Foreign.

You're listening to the Master Passive Income Podcast Network.

Hey, guys, this is Charles Seaman here with Erica McNew, and we're hosting the Master Passive Income Multifamily Podcast.

And today we're going to be talking about a very exciting topic, evaluating multifamily property potential.

Welcome to the Master Passive Income Multifamily Podcast, where we guide you to invest in commercial real estate with a special focus on raising money from others to buy bigger and better deals.

And now, here are your hosts, Charles seaman and Erica McNew.

So what does that mean in a nutshell?

So when you're looking at what potential multifamily property to purchase, there's several different factors that you want to take into consideration when you're, when you're purchasing and acquiring multifamily.

So we'll go over some of those key ones.

I think, for starters, understanding your key metrics.

So like getting very, very familiar with the verbiage and the lingo that people use within the multifamily asset.

Some of those key metrics being like cap rate, your cash on cash return, your net operating income.

What do you look for typically, Charles, when it comes to like your cap rate, your cash on cash return?

You know, it's a great question.

So the answer to that's probably going to vary a little bit, depend on depending on the size of the deal I'm looking at.

Most deals that I've looked at in the past have been larger deals like 50 units and above.

So, you know, in a perfect world where I love to see an 8 in 8 cap and a 12% cash on cash return.

Absolutely.

But for anybody who's looked at deals in the list 5, 6, 7, 8 years, there probably haven't been too many of those.

Matter of fact, there's next to none of them.

Rephrase that.

So I think it's important to be realistic with the market you're looking at and what the expectation is.

A lot of times, you know, like people ask you, what cap rate do I want and what cap rate do I want?

Well, the answer is as high as I can get, but ultimately it depends on the market.

So if I'm looking at a property in Charlotte versus a property in Salisbury, North Carolina, which is about an hour outside of Charlotte, I'm going to have a different expectation because there are different markets.

And, you know, to think that I'm going to find the same cap rate in Charlotte versus a tertiary market that's an hour outside of it's probably very unrealistic.

So for anybody here, you want to have certain parameters of what you're looking for, but you also want to adjust them to be realistic with the markets you're looking in.

So that way you don't just have a fruitless endeavor of looking and not finding anything.

Right.

Location, location, location.

Right, Charles, that's actually the next one.

Yeah.

When you're evaluating the property potential, you know, three very important words that Erica just mentioned in real estate.

Right.

Whether it's single family, multifamily, shopping centers, whatever it is, you need to have location in mind and you want to understand what you're buying.

Now, a lot of the properties I bought have been in rougher areas.

Now, going forward, I may change that strategy because I don't know that I want to keep buying those.

But it's important to at least know what you're getting into and to understand it because there's different risks associated with each.

If you're buying in a major city in an A class area, there's probably minimal risk.

I mean, there's always risk, but there's a lot less risk because you generally have a demographic that has more affluency.

They generally pay the rent on time.

If they get laid off from their job, they usually have a few bucks in savings that they can use to pay rent.

Where if you're buying in a C or a D area, you know, oftentimes you want to see higher returns in those areas because there's more risk.

You're dealing with a rougher tenant base.

You deal with a riskier tenant base because a lot of times that demographic doesn't have any money in saving.

So not even if they lose their job, but if they lose five hours a week at that job, at their job, they may struggle with the rent.

So it's a.

It's a different demographic altogether, and you need to just understand what you're buying and set clear parameters.

That is such a good point.

I absolutely agree.

And as far as, like, I guess, the location, when you're looking at what location you want to be purchasing in, even if you're purchasing in a market that is outside of your own, it's.

You can do so as long as you're familiar with particular data points, especially for multifamily on a location economic analysis, some of the key data points that I'll look at for my investors is the growth rate of that area, estimating the future population based on that growth rate, new household formation, new rental formation.

Right.

Because if you're buying a multifamily asset and it's an apartment building and you're, you have leases.

You, it matters then to know how many new renters are coming into the area annually.

Your growth rate, number of units, your growth rate, percent of units, and then your rent versus household income so that you understand that like you can go in and buy class A asset in an area that the rent versus household income doesn't actually support it.

