Found a multifamily deal? Nice work. Believe it or not, that’s the tough part. You probably feel like this deal just fell into your lap, but it took a lot of effort, education, and changes to your mindset to get there. Now what?
Here are the 5 steps to get that first deal under contract.
Step 1: Evaluate the deal
Look at the deal from a bunch of different angles. You might have a few metrics when buying a new car: how fast does it go? what’s the gas mileage? how long is the warranty? It’s the same thing. The Expense Ratio, The Capitalization Rate, The Cash on Cash Return. Look at it like each is a test of the property. If any fail, the deal is out. You’ll probably do this ten times before one is good enough for the next step. If the deal seems to work on paper, you can move on to step 2.
Step 2: Tour the property
Go do a drive by. You don’t need the seller’s permission for this. If the place doesn’t pass the sniff test, it’s dead, go to the next deal. If it does pass, then now is the time to ask the seller for permission to walk the common areas. If this works out, the seller should be willing to let you enter a unit or two of his/her choice. They will undoubtedly show you the best ones; this is OK. You’ll check the others later. Most times, the deal will pass this step and you can move on to step 3.
Step 3: Gather Information
This is a little like step 1, but more in depth. Ask the seller for a Pro Forma Rent Roll, a T12 Profit and Loss Statement, Vacancy for the past three years. The seller might not want to give all of this information to you yet. Sometimes they have a real estate agent who will give it to you if you sign a non-disclosure agreement. Talk to your property manager (or find one) and find out what this place should get for rent. Get as much information as you can early on so you can exit the deal with no or low cost to you. Another ten deals will get to this stage before you find one that can move on.
Step 4: Generate a property value
Now that you have most of the information you can apply what the seller has given you to your knowledge of income and expenses for multifamily. Calculate a value based on what you expect the Net Operating Income (NOI) to be.
Step 5: Submit a Letter of Intent
The LOI is the biggest mental hurdle you will experience even though writing it is so easy. This piece of paper is not even legally-binding but submitting it means the deal is real and, once accepted, the real work begins – Due diligence.