchasing a multifamily property, check out episode SS19.

Transcript:

Charles:
Buying a multi-family property doesn’t have to be overwhelming if you follow the right steps. I spent years buying and managing multi-family properties and I’ve broken it down into 10 simple steps. Welcome strategy Saturday, I’m Charles Carillo and today in this episode I’m breaking down the complete 10 step process for buying a multi-family property. Whether you’re just getting started or you’re looking to sharpen your investing skills, this guide will help you move from searching for deals to collecting rent checks. So let’s get started. On this show, I break down a number of different specific parts of buying and managing multi-family properties that I’ve picked up over the years. But in this episode I’m going to break down the complete 10 step process for buying a multi-family property that you can follow to purchase your first rental property. So number one is to set your investment criteria.

Charles:
So clearly define your deal parameters such as property size, your expected returns, the property age, the vintage location, the condition, and really your risk tolerance for investing. The second part after you’ve set that in criteria is to establish your broker relationships. So start speaking with brokers who specialize in your target properties and in your target area and research some recent closings that they have handled. Number three is build your team. So going hand in hand with establishing broker relationships is building your team and utilize your broker and local investors to start finding team members including the lenders, the property managers, the inspectors, the attorneys, the contractors, et cetera. And this will help you develop a very strong team to buy your property. Number four is your initial deal screening and analysis. So how will you screen deals to avoid fully underwriting every deal that crosses your desk?

Charles:
What filters and deal metrics like cap rates and a y will you utilize to assess deal feasibility? And this is really important because you wanna be fully underwriting less than half the properties that really cross your desks. You wanna have a quick way of going through in 10, 15 minutes reviewing something and seeing if it even really passes the smell test for lack of a better phrasing. And you can go into full underwriting after that. This will save you a lot of time. And then a allow you to really respond back to the brokers because you’re gonna get burnt out. If you’re underwriting fully every deal and then you have to respond back to the broker on why you don’t like this deal, it’s a different thing. You go, this is too old for us, I don’t like this area. This is too large, this is too small.

Charles:
And then you can add on a couple more probably bullet points there, you can send back to the broker, thank them for sending it over the deal. But the thing though is that you wanna make sure that if you’re looking at a hundred deals, you’re really only like fully underwriting, maybe 40 of those. If you go more than that, it’s gonna take a lot longer to find your target property, but you’re really gonna be spending a lot of time wasted on deals that really aren’t even in your investment criteria. So number five is a due diligence preparation. What will you be requiring from sellers and brokers initially? So once you look at a deal, if if it’s, you know, if you’re looking at a specifics, you’ll get some information from the broker and then from the owner. But what really will you be requiring from sellers and brokers initially to do your overview?

Charles:
And this is usually like a T 12 and a rent roll, but what other key areas will you be requesting information on? So once you get into a deal and you start really underwriting it, you know, physical, financial and legal, you know, create a list that will allow you to efficiently underwrite the deal. And then what underwriting model will you use? So this is really important to have this documented. So if a deal comes to you and you say, you know, if usually if it’s from a broker, the brokers prepped or should have prepped the seller on what’s gonna be required, what we need so they can, because there’s some way that they had a value of the deal hopefully. So they should have that documentation, they can provide it to you. If you’re going direct to an owner, it’s great to have like a detailed form that you can send out to owners.

Charles:
I might have two of those because you don’t wanna scare off an owner or a, you know, a seller. Maybe you’ve gone direct to an owner and you’re trying to say, Hey, maybe you’re interested in selling it and they’re not sure they’re on the fence. You send ’em over like a 15 bullet point document of all these items you need, you might scare them off versus if you just ask for maybe two or three items at a time and you’re kind of getting an idea of, so you can put an offer on the property and then maybe at that point you can say, listen, if you send me over these other documents, I’m gonna need ’em at some point we send ’em over earlier, I can do it or I can just send you out an offer as is and we can kind of work out which isn’t really the best way of doing it.

Charles:
But the thing that was in that situation, you’re not scaring off someone. ’cause If they get a whole list of it, they’re gonna immediately be like, no, this is, I’m not putting all this together. You know what I mean? And a lot of that work when you’re dealing with smaller mom and pop owners, you’re gonna have to kinda recreate their documentation for them so you can put it into your underwriting model. Which brings me to my second point, which is really the underwriting model that you’re gonna use. So which underwriting model are you using? If you’re doing syndications, you’re gonna use a much more complex model. If you’re doing larger properties, if you’re doing like five, 10 unit properties, you can probably put together something pretty straightforward. We have something straightforward we use for those type of like small JV deals and it’s where there’s no limited partners and you get an idea of what the feasibility of the deal is pretty in depth and you can put ’em into one of those larger models later.