And so, and then you're putting yourself in a position of higher vacancy.

So still.

Okay, but you definitely want to make sure that you're calculating that stuff correctly on pro forma and making sure that that way you're able calculate in the correct amount of vacancy versus occupancy.

And all of these data points are gonna be really important.

So economic analysis, absolutely.

And like the single family, those things are important too.

So for anybody listening who's only done single family, yes, location matters.

But here's the thing.

You can buy a single family home and be wrong on your analysis and get lucky to fill one unit.

It's a lot tougher to do when you, when you have 100 unit building, you may not get as lucky and you may not fill those units.

So you really have to be, you know, more, more focused when you're doing the analysis of the areas and making sure that you really know.

So like all those points that Erica says, they're really important.

You need to know what the, what the median income is for the area.

You need to know what rents are.

So one pitfall that I've seen in the industry, and admittedly one that I made myself, is a lot of times for my rent targets, I look solely at rent comps.

But the issue with that is it doesn't take affordability into account.

And you know, for like an A class demographic, that's probably not as relevant because that that demographic has disposable income.

I don't want to say that they don't care what they pay in rent, because that's not true, but they don't care as much.

So they're less likely to, you know, really look into it because they're probably looking at a lot of apartment complexes that are charging the same rents.

And you know, they realize that's just kind of what the going rate for the area is.

But if you deal with the lower end demographic, like a C or even a D class, you know, what happens is if you price your assumptions solely on the comps, the issue is you may not be able to collect those rents.

And that's where the median household income comes in because seeing what it is within, you know, ideally a 1, 3 and 5 mile radius of the property, but really that 1 mile radius is the most important because that's your, that's your renter base.

You know, if it doesn't line up with what the comps are, there's a good chance that a lot of properties in the area probably have a lot of collection laws.

So you want to keep that in mind because that's going to help you evaluate these properties.

Such a good point.

I think too it shows that how these data points play into the real life scenarios that you will live out as the landlord.

If you're not cautious and really looking at these data points up front, it's hard to predict those real life scenarios that are going to play out as a landlord.

I think so often people get into assets thinking that it's going to be easy value add before realizing that the, you know, the demographic of tenants is a lot different than they thought it would be.

And so, and it becomes a little bit more difficult of a project than they thought it would be.

So really find is so important.

Totally.

You know, the, what I always hear most people looking for is they want the C property in the B area.

It's kind of like the unicorn that everybody searches for.

And miraculously I hear so many people saying they find it.

Now I think, you know, the C property in the B area, you know, you really have to look at it a little bit closer because sometimes people that say they find it may not have found it quite as.

Quite as well as they make it out to be.

It is a little more of a unicorn.

But yes, if you illegitimately find one of those, that's, that's definitely a great thing.

One thing I learned in this business a long time ago from people who were further ahead of me is that you can take a C property and try and convert it to a B.

But there's a lot more risk in doing that than just taking that C property and making it be the best C property in the area.

I generally would prefer less risk.

So I would rather just go with that strategy because it's, it's a lot easier to execute in my opinion.

It's a lot safer.

Unless it's just an absolute slam dunk that is like, oh, I can take this and convert from a C to a B.

Then yes, do it.

But when you really think about it like retenanting a property, that's some serious work and if things go wrong, you could have a lot more vacancy.

You could Have a lot more money going out than coming in.

So you want to be cognizant of that and make sure you're using that as part of your analysis.

So, you know, aside from location, using all those location points to be able to determine really how valuable the property is and how much rent can you get and what can you be using for vacancy.

So not every market is going to be identical.

You know, even markets that I own in, there are some that consistently are full and there's others that are consistently a struggle.

And that's the difference from one market to another.

And it's like you have to, you have to factor as much of that in as you can reasonably on the front end.

So that way you keep yourself out of bad deals.

Love.

It's like, don't get too optimistic on your, you know, your value add.

Don't get too optimistic.

Make sure that the value add that you're trying to do is reasonable.

Like you said, if you can make it the best, you know, C class property in the C class area, it's like, yes, that's the best option.

Absolutely.

Just from a conservative standpoint.

So I love that mindset.

Very neat.

Another thing to talk about is unit mix and layout.

