Follow our comprehensive guide below when purchasing multifamily real estate

Step 1 (Optional): Hire a real estate agent / broker

Experienced real estate agents / brokers complete dozens, if not hundreds, of real estate transactions. This type of experience is vitally important and extremely beneficial to buyers who are looking to buy investment properties.

Agents can be specialized in various asset types, so choose carefully.

It’s important to identify an agent that specializes in asset types that fall in the category of the property types you are looking to purchase. Just like you wouldn’t hire a heart surgeon for brain surgery, don’t hire a residential listing agent for buying a multi-family property.

A good real estate agent can help you understand current market conditions and other factors that will be crucial in identifying suitable properties. Experienced agents will many times have access to inventory that is not always found on the open market.

Pro Tip: A large percentage of multifamily properties are transacted in off-market type dealings. Many of these transactions occur with very limited publicity.

At Citypoint we understand the benefit of engaging the right professionals for achieving your investing goals. For a list of Citypoint Professionals in your area visit:

Illinois https://citypoint.com/state/illinois/

Arizona https://citypoint.com/state/arizona/

Continue with the guide below to familiarize yourself with recommended buying processes.

Step 2 – Determine Your Financing Options

A Citypoint broker/agent can put you in contact with an array of financing professionals. An important first step is to know how you will be paying for a property. There are numerous loan types and financing options. Some of the more common options that investors use are:

Cash

Not much context to add here, cold hard cash is a common way many investors purchase investment real estate. Cash purchases can help investors buy properties at discounts due to the limited contingencies a cash buyer will be requiring. Since a lender is not involved, there is typically no finance contingency or appraisal contingency found in the offer package that the buyer submits. This makes the offer more attractive to the seller.

Commercial Financing

Commercial loans are similar to residential loans, but the loan is collateralized by an investment property vs. a home owner occupied residence. Whereas, residential loans are usually “sold” off to 3rd parties and/or loan servicers, commercial loans are often held by the bank originating the loan. Due to the bank needing to “hold” the loan, the duration of these loans are often short term compared to residential loans. Commercial loans often have a term of 3, 5, or 7 years where most residential loans have terms of 25 or 30 years.

Due to the risk profile of commercial loans, they will usually come with a higher interest rate compared to residential loans (this isn’t always the case as market conditions play a big role in lender rates offered).

Typical LTC for commercial loans are 70% – 75%

Pro Tip: Build a relationship with smaller lending institutions in your market. Good relationships with these banks can lead to better financing terms, easier approval processes, and more.

Conventional Financing

Similar to a commercial loan, as it’s also collateralized by an investment property vs a home owner occupied residence, these loans are commonly used to finance smaller investment properties, or 2nd homes, by individuals. These loans are commonly originated by larger national institutions. Because these loans are typically sold off to 3rd parties and/or services, they come with terms as long as 20, 25, or 30 years.

Typical LTC for conventional loans are 80%

Hard Money Loans

Hard money lenders (HML) are companies that pool investor funds and then use these funds to originate loans to experienced investors. Since HML companies don’t operate under a banking charter, they do not collect consumer deposits and they are not able to leverage consumer deposits like a chartered bank can. The HML looks to make a spread, or delta, between the interest it pays its investors vs the interest it charges its borrowers. Since private investors are directly funding the HML’s balance sheet, the

investors look to generate an acceptable return. This means charging the borrowers an interest rate that’s typically higher than bank lending rates.

A borrower can expect to pay 2%-10% higher than the interest rate offered by bank loans.

The benefit to using HMLs is that they may offer an easier/faster approval process, more flexibility, higher limits on loan amounts, and higher LTC ratios.

Private Debt

Many investors confuse HMLs with private lenders. A private lender is simply an individual that you have a private relationship with, that is offering you money, at terms negotiated by you and the private individual. The most common private debt is obtained from family members or close friends.

Agency Debt

Agency loans are government backed loans. Currently Fannie Mae and Freddie Mac are the largest government lending institutions. These agencies used to be privately held corporations. However, after the 2008 housing crisis, they were bailed out by the government and were nationalized. The shares of these companies are still owned by corporations and private citizens (FNMA and FMCC stock symbols) but all the profits generated by Fannie Mae and Freddie Mac go directly to the US treasury. Speculation exists that these companies may eventually be de-nationalized. Whether this will happen or not, is a subject that we’ll dive into on a separate post.

