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.
Next, we’ll analyze the property’s cash flow, as well as the NOI (net operating income). Another key metric that we look at is the Cap Rate, which is calculated by dividing the Net Operating Income by the property’s price. We look at how it compares to the rest of the real estate market.
Our team will also call seven to ten competitive apartment properties in the market to determine what rents are going for on one, two or three-bedroom apartments, as well as rents on renovated or non-renovated units. This provides us with an overview of how much the property is charging per square foot, and whether or not there is room to increase the rents. For example, if the market average for a one-bedroom, non-renovated unit is $1.50 per square foot, and the property is currently charging $1.00 per square foot for the same it shows me that I could boost the rent to $1.30 for an increased profit and still be competitive in the market.
Putting EQ into Play When Walking the Property
Prior to submitting a best and final offer, I will fly to the property and walk it with my team. When I walk the property, besides assessing the cost to operate it and the capital expenditure and deferred maintenance needed to improve it, I also use my EQ to evaluate the asset. I take a first-hand look at whether the property feels “right”; whether it has good energy, looks nice and is not in disrepair. I try to look at the property from the perspective of a tenant – is the property one that they would want to live in, or whether it is too cold and uninviting. I want to be sure that the property will attract the right type of tenants, and I also want to be sure the neighborhood is safe and welcoming. A property that feels homey will be easier to market and keep occupancy high.
Putting EQ into Play When Interacting with the Seller
When you’re negotiating a deal, you want to let your intuition lead you, but you want to use the numbers to ensure that it’s a good, solid investment. You have to balance your intuition with hard numbers, because that’s how you make investment decisions. The truth is that when it comes to real estate investing there are a large number of independent variables that you can’t have direct influence over. That may create uncertainty, but if you have a strong EQ you’ll be able to stay focused on the deal at hand.
If I’ve submitted our best and final offer and the seller has chosen me as one of the potential buyers he wants to talk to, I can put my EQ into the equation. The seller wants to hear about my company, our successes, our history of closing deals and other reasons why he should award the sale to me. It’s my opportunity to sell my company to the seller, but it’s also an opportunity to assess the seller and determine if he or she is someone I want to do business with.
I’m looking to use my intuition to see if the investment has a solid story to tell, one that would speak to investors. I’m also using my EQ to see if the seller is a trusting person, based on the type of responses I hear and how quickly questions are answered. If I sense that the seller is not very trusting, I will go out of my way to make them feel comfortable; for instance, I will tell them about a challenging deal we’ve had and share how I felt and make myself vulnerable to in that call. This usually helps sellers open up and feel that they can trust us.
Another use of my EQ is to find ways to make the seller feel comfortable with me and decide to choose me as the one to sell the property to by giving them something other potential buyers are unwilling to give. For example, if the seller has a hard date for closing, I will offer to close within 45 days, instead of the usual 60 days. Or, if they are unsure whether buyers can close during COVID, I will increase my hard money deposit and make it non-refundable once we sign the purchase and sale agreement. You can get creative, and the main point that I am trying to make here is that you should always offer something you feel comfortable with, and it doesn’t have to be a higher price. Listen carefully and read between the lines while you are speaking with the seller to make sure you are giving them what they are looking for, which will put you in front of everyone else.
Putting EQ into Play When Working with Investors
Another reason to use your EQ while touring the property is to be sure that it would be an investment that my investors would find appealing. While numbers are paramount in a deal, investors want to be part of an investment that they can take pride in, and if it is a beautiful property and has the right numbers backing it up, then it is a property I can take to my investors. Assets can look great on paper, but when I see the property and it doesn’t look good enough for an investor to feel pride of ownership in, I may walk away.
Another aspect of using EQ when working with investors is the business plan and the story. Every deal has a story; whether it is bad management, rents below market, or older vintage that you can make more appealing – all can make a solid story. Investors need to understand the story, believe it makes sense and feel comfortable with it. Use your EQ to create the right story; for example, even if I believe I can raise rents by $300, it might be perceived as an aggressive assumption, so the story and business plan you present to investors should be $180 for instance. Of course, you will have to underwrite to those numbers and present the projected returns according to the new story. Use your EQ and try and see the deal through investors eyes; what would be appealing to them, what will attract and what will deter them.
Final Thoughts on EQ
Another thing to remember is that multifamily real estate investing is really about relationship building. You’re working to build relationships with the brokers and sellers, so you are considered the top buyer. If you have problems creating healthy relationships, you won’t make deals. A key advantage to having a strong EQ and good intuition is that you’re not only self-aware, you’re also socially aware. Social awareness gives you an advantage because it lets you understand another person’s perspective and gives you the ability to reason with them using their perspective.
Just remember that as a real estate investor the quickest way to get into trouble on an investment is to let your emotions pressure into making a deal that really doesn’t make sense financially. Having a strong EQ helps you keep your emotions in balance, helping you make objective decisions that are based on numbers and facts. The ideal balance is a strong IQ and a strong EQ that work together synergistically.
Many investors analyze multifamily investments by only using their knowledge and experience. But an additional element to utilize is your Emotional Quotient, or intuition. While numbers play the key role in any property analysis, intuition can be another asset to be used when evaluating a property.
The acquisition process is long and extensive and requires many steps. I start by doing an analysis of the numbers. I do a deep dive into the cash flow, operating costs, profits and other numbers, because numbers determine whether or not I will submit an offer. My team also does comparatives with other area multifamily properties, to determine if the rent is appropriate, or if there is room to increase it. If the numbers look good, we’ll submit a LOI (Letter of Intent) to purchase the property, which the broker will submit to the seller.
If the seller likes the bid we offered, we’re asked to submit a “best and final offer.” Before sending in the best and final offer, I fly to the property and walk it with my team. This is where I use my EQ, looking at the property from the perspective of a potential tenant. If the property looks and feels homey, it will be easier to market and keep occupancy high. I also want to be sure it’s a property that my investors would take pride of ownership in, otherwise I’ll walk away.
After submitting a best and final offer, the seller will choose several potential buyers to talk to. This is another area where my EQ comes into play. In talking with the seller, I want to evaluate his or her responses, to see if intuitively they are a trusting person, as well as to make the seller feel comfortable. I want to be able to sell my company to the seller, providing reasons why he or she should choose us. Intuition also helps me determine whether the seller is someone I want to do business with, and if not, then I won’t pursue the deal. While EQ is an important aspect of evaluating any deal, the numbers dictate the ultimate decision.
With respect to investors, every deal has a story to tell. I use my EQ to craft a story that is believable and one that won’t be perceived as too aggressive. I also use EQ to view the deal through the eyes of my investors – including what would be appealing to them, what will attract them and what will deter them from wanting to invest.
The bottom line – never let your emotions dictate whether or not to proceed with a purchase. Let the numbers dictate your decision, and use your EQ to help successfully complete the process.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.