So what is, what does that mean?

Well, the unit mix is the breakdown of the floor plans that you have at the property, right?

So like, let's say if you're looking at a 25 unit property and you say, okay, it's got 101 bedrooms and 102 bedrooms and 53 bedrooms, so that's your unit mix at that property.

Now that's just a random unit mix I came up with, but that's not a bad one.

General rule of thumb, a lot of people like to see twice as many two bedroom units as they do one bedrooms.

In most markets, two bedroom units usually are the most in demand.

And especially in the C class demographic right now, it's probably good having two bedroom units because it allows for a roommate or a couple situations.

So you get two incomes in there instead of one, which makes it a little bit easier for people to qualify and transparently a little bit easier for you to collect the rent.

So sometimes that can be a good thing.

The more studios and the more ones you have, there's a good chance you're getting a more transient workforce type of demographic.

Now if you're buying a property that's like in a city center, well, okay then, then you might be getting the young, single professional.

So that's a different crowd.

But anywhere outside of like that center City, you're probably looking more transient tenants when you have those smaller floor plans and small unit mixes.

Do you agree, Erica?

I absolutely agree.

And I think that I love even how you kind of demonstrating how your data points when you're doing your location economic analysis, it's very important that it be that hyperlocal because the property that you're purchasing, say near city center, is going to be much different than the property you're purchasing, like for instance in South Charlotte.

And it's based mostly the data point that I see for this one is your average household size.

So like in certain parts of Charlotte market, the average household size is like 3.2, which would mean, you know, if I'm purchasing a almost completely studio, one bedroom multifamily complex in that area, I probably am going to have issues with vacancy.

And so that's just something to consider.

Also when it comes to those properties that are like mostly studio one bedroom, what I see a lot of, especially in my market is people partnering with nonprofits to do some type of nonprofit housing, subsidized housing, and that kind of helps offset, you know, through tax deductions and certain benefits of the program, it can help facilitate filling in multifamily complexes that otherwise you maybe would have higher vacancy rates on.

So that's like one of the strategies I see people use for those mostly like Studio one bedrooms in particular here.

Totally.

And another thing to take into account when you're evaluating multifamily property is what type of amenities does the property have, both in the community and in the units.

So you know, do you have a property that has washer, dryer appliances either in the units or in a common area?

People like having that on property.

So that can be a plus.

Does the property have a swimming pool?

Does it have a dog park?

Does it have a gym?

Now, if you're dealing with a 20 unit apartment building, let me be clear, you're probably not going to have a gym or a door park or things like that because you just don't have the space.

If you're buying a hundred unit apartment complex, you know, there's a good chance you may see those things.

So that will vary a little bit based on the size of the property you're looking at.

But ultimately what you want to do is look at what the property has, but also look at what the surrounding properties have, because that's going to let you know if you have an advantage or a disadvantage or if you're kind of on par with them.

If you're the only property in the area that doesn't have a swimming pool, there's a good chance that people may not want to go to your property as much.

So something just to be aware of because that may make it a little bit more difficult for you to attract tenants and for you to attract quality tenants.

So things that you want to evaluate as you're looking at deals.

Absolutely.

And from a standpoint of evaluating deals, each of those amenities, when you're looking at a particular complex, comparing to others in the area, each of those amenities typically will have a dollar per door value.

And so kind of getting familiar with that dollar per door value of like, what is that swimming pool going to add to the value overall of this complex?

What is that clubhouse or that, you know, gym going to add overall?

You can find some just general numbers that kind of help you with your, with your analysis of pricing also, as you're doing that kind of underwriting.

Right.

Another one, and probably a very common one for everybody here who listens to other podcasts.

Not that there are multifamily podcasts, but.

But it's value add opportunities.

Right.

So that, that's a very common term we hear in the industry.

So what is value add, Erica?

So value add is, for me, I think of it as two different parts.

You have your operational value add where you're going in and you're looking at the line item expenses, and you are analyzing where can you optimize this property and optimize the net operating income.

And it can be through a variety of different things.

I think you're pretty well versed on those line items.

And how to optimize the other side would be the construction side.