Charles:
But really just to kind of figure out if that’s something that’s gonna pencil number six is sourcing deals. So that we’ve gone through everything. We have a team, we have a deal criteria, we know exactly what we’re gonna be offering when we talk to the brokers. We have our brokers together. And now number six is we’re sourcing these deals. So when we start sourcing deals, you start speaking to brokers regularly while attending local real estate investment networking events and make sure you’re talking to brokers in all different kinda asset classes within real estate. So if you’re looking for a 10 to 20 unit property, you’re talking to some, you’re like, well I don’t wanna deal with any residential agents. I only wanna deal with commercial agents. Well if you’re dealing with a hundred plus unit properties, yes you’re gonna have to deal with specific commercial multi-family commercial property agents and brokers that are gonna focus on that.

Charles:
Okay, no one’s really gonna bring their a hundred unit property to a residential broker, however, it is very normal to see multi-family properties, commercial multi-family properties. So five plus unit deals be put on the MLS and you can find ’em there. I’ve purchased them off there. So a thing in that scenario is that you’re gonna be able to, if you keep in contact with certain residential real estate agents, they can put that feeler out for you and you’re gonna be the only person or one of the few people that they speak to that’s actually gonna look at the deals. And if you actually look at them, maybe they say, well I’m sending this to a few other people. If you’re responding to them, they’re gonna put it much higher than their list and they’re gonna start calling you first before they send it out. If other people are just getting emails and deleting them.

Charles:
Okay, so start speaking to the brokers. Always attend local real estate investment networking events in all different really asset classes within real estate. And that is really how you’re going to find the brokers and then also fine deal flow from those people. Number seven is underwriting deals. So here we are. So we have some deals, we’re starting to underwrite ’em and we want to initially underwrite them and then fully underwrite deals that pass the initial screening process. That’s what we always do. As we said before, we wanna make sure that we can pretty much filter out the majority of those deals, like two thirds of those deals off the top. And then we wanna really focus on that one third of deals that has a higher potential of actually working okay if you’re too far apart on deals. Some people won’t even put offers out, some people put offers out on everything.

Charles:
I personally would rather find deals where I’m closer with or I can work with the broker and see kind of what their personality is towards you coming back and telling them what’s going on. Yeah, you have some brokers that are very difficult to work with. You have some that are easier that are just welcoming in deals. Usually you find this with like younger, newer brokers, they just want offers coming in so they can bring ’em to their clients that are selling properties. So in this scenario this might be easier to work with because they’re more likely to go to a little bit more for bad for you and say Hey, you know, this has been on the market for so many months, this is like the first good really offer we’ve had in that time. Versus if you have some other brokers that really just want the price and they’re just gonna leave it on there and maybe it’s not the best way of representing their seller, their client, but it’s gonna be something that you have to work with across the table from.

Charles:
And in that situation getting underwriting the deals and figuring out through that initial screening process and focusing on the ones that are really the ones that you think can pencil is where you wanna spend your time. Number eight is submitting and negotiating offers. So we’ve underwritten deals, we’ve gotten rid of two thirds of the deals. Let’s just say we have one third of deals. We’ve cut down that one third to another one third. So now we’re somewhere around 10% of the deals that you’ve received in, you’re now actually putting offers in, you’re seriously underwriting those deals. And now we’re submitting and negotiating offers. So when you’re getting commercial real estate, it’s really LOI Letter of intent is really the beginning of the conversation. It’s not something that you shouldn’t be expecting it to be signed in the first go round. Okay? It’s something where I’m sending it out and this is where we’re starting, okay, I wanna pay you a million dollars for you know, this eight unit building and then you’re gonna tell me you’re gonna come back to me and go, okay, now I want 1.1 or whatever it might be.

