Updated: Mar 7
Successfully investing in multifamily real estate requires hard work, knowledge, and intelligence along with a good deal of experience. After all, if real estate investing was easy to do, everyone would do it and would be successful. However, in addition to traditional intelligence, or IQ, there’s another element involved in the process, which is emotional intelligence, also known as emotional quotient, or EQ.
Each element in the acquisition process plays a significant role in how I evaluate a real estate investment, helping to determine if a property is worth investing in. I’m a numbers person and data driven, thanks to my educational background at MIT, and even though numbers are without question the driving element in my acquisitions process, I also put emphasis on EQ, which helps me evaluate the people involved in the sale of the property. Emotions play a role in most everything we do, and real estate investing is no exception.
The Acquisition Process at a Glance
Acquiring a multifamily property is an extensive process. It starts when we see a property that’s for sale or hear from a broker, “I have a deal worth looking at.” Other times my team may find a deal listed on a broker’s website. Once there is a deal to explore, the work begins.
It starts with an examination of the numbers, a look at the seller’s Offering Memorandum, or OM. It is often a massive document that discusses the property, the market, and other factors that provide us with the numbers associated with the property, but also a glimpse of where value add enhancements might be made. That might include adding a washer/dryer in each unit, putting in an Amazon locker, adding a yoga room, or adding other amenities. However, the figures in the OM are to be taken lightly, as more often than not the numbers are over exaggerated. Just remember that the OM numbers are pro forma numbers and are usually based on assumptions – which is nothing more than guesswork.
I also have a discussion with a lender to see what type of financing might be available, and to obtain a soft interest rate quote. If everything looks good, we have the property manager walk the property to see where improvements might be made that could help drive up rents, and of course, profits.
If we decide to proceed, we’ll send an LOI, or letter of intent. That includes our interest in the property and a preliminary offer. The broker will present those letters to the seller, and he or she will choose several to pursue further, asking for our ‘best and final offer.” The seller will then choose several of those “best and final” offers and have an extended conversation with each potential buyer. As you would imagine, all of the steps involved take an extensive amount of time.
Looking at the Numbers
When looking at each deal, the numbers drive the process. I look at financials, which includes the tax forms, rent rolls, the OM and the T12, which shows the multifamily property’s previous twelve months of operation. I do comparisons of 3-months, 6-months, 9-months and twelve months to see if there are any trends that would be of concern. This might include vacancy rates, late rents, collection problems or delinquencies, excessive concessions or higher than normal expenses. Most importantly, it’s important to look at how a property is performing during COVID.