Agencies like Fannie Mae, Freddie Mac, and HUD offer very friendly lending terms to investors. Typically, the interest rate is approx 1%-2% lower than what you can expect from a commercial bank. They also offer attractive LTC ratios and lengthy loan terms.

Agency debt is best suitable for large investment properties, as it comes with loan minimums, and yearly audit requirements, that can cost $10,000 / yr or more.

Other

Many other financing options exist that are not mentioned above. Some, but not limited to, are bridge loans, mezzanine debt, life insurance loans, syndications structures and more.

Step 3 – Browse and Analyze Properties

Once your financing is in order, work with your agent to find suitable investment properties. Properties come in various “shapes and sizes” and it’s important to analyze properties properly. Some important items to pay close attention to, prior to a site visit, are:

Condition

General exterior maintenance is an item that many investors overlook. If you are expecting to keep expenses at a minimum, pay attention to any deferred exterior maintenance items that exist. These can foreshadow the general condition of the rest of the building. If the property owner takes great care of the exterior, then it’s probable that the interior of the building will be in similar condition.

This doesn’t mean that poorly maintained properties are not good investments. Poorly maintained properties can be great investments, as long as repairing all the existing conditions fits within your budget and is part of your plan.

Some exterior items to pay attention to are: Tuckpointing (brick buildings):

• • Roof
  • Fascia, Soffits, Gutters, Windows

Adjust your preliminary underwriting accordingly based on a quick assessment of the exterior condition of the property.

Wear and tear of the interior units is commonly acceptable as the units are usually occupied. Since a tenant is currently living in the unit and the unit wouldn’t cost much to “turn” the unit, if the tenant moved out, then an “average” unit condition is acceptable.

This of course can be dependent on the area, rent levels you’re looking to achieve, and quality of tenants you’re looking to attract.

Pro Tip : Regardless of your experience, it’s ALWAYS advisable to hire a licensed home inspector to do a full inspection of the inside and outside of the property you are under contract to purchase. More on this in DD below.

Rent Roll

Conduct a basic analysis of the rent roll. Prior to scheduling a site visit at a prospective property, ask the seller for a rent roll. A detailed rent roll will show you current lease rates, lease expirations, and more. Some of the immediate items to analyze are:

• • Current Rents – Are these below market rate, above market rate, or at market rate? Many investors will buy properties, even at negative cash flows, with the intent to raise rents in the future. If the property is currently 40% under rented a savvy investor can realize lucrative returns by increasing rents to market rates.

WARNING: Increasing rents isn’t always easy to do. Many tenants won’t be able to bear the burden of a large price increase and therefore might opt to move out of the property. When this occurs an investor might face several costs such as vacancy (hidden cost), maintenance/unit turn costs, and leasing fees.

• • Expiration Dates – Leases may have expiration dates well out in the future. Regardless of if the property ownership transfers a lease still holds valid, regardless who the owner is, as long as the tenant hasn’t violated their lease.
  • Current Balances – Familiarize yourself if all of the tenants are current on rent. It’s not uncommon for a tenant to owe a small balance, or for a tenant to occasionally pay late. Be cautious with any tenants that are many months in arrears.

Expenses

When exploring suitable properties for investment it’s important to be able to conduct a “quick” analysis of potential expenses a property may incur during your ownership.

Remember, you’re not at a site visit yet, you’re simply sifting through hundreds of listings to identify potential investments that might fit your goals.

Some listings will provide expense estimates and some listings won’t provide any estimates. It’s important to be able to identify ballpark costs of a property effectively. The most common expenses on multifamily real estate are:

• • Real Estate Taxes
  • Insurance
  • Utilities
  • Management Expenses
  • Maintenance Costs

The real estate taxes, management expenses, and insurance costs are relatively easy to identify. The Utilities and Maintenance expenses will require a bit of finesse. A good general rule of thumb, for beginners, is to apply basic logic. If a 100 unit multi-family building is claiming a water expense (assuming landlord is responsible for water costs) at $5,000 / yr, that would equate to $4.16 / Unit / Month. You don’t need much real estate experience, if any at all, to know that $4/month/unit for water is not a realistic expense.

Many properties may also have utilities that are separately metered to the tenant, meaning that the tenant would bear the cost of the utility. The most common utility that is metered and billed directly to the tenant is Electric. The most uncommon utility metered and billed directly to the tenant is Water.