So when you have a particular rent bump per door, that can happen and you're able to go in, do some slight renovations to each unit, and increase the lease rate based off of that.

So those are the two kind of sides of value add that I typically see.

But tell us how you do this, Charles, because I know you really are very skilled at the operational side, for sure.

Well, you know, I think you nailed it.

I mean, those are really the two sides.

So value it is anything that's done to increase the value of the property.

Right.

So regardless whether it's operational, whether it's capex, you know, you want to see where can you extract more value.

So commercial real estate, keep in mind, is valued oftentimes on the net operating income.

So because of that, as a general rule of thumb, if you're increasing the net operating income, you're probably increasing the Value.

Now, I'm not going to say 100%.

You know, there are other factors like market, market components like cap rates, which we can't necessarily control, but at least the part that you can control.

And you know, you're either pushing income, reducing expenses or some combination of both.

So on the income side, you know, for me personally, I'll give you some of the value adds that I've actually done.

And this is my favorite type of value.

This is the one I'd rather do all day long because I personally see it a lot less risky.

I bought a property In South Carolina, September 2020, the average.

So that was a smaller property, 48 units.

The rents at that property were between 575 and 700 bucks when we bought the property and there was only one at 700.

Most of them were between 575 and 650.

And even for a smaller market like Sumter, those rents were pretty low by 2020 standards.

The thing is that the property was owned by a mom and pop.

It wasn't really a priority for them because they had a successful furniture business, they had a third party management company managing the property that to be honest, really didn't give it any attention at all.

And the owner was very hands off because you know, it was an investment they had, but it wasn't a high priority for them.

So the property had very low rents because of that.

So initially when I looked at it and kind of did my first pass, you know, just looking at the area and looking at what I saw, I felt pretty confident you can get 750.

Now admittedly my property manager told me 950.

I didn't believe her.

I'm glad she proved me wrong.

But that being said, we didn't do anything to those units.

There was no upgrade whatsoever.

So it was a nice property, decent submarket.

And what happened is, out of the 48 units, while the occupancy was strong, when we closed, 27 of those units were leased by month to month tenants, which means that they don't have a full term.

So they could basically all leave in one month.

Some people look at that and say it's a risk and it can be.

I also look at it and say it's an opportunity.

So the opportunity was in the first three months after takeover.

We were working on getting as many of those people signed the leases as possible.

So we were successful at keeping 24 of them.

We only lost three out of the 24 we kept.

We got most of them right around that 750rent pretty quickly.

So just think, we literally increased the rent roll by thousands of dollars a month within three months of buying the property and not doing any capex to it.

So that was evaluated because we bumped up the net operating income by being aware of the market and simply paying attention to the management, which the prior ownership and management didn't do.

So we had an advantage there and that gave us a lot of value that we added to the property.

So it was good.

Wow.

And you don't find those too often.

No, that one strictly of all my deals, that was my favorite.

I wish I found one like that.

One of my fellow commercial brokers in Florida found 120 unit property in Destin, Florida that had about 250, 300 rent bump per door without any capex.

And then with the capex about 5 to 550 per door.

And so they were able to do approximately about $4 million worth of value to the property within six months based on that.

So those rent bump per door, like that's the one that I look for.

But you know, they're more unicorn deals.

It's harder to find for sure.

Absolutely.

Well, let's talk about the other side of that equation, Erica.

So increasing income is one part, but how about expenses?

That, that part's not as sexy.

So you don't hear people talk about that one as much.

But it's kind of an important piece of the puzzle.

What do you see there?

I agree it is an important piece, especially if you are in a category of like what I find for instance, anywhere from like 12 to 50 units in my market those are many times self managed.

And because they're self managed, what I find is a lot of times there's lots of value add opportunity on reducing operating expenses because there's just a lot of oversight, you know, when they're self managing sometimes.

So going through each line item expenses and looking at things for instance like the property management fee, how much is being paid to the property managers, are they performing or not?

Based on KPI metrics, you have your utilities, you have your maintenance fees, how many, you know, your, your work order times, how many work orders a month and what did the maintenance fees look like on the property?

Which also helps you and your pro forma for your capex and determining, you know, what are you taking on truly with this property and what to expect in the future.

