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I recently went to a networking meeting where a young real estate investor spent about thirty minutes talking about how investing in multifamily real estate is making him wealthier than he ever imagined. He claimed to get into the business with no cash using other people’s money (OPM). So why was he in a networking meeting trying to make connections? There’s a special place for people like that.
Is there money to be made in this area of real estate? Absolutely! To succeed you need what I like to call the 3 C’s and some B’s. Capital, Credibility, and Crystal Ball(s).
Capital – This is risky business. Lenders want a down payment of at least 20-30%. Depending upon your preferences and goals, current criteria generally seek cap rates of not less than 8% and “cash-on-cash” returns of not less than 12%, loan-to-value (LTV) ratios of 70% to 80% (depending upon whether recourse or non-recourse financing is used), and debt service coverage of at least 1.25. Banks are not excited about lending for commercial property these days, so the only option is private lending. Equity share in a property may be used as a contribution for down payment with some lenders, but these deals require that all the pieces fit together well. The consultants representing the buyers add a fee, they sometimes involve other consultants and you end up with a “broker’s chain” of fees that could end up with upwards of 23% APR or more on the loan.
Credibility – Okay, say a mechanical engineer just lost his or her job, and wants to buy an apartment building, fix it, flip it and make a huge profit. Engineers are smart, respected people. Multifamily RE investing is not like engineering; Real estate investing requires business savvy, and an understanding of finance, risk assessment, marketing, construction, and timing. Lenders lend to people with relevant experience. Conversely, a general contractor who knows how to renovate a building may not have the expertise to improve occupancy through management and marketing.
Crystal Ball(s) – The combination of being able to analyze market trends, economic forecasts, and being in the right place at the right time is important. If the property is bank-owned or priced under market, there is usually a good reason. Valuation of commercial property is based on cost and income. You must know about CAP rates, NOI, and have an ability to predict the future. Having “skin in the game” as they say requires courage, backbone, guts. You need to be just like a financial gladiator, except without the lions and swords.
The Mortgage Bankers Association (MBA) released its Commercial Real Estate/Multifamily Finance Quarterly Data Book for the third quarter of 2009. The data in this report reflects a negative outlook for multifamily apartment investments. Here are highlights from the report (www.mortgagebankers.org):
Another analyst has a different story. The CoStar Group (www.costar.com) reports “U.S. Multifamily Market Strengthens in Third Quarter On Rising Demand, Falling Vacancy.”
So where is the beef? Kiplinger (www.kiplinger.com) says the 10 best cities for prosperity, innovation, and jobs are:
The above cites will no doubt experience growth, but may not reflect a fertile ground for multifamily real estate investment. As local economies are declining, the foreclosure rates increase, as does the demand for rentals. At some point, when the economy improves, and the high paying job market stabilizes, renters will become home owners. The economic cycle requires understanding the demand window.
Andy Sabo is the President of TOP 10 Funding, LLC.
TOP 10 Funding represents private lenders with access to $400 Billion to lend for commercial real estate projects, such as multifamily, assisted living, and office building purchases and refinance, business financing, new developments and construction in most cities in the US.
We have great relationships with DIRECT lenders for Commercial Real Estate.
There are no up-front fees and the application process is simple and fast. An executive summary and a two-page application will get you an answer in a few days.Phone: (808) 375-4845 Email: firstname.lastname@example.org Website: top10funding.com Andy’s Blog: http://top10funding.com/blog LinkedIn: linkedin.com/in/andrewsabo Facebook: facebook.com/andy.sabo Twitter: @andysabo808