This same logic “rule” can apply to maintenance expenses. If you are analyzing a complex, with a maintenance tech on site, you can estimate the cost of keeping that position filled plus any materials needed for the repairs. If you are analyzing a property that’s newly built, with no maintenance tech on site, you can assume that the maintenance expenses could be pretty low. Vice versa if you are looking at 100 year old building that looks like it has deferred exterior maintenance, you can assume that your maintenance costs could be pretty high. For simplicity it is sometimes best to try to estimate a maintenance cost / unit / year.

There are unique properties and exceptions to the “logic” method mentioned above, so don’t be afraid to ask the seller or the listing agent for more details regarding a specific expense.

Rental Comps

Understand what the delta is between current rents and market rents. Market rents aren’t always identifiable to the exact dollar amount / month, so it’s important to understand how to properly analyze the rental market.

Most real estate agents can easily do this by “comping” recent rental units, or in other words, analyzing recent comparable rentals that have rented within a recent time period. The process is relatively simple and can be completed efficiently if you have a data source available to you. Most agents will use the multiple listing service (MLS) to do this.

In large markets, a simple search of the surrounding few blocks will usually identify dozens of rental listings that have been rented, are active, or that are pending. Pay attention to the likeness of the unit (as it compares to yours) the listing time, and the rented price. If multiple units, that are like yours, have rented for a price of $X, within a few days of being listed, then it’s safe to assume that you can expect $X market rate for your unit.

Review other rental listings in the market that have canceled and expired. These will help paint a picture of rental rates that may NOT be achievable. Viewing the full picture of how inventory has moved, or not moved, in your area will help you understand at what price you can expect to rent your unit.

Sales Comps

Review listings in the market that have sold, canceled, expired, are active and/or are pending. Most agents focus exclusively on SOLD comparables. This is a foolish approach as it only provides insight into a sliver of events that have occurred in your marketplace. On average there are 4x – 8x more listings that are Active, Pend, CTG, and that have canceled/expired vs listings that have sold. All of this, usually omitted data, provides deep insight into recent real estate activity surrounding the property you are analyzing. Viewing the full picture of real estate activity can help you determine if the property you are analyzing is priced right.

You should review ALL property statuses as they will help you understand property values.

Apples to apples comparisons are important. Many amateur investors fail to make the distinction between properties that look similar, but are in fact not similar investments. For example, building A may look like building B, but building B has all 2-bedroom units whereas, building A has only 1-bedroom units. Building B will be able to gross more income and will be valued higher. Examples like this, and others, can cause investors to miss out on hidden opportunities.

At Citypoint, we not only analyze the full MLS history but we dive into public records, off-market transactions, and more to obtain important data points within our market.

Market Reports

While market reports can be valuable, they are typically speculative in nature. Having a pulse on what’s happening within your market is good but, don’t let it be a catalyst for an all-in or all-out approach. The future is impossible to predict and many investors have fallen victim to “up and coming neighborhoods” or overpaid to be in the “best neighborhoods”. Neighborhoods will change over time, but timing these changes is very difficult as they usually respond to macro economic forces that neither you nor I can predict.

Site Visit

Now that you’ve identified a property/ies, that you are interested in, set up a site visit prior to submitting an offer. It’s important to visually see the asset you are considering purchasing as it gives you an opportunity to further familiarize yourself with the property and its surroundings.

Pay attention to exterior condition (as mentioned previously), interior condition, and mechanical rooms (plumbing systems, electrical systems, and HVAC systems).

A site visit will also give you an opportunity to obtain more information from the seller’s side. Whether you’re meeting the owner, list agent, property manager, or the seller’s representative, they will most likely be able to provide you with additional property details.

Step 4 – Submit An Offer

If you are ready to make an offer your agent will guide you on completing an offer package. You can also use Citypoint’s instant offer submission available for any Citypoint listing. Your offer should include the following details:

• • Purchase Price
  • EM Amount – Sellers typically like to see a “healthy” EM amount. Usually $1,000 EM on a $1,000,000 listing will not be acceptable to the seller.
  • Financing Type (Remember Step 1 Above) – Sellers will pay close attention to your financing details.
  • Inspection and Due Diligence Period – 15-30 days is common in “smaller” real estate deals.
  • Other Contingencies
  • Anticipated Closing Date

If a contract is executed, the transaction process begins. In attorney/title states, like IL, It is highly encouraged to hire a real estate attorney to help guide you through this process. In agent/title states, like AZ, your agent will help guide you through this process.

Once a contract is signed, the clock starts ticking on many of the provisions provided in the contract. Described below are many of the common contract provisions

Attorney Contract Review

Your attorney or agent will flag any areas of concern in the contract. This is a chance for the parties to request any contract modifications. In IL it is common for the attorney review period to last 10 days, or indefinitely if the parties don’t officially conclude the attorney review process. Of course this is all contract dependent and the language in your contract will direct this process.

