“Start by doing what’s necessary, then what’s possible, and suddenly you are doing the impossible.” – Francis of Assisi
A lot of people ask:
What makes a property perform well or poorly?
What are the things that property operators do that allow properties to perform well?
How do they produce the type of returns investors hope for?
Today, we’re going to talk about three reasons that will answer these very questions!
1. You Get Paid Well to Fix Problems
In multi-family apartments and multifamily syndication, you get paid well to fix problems.
One common thing we do is a value added approach.
We come in, we find a problem, and we fix it.
When we renovate individual units, we see the same things happening time and time again.
When a tenant moves out, we’ll put a certain amount of money (typically $8,000-$10,000 per unit) into renovations.
We come in and really make the unit more attractive.
After we do this, we’ll see rent bumps as new folks move in.
That’s one way we add value in a particular property.
Another way is making the best out of problems that often pop up.
During COVID, we had a situation where some tenants had basically squatted.
We were able to come in and try to get them caught up on their payments.
We did that through some government assistance.
The prior owner did not know that this assistance was available for tenants.
We were able to apply for some of these payments on their behalf.
At that point, we gave tenants a choice between staying and leaving.
We were able to get tenants out that didn’t want to be there or had stopped paying.
After that, we began renovations and were able to start new leases on the property.
These are just a few ways that multi-family investors really get paid and how properties perform wealth.
2. Good Management Pays Off
Whenever somebody comes into a property, they’ll almost always replace the management.
Part of that reason is they want to optimize performance.
They want to look at collections and vacancies and keep track of any lost income.
Good management will increase income and lower expenses.
One way we see this is with good property managers.
You not only need good property managers, but you also have to manage them.
You need to do site visits.
You need to look for any problems.
Are there any areas that need to be addressed?
Typically we’ll find property managers are not necessarily interested in the performance of a property as much as the property owner.
A lot of our job is the asset management side.
We come from a financial perspective.
Owners make sure the property performs in a way that gives returns to investors.
That’s really important!
3. Projections Must Be Conservative
In real estate investing, people often say that their deal is conservative when in reality they have really rosy projections.
If a deal doesn’t perform, it’s typically because people are not taking errors into account.
Things don’t always go according to plan.
If you’ve ever owned any real estate, stuff can happen that will put a wrench in your plans.
Here at Bronson Equity, we try to be very Conservative.
We don’t make estimates for the best case scenario or the worst case scenario.
We try to do this in two major ways that are easy to see when you’re looking at a deal.
The first way is looking at the rent and growth assumptions.
Let’s take this example:
In Atlanta, if you’re seeing 4-5% rent growth per year, we would rather take a much lower figure going forward.
So instead of 4-5% we would take 2-3% rent growth.
This could take a deal from a 25% annual return to a 15% annual return.
We’d much rather under promise and over deliver.
This strategy also allows for things that could go wrong in a deal.
Always make sure that you’re taking surprises into account!
The other major way to make estimates is the cap rate of exit.
Let’s say we’re buying a property at a 4½% percent cap rate.
(Aka: How much income you’re getting for how much you’re paying for the property.)
Then you want to raise it up at least 50 basis points (0.5 percent) in the cap rate.
If it’s a five-year hold, that means it would be a 5% cap rate.
You’re basically saying we’re being conservative.
It may not be as favorable to sell this in five years when we want to sell it.
This is why being conservative is really, really important!
If vacancies are higher, more expenses come up.
But when deals perform well, it’s typically different operators who have been very conservative on the front end.
Now I want to hear from you!
What are some things that you’d like us to talk about when it comes to multifamily investing?
As always, thanks for taking the time to educate yourself.
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.