You may know, if you have been following along on my real estate investing journey, that I began adding multifamily apartment buildings about a year ago. Single family property investing helped prepare me for bigger deals, but there are some new terms and lingo to learn. Here are the top things that I’ve learned and find the most important when doing big real estate deals.
How are the utilities paid?
When you transition into multifamily investing, utilities are an entirely different ballgame. The things you will need to know is who is paying them, what the current status is for utilities, and how your income will stay positive— so you can be sure electricity stays on. In a bigger complex, you may have community utilities like a pool, guest lobby, office, laundry, exterior and hallway lighting, and more. All of that, and we haven’t even mentioned the individual units yet!
Depending on how large your property is, you can expect a monthly utility bill as high as $24,000. You might be thinking about the lights, but you have to remember water, sewer, trash removal along with heat is all part of it. It’s so important for you to have a reserve so that you can keep up with these bills, even if rent isn’t coming in at full capacity. Having lights or water shut off is a problem that could incur big financial or legal issues. What my partner and I did at the property that we acquired is to bill tenants back for utilities. This has worked out great because it helps our bottom line and ultimately increases the value of our property.
Where is the property located?
Have you thought about where the tenants will come from to occupy the property? It’s important to not rely completely on one employer for prospective tenants. If you do, what could happen is a relocation or a company shutdown. This will significantly affect the occupancy of your building. To mitigate risk, take into account where the property is located and who are the people renting out the units.
Consider what the current rents are versus the actual market rents. That difference could bring you bigger profits. It’s important to be patient and expect to eat some of the costs if the current renters have extended leases at a lower than average rate. If you have patience, once that leases expire, you can increase the rents.
Consider the cap rate
Generally, multifamily properties are sold by cap rates. A cap rate is the NOI divided by the market value or asking price. These values are important to know; otherwise, you cannot calculate the cap rate. Often, the lower the cap rate, the more desirable the property and location. An 11%-13% cap rate gives evidence that the area is questionable and possibly in the ghetto.
What is the net operating income?
The net operating income, or NOI, is your income from a property after subtracting ALL of your expenses. This includes property expenses, property management, and any other costs that eat through your bottom line. If you can get the expenses down as well as increase income, you will have a chance to improve.
What are the T-12 financials like on the property?
T-12 is important if you are investing in multifamily because this shows the actual income and expenses of a property over the previous twelve months. Purchasing a building on actuals is preferred over a pro forma. It’s just good to know what is really going on.
What is a rent roll?
Information on a rent roll should be obtained at the same time as the T-12 if possible. This showcases what tenants are paying, how long they’ve been at property, utility bill back charges, etc. One thing to keep in mind, if you’re purchasing a property, and noticed that all the tenants have recently signed a lease, this could be be a red flag.