What do you find typically when it's the line item expenses for operational value add in particular?

Well, let me stress one thing right now.

So as we record this, It's November of 2024, and in many markets, especially across the Sunbelt region, it's gotten a lot tougher to push rents.

Regardless of all the hoopla you see on social media, it's not as easy as it was two or three years ago when all you had to do was advertise it and people would have come in.

Market conditions have changed, the overall economy softened, and people are watching their purse strings a little bit tighter because they have to.

So that being said, the expense reduction, or at least not growing, is going to be very key to value add right now and that'll probably stay that way for the next year because many markets even outside the Sunbelt region do have a good amount of supply.

That's the last of the absorbed.

So keeping the expenses and the control is important.

Now, there's certain things that you're not going to have a lot of control over and those are namely taxes and insurance.

You still want to be aware of them because that's going to be a very important part of your decision.

I don't think I've ever seen insurance influence deals like they have in the last two years, but many deals literally live and die on the insurance premiums.

Yeah.

And especially if you're in Florida, you know that then it can be insane.

But it's become very challenging.

So something you want to still be aware of.

But the things that you can control, so your payroll, your repairs and maintenance, management, like Eric is saying, advertising on a lot of our properties, One thing we've done, and hopefully, hopefully the good people at Coastal aren't listening as I say this, but we've cut Apartments.com, out because we haven't found it to be a good value.

We found we were spending a lot of money, we weren't getting a lot of leads that were actually converting and it didn't make sense.

So it's like, okay, well you know, if we can't justify that 8, $900 expense, $1,000 expense a month, it's time to get rid of it.

One of the reasons that 48 year property works so well that I just talked about is because aside from increasing the income, we found the management company that already had some other properties they were managing in the area because at 48 units, that property is not big enough to support staff, full time staff anyway.

But because they had other properties, we were able to get the benefit of a full time manager without the cost because that course was split amongst the different properties and we only had to pay a small piece of it.

So that gave us, you know, a higher quality person because when you get a full time person, it's always going to be higher quality than part time.

And it gave us the benefit of not having to pay for that.

That person, the property wouldn't have supported it.

So things like that help you run your properties more effectively and the things that you want to keep in mind when you're evaluating deals and it sounds.

Like that's, that was a really good relationship.

You and I find that relationships, especially with property managers, are very key in reducing your operating expenses.

For instance, somebody I know in Florida on that same, actually 120 unit in Destin, because of the property manager relationship they had, they were able to get basically their property insurance under the property manager's master policy.

What ended up happening is not only did that policy cover the building better than the previous policy with the previous owner, however, it also reduced their annual expense on insurance by almost 30%.

And that was just.

And so that again is, you know, can make or break a deal, that type of reduction in something like property insurance in Florida.

So that relationship with the manager is why that was able to be accomplished, kind of like with you.

So your relationships matter a lot, that's for sure.

Right?

Totally does.

So what else do you need to be looking at when you're evaluating multifamily property?

Well, how about local regulations and zoning considerations?

So, you know, sometimes depending on, on the property, like Erica mentioned, you might be able to have certain arrangements where you have affordability.

That means you have to rent many times to certain demographics.

So you need to be aware of that.

Because if you're planning to go in there and operate the property differently, but you're not allowed to do that.

It's something you have to consider.

You don't want to be doing something that's going to land you in hot water and that's going to get you penalties or violations or worse yet, jail time.

Make sure that you're understanding any, any restrictions that are on the property.

Some properties have what they call a Laura Land use restriction agreement.

And what that does is it, it tells you, okay, you can rent so many units to people that make this type of income, or maybe it's a senior community where it's, you have to rent the people who are 55 and above.

So you have to understand these things because they're going to dictate what you can and can't do with these different properties.

Yeah, I think for instance, with like the lihtc, the low income housing Tax credit.

I think a lot of investors were excited at first and so a lot of my investors were, you know, bringing it up and they wanted to target properties with that.

I think after realizing that on a lot of properties that it's on here in my area at least it doesn't lift until 2029.

And these are syndicators that are looking to do, you know, that that value add to the property and typically have like a 5 year exit strategy.

