SS157: How to Prepare Your Property for Sale or Refinancing

SS157 How to Prepare Your Property for Sale or Refinancing

Are you planning to sell or refinance your rental property? In this episode, Charles discusses how to best prepare your property for a liquidity event.

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Talking Points:

  • When trying to sell or refinance a multifamily property, you want to focus on increasing the net operating income or NOI. The higher the NOI, the easier it will be to obtain a higher purchase price for the property, and it will be easier to refinance since the lender will see the property as less risky. If a bank will refinance a property up to a 70% loan-to-value, and you spend several months getting the NOI up so the loan-to-value comes in at 60% or 65% loan-to-value, it will be much easier to be approved.
  • This current lending environment will make it increasingly challenging to complete refinances of existing assets (and especially those purchased in the last 1-3 years). With tightening lending standards and higher rates, proceeds on those refinances are dropping fast, so increasing the NOI is necessary now.
  • How Do I Increase the NOI, then?
    • Push revenue: as an operator, the most important thing you can do is push revenue. Perform consistent market evaluations. Intimately understand your market, and the rental rates being achieved by other professional property owners in the area.
      • Speak to your property management company, if you have one, and tell them you want to refinance or sell and offer to give them a bonus to assist in hitting revenue milestones. Ask them what they suggest. I bet they have several good ideas.
      • For our company, this is one of the reasons we are starting to utilize AI leasing systems. This helps us with improving both lead sourcing as well as lead conversion. With AI assistance and better data, we can pinpoint where our on-the-ground team needs help and where we need to focus our marketing dollars.
    • Secondly, look to see where you can cut expenses. Make sure you are reviewing and requoting all contracts on an annual basis. This is a fine line though, if you change any contractors/vendors, you need to ensure that the service the new contractor is providing is meeting or exceeding the service and quality of the previous contractor.
    • Next is resident retention and lease renewals.
      • We focus on resident retention in properties, specifically, residents who are good, steady-paying residents. A resident saved from moving out is a unit turn cost avoided – and with labor and material costs on the rise, turning a unit for a value-add deal can easily cost $2-3k (or more).  That’s the equivalent of $200/month – so if you can get a $50/month rent increase on a below-market unit that is paying consistently, it might be the right time to take it.
    • Lastly, I would inquire about renovating some of your oldest, most outdated units.
      • If you are having turnover and the units are dated, it might be a good time to start running the numbers on renovating those units, instead of just painting, cleaning, and re-renting them as is.
      • How we determine what to update is by comparing our units with other nearby, comparable properties that are more updated. We use a 36-month – 48-month payback calculation. In other words, we need able to recoup our renovation investment within 36-48 months, or we do not do the renovation. For example; if a renovation is going to cost us $4,800, and we will easily be able to increase rents by $100-$150 or more per month, we will do the renovation.
      • To be more conservative, choose a lower multiple such as a 12-month or 24-month payback. For example; adding a washing machine and clothes dryer combo unit that is say $1,500 installed into your units, which will increase rents by $75-$100 per month, is really a no-brainer. It will offer you a much higher return on your investment, and greatly increase your net operating income.
      • Other factors that weigh into our decision process are how many units are we able to renovate each week (since it requires both our in-house staff plus third-party vendors).
      • Another factor is how much working capital do we have to work with and lastly, do we have enough new resident traffic to accommodate the turnover while avoiding costly excess downtime. You want to renovate, and rent within a couple of weeks preferably, and definitely within a month.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing how to prepare your property for sale or refinancing.

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 and 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 to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
When trying to sell or refinance a multi-family property, you want to focus on increasing the net operating income or NOI. The higher the NOI, the easier it’ll be to obtain a higher purchase price for the property. It’ll be easier to refinance since the lender will see the property is less risky. If a bank will refinance a property at say, 70% loan to value, and you spent several months getting the NOI up, so loan to value comes in at 60% or 65% loan to value, it’ll be a much easier loan to be approved for. Now, in this current lending environment, it’s gonna make it increasingly challenging and complete refinances of existing assets, and especially those purchased in the last one to three years with tightening lending standards and higher rates proceeds on those refinances are dropping fast. So increasing the NOI is necessary now. So how do you increase the NOI? Number one is push revenue. As an operator, the most important thing you do is push revenue, perform consistent market evaluations, intimately understand your market and the rent rates being achieved by other professional property owners in the area.

Charles:
Speak to your property management company if you have one, and tell ’em you wanna refinance or sell and offer to give them a bonus to assist in hitting revenue milestones. Ask them what they suggest. I bet they have several good ideas on how to add value and grow rents at your property. For our company, this is one of the reasons we are starting to utilize AI leasing systems. This will help us with improving both lead sourcing as well as lead conversion. With AI assistance and better data, we can pinpoint where our on the ground team needs help and where we need to focus our marketing dollars. Secondly, look to see where you can cut expenses. Make sure you are reviewing and re quoting all contracts on an annual basis. This is a fine line though. If you change any contractors or vendors, you need to ensure that the service to new contractor is providing, is meeting or exceeding the service and quality of the previous contractor.

Charles:
Next is resident retention and lease renewals. We focus on resident retention in our properties, specifically residents who are good, steady paying residents. A resident saved for moving out is a unit turn cost avoidant, and with labor materials cost on the rise, turning a property from a value add deal can easily cost two to $3,000 or more. Now, that’s the equivalent of $200 a month. So if you can get an extra $50 a month increase on a below market unit that is paying consistently, it might be the right time to take that. Lastly, I would inquire about renovating some of your oldest and most outdated units. If you’re having turnover and the units are dated, it might be a good time to start running the numbers on renovating those units instead of just painting, cleaning, and rerenting them as is. How we determine what to update is by comparing our units with other nearby comparable properties that are more updated.

Charles:
We use a 36 month to 48 month payback calculation. In other words, we need to be able to recoup our renovation investment within 36 to 48 months, or we do not do the renovation. For example, if a renovation is going to cost us $4,800 and we will easily be able to increase our rents by 100 to $150 or more per month, we will do the renovation. Now, to be conservative, choose a lower multiple such as 12 month or a 24 month payback. For example, adding a washing machine and closed dryer combo unit and say it’s about $1,500 installed than one of your units. This will increase rents by say, 75 to a hundred dollars per month. It’s really a no-brainer. It will offer you a much higher return on your investment and greatly increase your net operating income. Now, other factors that weigh into our decision process are how many units are we able to renovate each week since it requires both our in-house staff plus third party vendors. Another factor is how much working capital do we have to work with? And lastly, do we have enough new resident traffic to accommodate the turnover while avoiding costly excess downtime? You wanna renovate and rent within a couple of weeks, preferably and definitely within a month. So I hope you enjoyed. Please remember to rate, review, subscribe, submit your comments and 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 syndication superstars.com. Look forward to two more episodes next week. See you then.

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 Superstar, LLC, exclusively.

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