Charles:
And now we’re starting it and you say, well I was gonna do this with the owner financing. They don’t wanna do one on our financing or maybe they do whatever it is. This is where like the talks and the negotiating really begins. And so get those offers out and start having serious conversations with sellers and then also with brokers. Number nine is once we have that accepted offer, we wanna do PSA and final due diligence and we’re gonna consult with your attorney at this point and have them draft the purchase and sale agreement always. Okay? It’s not something where you’re utilizing a residential contract or something like this when we’re getting into commercial properties, no matter if they’re multifamily, industrial, whatever they might be, you’re having your attorney draft the PSA, the purchase and sale agreement and then while you are focusing on preparing for inspections and final due diligence, usually at this point it’s gonna be the seller and buyer’s attorneys going back and forth and kind of figuring out what’s best to protect their clients and to get the deal done.

Charles:
And then you are gonna be focusing your time on putting together the inspectors, putting together all the people that you’re gonna need while also finalizing due diligence. And that’s gonna be like the physical due diligence where we’re actually going on site and inspecting every unit and every kind of aspect of the property physically. And it’s also gonna be like we’re going through documentation, we’re going through leases and we’re kinda reviewing exactly what we’re getting ourself into here on this deal and what issues or what problems or things that pop up might become issues down the road. Number 10 and the final step is really closing initial stabilization. So once your inspections are completed and any issues have been addressed close on the property, we notify the tenants of the new owners and then we initiate the process of initial stabilization. Now this is a process that I’ve really coined and it includes like addressing deferred maintenance, updating tenant information.

Charles:
You’re registering their tenants, you know, sometimes you have to re-register ’em and you don’t have the right information where they’re working, all this information, all the emergency numbers, all this type of stuff you have, maybe they have a new roommate now maybe they have something partner moved in with them, whatever it might be. These are things that you’re updating these applications and you’re updating the leases so you know exactly what’s going on in the property and then you’re performing any kind of necessary renovation. So it’s gonna be the roof’s leaking, that’s what we’re gonna take care of immediately. We’ve got two hot water heaters that are on the brink of starting to leak. Okay? Those are taken care of right away. We’re doing all this stuff now to make sure the property is starting to get stabilized. We’re gonna start renewing leases that haven’t been renewed.

Charles:
This is a very common thing when you’re dealing with mom and pop properties. If you’re purchasing them, this is where you have some tenants that haven’t been evicted and haven’t paid in months. This is where we’re gonna start setting up or talking to them and starting that eviction process. This is where we’re really starting to clean up the property. And it’ll take a few months to maybe a year, depending on the size of the property, depending on how aggressive you are. If you come into a property and has like really no leases they’re all like verbal, they’re nothing written, right? So it’s like month to month it’s gonna take time to start bringing those people onto leases. And when you start bringing them onto leases, you don’t want them all coming up at the same time every year. You know, you have 20 units, no one’s on leases or maybe, you know, 18 of ’em are not on leases per se, month to month.

Charles:
And you have a couple that are on 12 month leases. Maybe you wanna stagger that a little bit. Speak to people. How long do you wanna stay? Maybe you put some people on month to month, you resign ’em a little higher. Maybe you put some people on six month, maybe you put some people on 12 month. We don’t really write people over 12 months depending on your state. There’s a huge process that goes with it. A lot of witnesses, all this type of stuff. And if there’s any expenses that come up that you need to increase people’s rent bond in 12 months, you’re not able to do that. So really it’s figuring out how you can stagger the leases a little bit and how we can get the property kind of up and running in the right direction. I probably would wait a little bit at time.

Charles:
I would want to get their information first. Renewing leases and increasing rent on those renewals is gonna be something like a couple months down after we’ve brought in the new vendors, after we’ve started. You know, really looking at and addressing the deferred maintenance. ’cause We wanna see show tenants, hey, we’re investing money into this property ’cause we want good tenants to stay, right? So if we’re increasing their rent a little bit, we wanna show them why we’re doing this and what they’re getting for this increased rent. If you just come in there and the first day and you’re raising everybody’s rent and there’s nothing being done, it’s gonna be a bad taste in their mouth. You’re gonna have people that wanna leave. It’s not gonna be a good scene for you as the landlord. So in conclusion, we want to have a clear investment criteria.

Charles:
We source deals efficiently through brokers or directly with sellers. Have comprehensive underwriting that includes downside scenarios. Perform thorough due diligence to review, reveal any kind of hidden risks that might be there. Have reserves to ensure a smooth closing process while you work to stabilize a property. And if you wanna learn more about the process of purchasing a multi-family property, you can check out episode SS19. That’s SS19. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments on potential 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.

 

Links Mentioned In The Episode:

  • SS19: The Step-By-Step Process of Purchasing a Multifamily Property

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