The credit not being lifted until 2029 didn't make them as excited to move forward on those properties just yet.

And so, and also there's no guarantee necessarily that it will lift at that time, you know, because it is, it is government.

So you're, you're also, you know, basing it off of something that you can't necessarily guarantee will happen.

So I think that those will become opportunities that people will start taking advantage of, you know, probably within two to three years.

But for right now, understanding how it truly kind of factors into your underwriting, a lot of my investors are holding off on those types of things right now, like the LI Tech in particular.

So definitely things to consider when you're looking at a property.

How does it impact your underwriting and your cash flow and is it something that is beneficial to your exit strategy or is it something that could hinder you?

Right, so then another thing we touched on this already, but we'll go in a little bit further, is assessing your property management options.

So, you know, a lot of people say that you want to use third party management and I'm not going to say that's, that's wrong, but I will say it's not right either.

It depends on your situation and that's going to be a little bit different for everybody and what they want out of the property.

If you want to maximize revenue, sometimes you could actually do that better managing yourself than you could with third party management.

Not always.

If your goal is to be more passive and to have time, then you probably don't want to be self managing because you're going to be spending a lot of time managing property.

It's not a job for the week.

So you got to be prepared for that and realize that it's sometimes a thankless job.

So you need to understand what you want out of the investment.

Do you want time, do you want money, do you want kind of a balance and are there good management options for this property in this area?

So in my experience, what I find is that it's a lot easier to find property management companies who want to manage larger properties with staff, let's say 100 units or above, and also even smaller properties, maybe a duplex or triplex or fourplex.

Because a lot of the management companies who do single family would also do those types of properties and they might be a good fit for them.

But it's very tough to find good management options in like that medium sized space, like 20 to 80 units, because it kind of falls into a gray area.

And like in our case with that 48 unit deal worked because we happened to find the company that was already in the area, they had other properties and there were benefits we could get.

But you don't always get that lucky.

Like if we didn't find that that option, there may not really have been another good fit, which means that you're hiring somebody who's not really equipped to do the job.

And while it's good to have third party management, sometimes, sometimes it can actually shoot you in the foot.

So you need to assess what options you have and how easy or difficult it's going to be for you to actually manage that property once you buy it.

Absolutely.

And I think that even, you know, being diligent on the front end to ensure that you have the right property manager and also, you know, making sure that you're holding them accountable and that you have KPIs that are measured and that that property manager is held accountable to KPIs, I think that there's so many times that people will hire a property manager and just think, okay, we're good to go and don't realize that maybe something's going wrong until for instance the, you know, there's now higher vacancy rates and potentially now you have delinquencies on, rent are going up and you're like wait a min.

What's happening?

When you see it in your reporting, you know, on a monthly basis or an annual basis.

So it's like by that time you, it's already, you know, you should have already intervened.

And so making sure to hire the right person, be proactive in that relationship and also making sure to hold it accountable, you know, to make sure it can be a long term relationship as you're scaling into other properties even I think is also really, really important for property managers.

Right.

And something else.

You ideally you want to be buying properties in an area where you have multiple property management options.

So if you're reliant on one management company and you find them and you can't find somebody else to manage that property, whether you want to or not, you're going to be managing yourself, so you got to keep that in mind.

So make sure it's an area that has different options.

You never want to be beholden to any one person or company.

And also make sure when you're interviewing management companies, one of the things you want to ask is have they managed properties similar to yours?

So if you're buying a 15 unit property in a tertiary market, you don't want a management company that manages a class properties in the best area of the city that's not the right fit for you because they're not going to most times they're not going to do the same job at that type of property.

Now there are some companies that manage different asset classes and different sizes, but what you'll find is most companies generally, if they're smart, they know their niche and they know what they do very well.

So you want to find the right company that's going to fit.

What do you need?

I think if you're going to buy 100 unit property in the best part of the city, you don't want the company that's used to managing property with no staff, because that's not the right fit there.

So make sure you know who your options are as you're looking at properties and make sure that you have some viable candidates lined up that you can go to in case you ever need to make a switch.

Very important.

For sure.

So I'll let Erica talk about kind of our next one here because I know she enjoys this side, the exit strategy.