Due Diligence

A due diligence period is commonly found in most purchase agreements.  The due diligence period allows you, the buyer, time to review documents, title reports, and more specific to the subject property.  Some common steps of the due diligence process are:

Property Inspection

Hire a licensed property inspector that specializes in multi-family inspections.. Your inspector will flag any items of concern. The cost of inspection will vary based on the size of the building, the number of units, and more.

While sometimes frowned upon, and sometimes labeled as “re-trading” It is not uncommon for investors to ask for seller repairs, seller credits, or to back out of contracts based on the results of the inspection. The conditions set forth in the contract, like an as-is clause, can set restrictions on your options so be sure to fully understand your inspection contingencies, or lack of, prior to entering into a contract.

Review Documents

Review all documents during due diligence. Your agent and/or attorney can help you with this process. Documents you should be reviewing are:

• • Leases

Review each lease in detail. Identify any discrepancies between the rent roll and the lease. Many times when a landlord increases the rent on a tenant, they do not update paperwork via a new lease or a lease addendum. For any discrepancies found, obtain additional documentation from the property owner that supports the lease or rent roll information.

• • Utility Bills

Obtain copies of each utility bill from the landlord. Review multiple months of utility bills to understand how billing changes seasonally. Electric usage will usually be higher in the summer and gas usage may be higher in the winter. Some expense receipts can be ignored, like garbage and/or sow/lawn care, if you plan on hiring your own vendors.

• • Maintenance Records

Cost of maintenance isn’t as important as the amount of maintenance performed. Think work load, not work cost.

Since every owner has different methods of completing maintenance, the actual historical maintenance expense isn’t very useful. If your maintenance tech charges $X/hr and the seller’s maintenance tech charges $Y/hr, the maintenance cost will obviously vary between the parties. This can further be skewed if the seller completed maintenance themselves, if a tenant completed maintenance in exchange for discount in rent, or if the seller hired a property management company that completed maintenance items.

• • Vendor Contracts

Does the seller have any vendor contracts that will survive closing? If yes, ask for them upfront and understand the contractual obligation you have to them.

• • Survey

The purchase agreement will usually contain language specifying which party is responsible for ordering, and paying for, a survey. In some instances the seller may have an existing recent survey that your lender will accept. Your attorney will help you review this document.

• • Other

Other documents may exist pertaining to zoning, environmental reports, code violations, insurance claims, and more. Work with your agent and/or your attorney to review all relevant materials.

• • Insurance

Work with a reputable insurance agent that understands multi-family real estate. Obtain quotes for proper coverage. Your insurance agent will guide you on policy types, limits, deductibles, and more.

• • Property Management

If you plan on hiring a property management company, interview and obtain quotes from various PM companies. Citypoint works with a very reputable property management company, for more details click here.

• • Appraisal

Your lender will require an appraisal to be completed on the property. Many contracts have appraisal contingencies that allow for a purchaser to back out of a deal, or renegotiate purchase price, if the appraised value of the property is below the contract price.

Step 6 – Prepare For Closing

Once your due diligence is complete AND when your financing is ready, it’s time for the parties to schedule a closing date with the title company. Your agent and/or attorney will help coordinate this with you. Here are items to obtain/complete prior to closing.

Finalize Your Insurance – Your lender will ask for this.

Tenant Directory – If not already provided, obtain a full list of tenants and their contact details.

Prepare a Tenant Letter – This notifies the tenants of the change in ownership and instructs them on how to make rent payments moving forward. This is usually prepared, and mailed, by your attorney.

Prepare Closing Funds – Your attorney or the title company will provide you with funding instructions.

Property Management – Alert your management company, if you’re using one, of the scheduled closing date. This will give the PM company time to ensure a smooth onboarding process.

Final Walkthrough (Recommended) – Visit the property in person shortly before closing. Pay attention to any changes, especially changes in condition. Alert your agent and/or attorney of any concerns you may have.

Step 7 – Closing

You’ve made it to the closing table. It’s an exciting day! Here are a few items to complete post closing:

Utility Transfer – Finalize the utility transfer. Will your management company be handling utility payments?

Obtain Keys

Congratulations on your purchase, hopefully you will be awarded lucrative profits and will be ready to buy another property soon. We wish you success on your journey, and if ever needed, we are here to help.

Cheers and happy investing.

The Citypoint Team