How do you know you have a deal?

That’s a really hard thing to understand and really focus in on when you’re new to the game. The wonderful thing about Multi-Family is it’s all about the numbers. Numbers are everything. If you put these numbers into the right system, it’s going to help you in figuring out what a deal is and what is not.

In analyzing numbers, you got to have a little bit of software. The Kahuna Underwriting Template is an upcoming tool that you can use to help you understand the system. It’s going to be really user-friendly and it’s something that you can really use to figure out what makes an apartment deal a deal.

Momentum Play

There are two types of deals. The first one is called “momentum play.”

Momentum play is the type of deal that you’re going to buy and it’s already doing pretty good. Since it’s already doing pretty good, you’re going to make it a little bit better. In other words, you’re simply going to carry on the momentum that the property currently has to carry it forward.

Basically, all you’re doing is you’re going to increase rents each and every lease. Also, you’re going to start adding value by doing the so-called “micro repositioning” or “micro turns.” This means you’re going to improve a little bit of the property here and there. You’re not going to do a big rehab. You can slowly start improving the indoor and outdoor features of the apartment. You can also mow the grass consistently each and every week. Micro repositioning could just be a lot of things.

The main thing about momentum play is that you’re improving the property over a period of time which shouldn’t be really that much. These are probably the best types of deals to get into when you’re first starting because there is already some cash flow. In fact, a lot of times these properties will cash flow the day you buy them.

“Cash flow is really what it is all about and what should drive you in all of your decision making in this process.”  Corey Peterson

Repositioning

The second type of deal is called “repositioning.” Repositioning is really where you’re going to do a very big rehab. It is where you take the property from a current state of probably disrepair to a whole different level of repair.

When you do a repositioning, expect to do a lot of turnover. It involves working on a lot of the buildings. It’s something that you need to make sure you have lots of cash in the bank or cash set aside for this project. They’re very profitable. However, your risk also goes up substantially on these deals. It’s something that you need to be aware of.

Repositioning is something that you are not encouraged to do on your first deal. It’s definitely easier when you cut your teeth on something that makes  a little bit more sense on the cash flow.

Getting To Know Your First Deal

What does that first deal look like? What  does that first momentum play deal look like? Finding the answers to these questions lead us to a good example of a deal. It’s called “Forestwood Apartments.”

Located in New Orleans, Forestwood Apartments is a 94-unit apartment complex that had all the right things wrong. This means it suffered from bad management. It wasn’t at all that bad since when the property was bought, it was 92 percent occupied. The collections were also decent which made us qualify for a leverage of 80 percent. An 80 percent leverage means being able to get a loan from the bank from Freddie Mac, at 80 percent LTV. It’s an important achievement since the purchase only required a 20 percent down. Next, the budget for capital improvement was calculated at $400,000. So far, these are the sole improvements that are needed in the property.

The deal turned out to be something that is indeed “very attractive.” Upon analyzing the numbers, it was learned that the property had a couple different expenses that were way out of whack.

The Property Packet

In a property packet, there’s going to be a spot, where the brokers are going to give either pro forma or actual. This refers to a place where they’re going to give you the financial numbers to a project.

Income Side

On the income side, here are the categories that you need to look for:

1. Gross Potential Rents – This refers to the total number of rents that you could collect, if every unit was totally rented out.
2. Vacancy – It is the percentage of units that are not rented.
3. Total Concessions – An example of which is when you’re giving $100 off for your first month’s rent.
4. Total Rental Income – This refers solely to rents.
5. Other Income – This is the money collected from facilities such as the washer and the dryer.
6. RUBs Income – Residential Utility Bill backs
7. Total Income – All the income that the property generates in a year.

Operating Expenses

1. Payroll – It is the most expensive line item for most of the time.

“The biggest expense you have on any property is the payroll of the people who work for your property.” Corey Peterson

2. Advertising – Free advertising and the internet can help quite a bit.
3. Maintenance – This category can be a beast since this is where you’re going to have the turns of your property.
4. Office Admin – Administrative Line – This is for your phones, your computer systems, anything to do with travel, or your management company traveling to the property.
5. Management Fees – A line item, management fees refer to the payment of the percentage of your gross collected rents to the management company.
6. Utilities – These are normally like your water sewer trash. It could be all the common area electric that you’re going to have to spend.
7. Insurance – It is something that everyone has to pay.
8. Taxes – In order to avoid getting slapped with a new tax bill , it’s better to budget your taxes in underwriting.

Net Operating Income (NOI)

After everything else is said and done, take the total operating income. Then, subtract it from the operating expenses. What you’re going to have left over is your Net Operating Income. This is the amount of money that your property is going to make in a year.

Cash Flow Before Taxes (CFBT)

From your NOI, you need to make a few more deductions. These include debt service (loan) and reserved account (the amount of money that the bank takes every year). When you get these two numbers totally deducted, you’re finally going to get to a nice fat number which is called CFBT or Cash Flow Before Taxes. This is the money that goes into your account.

Things To Watch For At Properties

One of the things we always try to watch when we’re looking at properties is if the utilities like the water bill is just abnormally high. It’s very important that when you first take over properties, the first thing you do is make sure that all your toilets are not leaking water. This is because it can get very, very costly.

The other thing we do is a water conservation. A good example is using big toilet tanks.

These are little things that you could do on the property level that makes so much difference. It can really add to the bottom line.

So, what’s the secret?

When analyzing deals, the secret is to look for ways to find great places where other people are messing it up. Remember that most properties suffer from one or two things. Most of the time, it’s a combination of both. These are bad management and deferred maintenance.

Every tenant always wants the same things. They want the cleanest, safest, most affordable place that they can get for the money they make. If you can offer that up to your demographic, you will win, and you win big.