So how does that play into somebody's evaluation of a multifamily property?

Yeah, so this, this one really is dependent upon what are the returns that you're looking to solve for.

Right.

And so you're analyzing a property and does it meet the requirements of the returns you're looking to solve for, whether it be for you or for your investors.

One of the other things that you're looking at for your exit planning, and I'm a big advocate of exit strategy A, B and C, you have a backup exit strategy because unfortunately our crystal balls do not work.

And so we don't know what the market will do two, three, four, five years from now.

So it's important that you are mitigating risk in your portfolio by ensuring that you have multiple exit strategies that could work for any particular property.

I think that's so important.

Some of the exit strategies that I see, obviously you have the option to do your value add, cash out, refinance and move on to the next property that's that can be a really great one.

You have your purchasing for basically for tax purposes.

So you're purchasing, you're doing a cost segregation on the front end, you're depreciating taxes, you're making sure to have a really good attorney and CPA in place that can advise you on tax implications that can help you mitigate your recapture tax.

And then you sell the property, whether that be on a 5 to 10 year hold.

And then I see what's.

Some of the unique ones I've seen are like people that are going to hold the property for say five years and at the end of the five years they're actually going to of course with permission from the lender, sell the unit's office condos.

So I see that done in Florida sometimes where they'll convert the building into condos, sell it off as condos.

And that's the exit strategy.

That one can be really profitable if it can be accomplished.

So different ones I've seen.

What about you, Charles?

What have you seen?

Well, I think those are really the basic ones.

It's sell, it's refinance, it's maybe a condo conversion or it's buy and hold.

Can't go wrong with buy and hold if you're buying for cash flow and you're going to keep holding the property.

Not never a bad thing.

But just be clear on what your strategy is and make sure that you have options.

You want to make sure that ideally you have more than one exit strategy as a viable option just in case.

Sometimes things don't always go according to plan and it's good to have a backup plan just in case.

Yep.

And I sometimes in that exit strategy you can calculate things in like for instance, opportunity zones.

Right.

And from last time I checked, it's like a 10 year hold.

In an opportunity zone, when you go to sell the property, you could just sell it, you know, free of capital gain tax.

And so calculating that into your business plan and into your exit strategy, but also being cognizant, like I had mentioned earlier, that when you're, you know, dealing with government regulation, you just, you never want anything to be too contingent upon that because you have no control over what the government does as far as their regulation.

So absolutely it can impact your exit strategy, it can make it a much more profitable exit strategy.

But also just being careful.

That's why you'd have to have exit strategy A, B and C lined up ready to go just in case.

Right.

So another important component is looking at sales comps and you know, for multifamily properties larger than five units, they are primarily valued on income.

There's truth to that.

If you're looking at smaller multifamily like duplexes, triplex plexus, four plexus, they actually, they're valued exclusively on sales comps, so you want to keep that in mind.

But larger than five, five games for larger, they're not necessarily valued on sales comps, but if you tell me you found an investor who's not looking at sales comps, I would tell you they're a fool.

And the reason for that is most buyers within a certain market usually have kind of a ceiling in mind for what they're willing to pay for a certain property.

And it's important to be aware of that.

So I'll give an example.

I was helping a friend look at a deal last night and with this deal it's a, it's an A class property, a 2021 building in a great market, Columbus, Ohio in the downtown area.

One of the things I really like about this deal is he's got the chance to buy it for, give or take, 150 a door.

When most of the sales comps over the last three years in this same submarket for similar sized properties range from 200 to 270 door.

Now, now granted, let's give a little context.

Market conditions have changed a lot in the last two to three years.

So you know, you may not necessarily see property selling for 270 do right now in that area, but there were two sales earlier this year in 2024 for similar sized properties that sold for 224 and 233 a door.

So buying a property at 150 a door when similar properties are selling at 224 and 233 a door, that's a pretty darn good bargain.

Very neat.

Yeah, I'd say so.

Yeah.

So something to be aware of.

You want to understand what things are selling for, what people are paying for in the market.

Make sure you're not overpaying unless there's a darned reason.

In most cases there's not a darned reason usually so, so, but you know, be aware of that.

