9 Out-of-the-Box Questions & Tactics Multi-Family Investors Should Consider Using

Apartment Building

9 Out-of-the-Box Questions and Tactics Multi-Family Investors Should Consider Using

By Richard Montgomery      www.DearMonty.com

Summary: Investing in multi-family housing and apartments requires extra investigation, sometimes called due diligence by attorneys. This extra investigation and these questions are beyond what a real estate investor may do normally for a typical commercial real estate investment. As a real estate investor, once you go beyond multi-family rentals such as duplexes or fourplexes, you enter the commercial real estate area.   Here are 9 out-of-the-box questions you should be asking, or at least consider asking, before you purchase that multi-family or apartment building.

DEAR MONTY: About six months ago, three longtime friends and I decided to make some real estate investments together. Our investment goals are similar; we are each high-income professionals, share similar risk tolerance and see real estate as a long-term investment opportunity. Now, we have identified a 60-unit apartment building we are interested in pursuing. We have the standard list of due diligence items, but wonder if there are some “out-of-the-box” due diligence tactics to make certain we do not make a mistake. Can you help?

Real estate apartment investing is a series of calculated risks

Answer: Buying, owning and selling investment real estate is always a series of calculated risks. “Make certain” are strong words. No matter your methods, you cannot know everything the seller knows. Over and above the standard due diligence list, buyers have ways to discover more about a property that either encourages or discourages them.

It is always difficult to understand the motivation of the seller because many sellers do not share their core beliefs, or some may even mislead or miscommunicate their ideas to create an image of trust. As callous as this statement is, I believe it to be true in many cases. To balance that statement, self-interest is to be expected.

Choose carefully which tactics to employ

Business ethics is a subject that is not black and white. It involves various shades of gray depending on the person with whom you are talking. Choose carefully which tactics to employ with which transaction. Some sellers might not take kindly to a given tactic, while others may well have done something similar, or further out-of-the-box, themselves.

I have never witnessed any one buyer applying all of these tactics on a single property. This is a career compilation of tactics I have seen.

No. 1 – The rent roll is not enough: Where do the tenants work?

Determine where the tenants are employed. This data will be on the rental application, but not on the rent roll.

If 25 of the tenants are with the same company, and a move to Mexico is announced 30 days after the sale closes, your vacancy rate could skyrocket.

No. 2 – Visit with former tenants

Visit with multiple tenants who have moved out of the apartments.

You can determine this by comparing year-to-year rent rolls. Look for patterns in the reason they moved out.

Getting closer to work is one thing. But moving away from drug dealers is a different story.

No. 3 – Look for patterns in the vacancy swing

Get the financials both annually and monthly.

Look for patterns in vacancy swings. If you find one, learn what creates it every year.

When you hear the answer, trust it – but verify.

No. 4 – Visit the apartments in the morning- and in case you don’t see them also “good day, good evening and good night”

The quote from the Truman show applies when you want to find out what is really going on with the apartment building.   Visit the property unescorted on multiple occasions.

Visit in early morning, mid-day, late afternoon and midnight. You will learn something about your potential tenants and how the building functions.

  • Do tenants congregate in appropriate places?
  • Are there vehicles with stale damage?
  • Is the parking lot well lit?
  • Do you feel safe?
  • It can be surprising what you learn going unannounced.

No. 5 – Talk with the local police about the apartments

Check with the local police department.

Tell them you are considering buying the building and ask if you could do anything to help them in the neighborhood. You will learn if the building has a reputation.

The best thing that can happen on that visit is they will have trouble placing the property.

 

Read the rest here.

The Best and Worst Cities for Renters

Memphis_skyline_from_the_air

What are the best and worst cities for renters? Well, WalletHub set out to answer that question by looking at criteria such as affordability and quality of life. I’m always a bit dubious about these things but people do read them. So we as landlords should be at least a little bit familiar about how others see the markets we work in.

Looks like Memphis took a hit due to quality of life issues such as crime. But at least we score high in affordability.  How does your city compare?