So you can factor that into your, your investment risk and your decision making process.

Absolutely.

And yeah, I agree the comparable sales approach, the income approach and very, very adamant with my investors that like I'll provide you an offering memorandum from, you know, like the seller, the list agent and scrap all of it.

Start from the ground up and do your own underwriting.

Because Many times, like the seller will include pro forma numbers within the underwriting on the om.

And until you go through and really analyze everything, it's easy to look at something and go, oh, it's selling at this cap rate.

This is a great deal.

You know, except for the seller is trying to get that price based off of pro forma numbers.

And those are, that's your value add opportunity.

That should be the amount that you're gaining off of the sale.

So being very careful to do your own underwriting when you're analyzing, you know, your comparable sales and when you're analyzing what you think the price should be, it's so important, right?

And the last thing to consider with any, with any multifamily property and really with any investment is risk.

Every investment has risk.

If anybody tells you they don't have risk, they're lying and you should probably run the other way.

That being said, you can mitigate the risk, but to mitigate it, you have to be aware of it.

So you need to look at what you're buying.

Again, just understand the area, understand the tenant demographic, understand how old the property is.

One thing I always say is, you know, look, at the end of the day, it's a.

If you're buying a 1960s or 1970s property, nothing wrong with that.

I've done that.

But you need to be aware that it's going to have some deferred maintenance and there's probably going to be some things that you don't truly uncover until you get in there and own the property.

Think of it this way, you know, it's just properties are like people.

The older we get, the more deferred maintenance we have.

Right?

No different with the property.

You could go out there and you could put, you know, lipstick on the pig, but it's still going to have the same bones.

And at the end of the day, it means you're going to be spending more money on the plumbing, you're going to be spending more money on things that go wrong.

So just things that you have to factor in so you can make a good investment decision and pay the right price for that property.

Absolutely.

And just again, this is where, when you're looking at the OM or the underwriting that the seller has provided, you're making sure that, you know, you're filling in the blanks.

I just looked at one yesterday actually, where their pro forma on what the lease rate would be for the portion that was available, which is basically the value add opportunity.

It was double what everything else was And I was like, well, what, what exactly, you know, how exactly are you calculating you're going to get double the lease rate for this one somehow?

So it's like that's obviously something that plays in then to, you know, what my investor has to underwrite and make sure to be careful of.

So like lack of financial records, financial records being incomplete or off, it's really important to make sure you're running your own numbers on things.

And that capex like you had mentioned, Charles, that's another big one.

Being sure to not get caught up with unexpected capex and that all of that is calculated in proactive is important, right?

What I would also say is any property you want to be doing a thorough due diligence.

So never be afraid to walk away from a deal if the due diligence doesn't go as expected.

Now, I'm not saying that's anybody's first choice because listen, by the point they get to that, there's already money involved.

But sometimes the amount of money you can lose from walking away during due diligence is less than getting into a bad investment.

So you do have to understand that one of my friends, you know, he bought a 37 unit property in 2018 or 2019.

And he always tells this story because it taught him a lot.

He made the mistake of not inspecting all the units.

He only inspected five of them.

So here's the problem.

When you buy a property and you only inspect a couple of units, which units do you think the seller is going to show you?

Because I know which ones I would show you and they ain't going to be the ugly ones.

So, so he went in and he, you know, overall what he saw was in pretty good condition.

But what he found is that he had to replace almost all the H Vac into the property.

He wasn't planning for that.

The good news is, you know, he wound up selling this property for a crazy amount in 2021 because of market conditions.

But you can't count on that.

He happened, it happened to become a good investment.

But there were things that could have been done on the front end to mitigate that risk.

So keep that in mind.

And that's something that's important.

You know, investing is all about mitigating risk.

So you got to do your homework on the front end and make sure that you're, you are doing your part to, to handle that.

Yep.

Caveat empore.

Buyer beware.

Do your due diligence.

Inspect every unit, don't deep.

So very good advice, Charles.

Absolutely.

Well, guys.

We, we hope, we hope you found this valuable.

And thank you for joining us for another episode of the Master Passive Income Multif family podcast.

Thanks, guys.