 

Just Graduated? Where Should You Move?

Group of young people having fun together at home.

Group of young people having fun together at home.

Trulia recently published a study that tried to answer the question: Where is the best place for a recent college grad to move? In this study they developed something they call the Graduate Opportunity Index. This index looked at 40 major cities across the United States and ranked them based upon the number of jobs available to recent college grads, rental housing affordability and the number of millennials living in that city with a college degree. How did your city rank? Check out the study here.

Memphis unfortunately did not make either the study or the list, but perhaps it should have. I can tell you from anecdotal experience that Memphis seems to be doing a much better job of attracting these recent college grads. For one thing we are renting to a lot of recent college grads lured here from all over the country and the world. Plus, I am just meeting more and more young people who have just moved here from out of state. Much more than in the past, but maybe that’s because I am getting out more :).

What’s bringing them here?

A lot of things are actually. But top notch organizations like FedEx, St. Jude, International Paper, AutoZone, Service Master and Smith and Nephew are high on the list.

What’s more, Memphis is perhaps the most affordable city in the United States to live in when it comes to real estate. It is very hard to get more bang (or square feet and amenities) for your buck anywhere else in the country.

And how can you beat Graceland, Beale Street, The Grizzlies and so much more?

Sure we got our problems just like everyplace else. But I think Memphis has a lot going for it and the younger folks who have recently moved here, that I talk to, seem to agree.

The Best (or Worst) Landlord Laws?

Welcome To Arkansas

I have always said that smarter landlords have to be very familiar with their state and local landlord laws as they can vary widely from place to place. As an example, check out this article about the landlord laws in Arkansas.

It is amazing that someplace just over five miles away can be so radically different from what we deal with here in Tennessee. Give it a read. I think some of you in more restrictive parts of the country will be fascinated.

 

Rent reforms 

Arkansas’s landlord tenant laws work well for honest landlords, too well for slumlords, and they don’t work at all for honest tenants.

By Ellie Wheeler

Arkansas’s landlord tenant laws work well for honest landlords, too well for slumlords, and they don’t work at all for honest tenants. Disputes between landlords and tenants are inevitable, and Arkansas needs laws that capture the worst players on both sides without abandoning good tenants or overburdening good landlords. The goal should be fixing the stark lack of legal balance that heavily favors landlords. Arkansas is the only state where not paying rent on time can land you in jail, and the only state where landlords are not required to uphold basic living standards of their properties.

Read the rest of the article here.

The Boom Is Here!

First Time Foreclosures

 

The real estate boom that is.

 

How do I know?

 

The stats tell me. Check out these two.

  1. First time foreclosure starts are at their lowest point since the year 2000. Not 2008 when things crashed, but 2000! Lower than they were during the last boom.
  1. New home sales are at their highest point in 8 ½ years.

Add the following to the above:

  • The stock market continues to climb ever higher.
  • The Federal Reserve is keeping interest rates very low.
  • Adjustable rate mortgages are making a comeback.

Suddenly it begins to appear a lot like the year 2005.

What is more, I am seeing A LOT more interest in real estate these days. Everyone wants to know how to go about getting started. Anecdotal I know, but still eerily similar to 2005.

Things do not seem to be quite as exuberant as they were a decade ago but let this be a warning to smarter landlords and real estate investors. The market is definitely heating up. There are still deals out there but there are more and more people chasing them thus driving the prices up. DO NOT get caught up in the exuberance. Keep your head in the game and listen to the numbers. Remember not to bet on appreciation and do not think you will always be able to refinance out. Instead always remember that cash flow is king. I’ll say it again, cash flow is king!

Enjoy it while it lasts. I do not think we are near a crash, but we should definitely remember that nothing goes up forever. So, If you need or want to sell a property, now is the time. In fact, I seriously considered putting some of mine on the market but decided against it. I like the cash flow.

What’s going on in your market? Seeing a boom there? Let me know with your comments.

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