By Don R. Campbell
Dont misinterpret the title of this column; do not attempt does not mean do not do. When you decide to progress to multi-family investing the margin for error is much smaller than when buying single family properties, which means you must enter into the multi-family investing category not as something you are going to try, but armed and ready to do it, and do it properly.
The Hunt for Yield has led many an investor to look seriously at adding a multi-family investment property to their lives. The goal is often an increased ROI along with a reduction in management hassles. However, the reality is, if done incorrectly, it can bring the exact opposite and, due to the larger dollar amounts, can lead to financial catastrophe more quickly than a mistake in a single family home investment. Yes, the rewards can be spectacular, but only if you truly understand and implement a proven process.
Multi Family Investing Success Begins and Ends with Reputation
In the single-family home market there are so many players and so many properties that it is easy to make a few mistakes, maybe even leave some promises unfulfilled, and you can continue to operate. However, when you enter the realm of multi-family investing the market is much smaller, the number of players is smaller and most know each other.
This can be a real advantage if you become known in the industry as someone who fulfills their commitments, can get deals accepted and has the financial resources to close. However, if you build a reputation of not living up to that standard, your name will quickly move through the industry like wild-fire and suddenly you will find it much more difficult to learn of good properties or arrange good financing. Not a great place to be.
The Importance of an Experienced Realtor
You will soon discover, especially when first starting out, that there are a number of multi-family properties that change hands in your target city that you didnt even know were available. These transactions occur usually with a select few realtors/brokers who have developed a quality reputation in their industry. They have their proven buyers list, often segmented between A Clients, B Clients and Others and therefore get contacted directly by sellers who wish to move their properties quickly and quietly.
Your job as a multi-family investor is to get to know who these realtors are in your target area and then prove to them that you are a ready buyer. Sounds quite odd, even as I write this. However, it is the reality in 90% of the markets across the country. You, in essence, are trying to sell yourself to someone who makes money selling you something. Bizarre, but true.
As you speak with these realtors, ask them what it takes to move up to their A Client (or first look) list. Each will have their own stipulations. Then, as your relationship grows and you begin to trust each other, a great multi-family realtor will ask you what you are looking for in a multi (size, location, age, condition) and will actively pursue properties that fit that criteria. That is where the hidden gold is found.
Hey, Wait, Thats MY Building!
I cannot count how many times I have received an email, or an actual signed offer on one of my buildings. Even though I dont have it for sale and nor was it in the plan. This is the sign of a good and aggressive realtor working with a proven buyer. The realtor wont risk their reputation doing this without a trust that their buyer can close.
I also discovered a great way for a realtor/broker to quickly prove they are out of their depth. He was aggressive yes; detail oriented: not so much. I received a telephone call and an email on a property that sounded like a perfect fit for my portfolio. Even though I had never spoken with them before, they had done enough homework to understand my geographic target market and thus thought this property fit the bill.
Well, much to my surprise when I finally received the proforma on this potential property, it turned out to be one I had already owned for the last 5 years. So, he was trying to sell me my own building at a price I would never sell at. Attention to detail and reputation out the window and now I no longer see him even mentioned in the industry.
Lesson is, you need to protect your reputation and at the same time ensure that you are using professionals with their own good reputation.
The Hidden Benefit of Multi-Family Investing
Strategic investors are always looking for ways to increase the stability of their portfolios while at the same time maximizing their ROI and cash flow. Over the last 22 years we have been working with investors across the country. We have seen economic ups and downs, interest rate gyrations and real estate market swings. That means we have been blessed to discover what strategies work best in economic good times as well as downturns. Access to real life data, such as that created through our Members $4.2 Billion portfolio, reveals some very interesting facts.
In a study we completed after the most recent economic downturn that many called the Great Recession we discovered just how important having multi-family properties in your portfolio is. Sure, there are the obvious management and financing benefits we discussed in last months column, but there also turns out to be a positive unintended consequence of hold some multi-family buildings.
The reality is in times of turmoil, confusing market signals and economic downturn, those who have a combination of single-family and multi-family properties in their portfolio had better results than those just solely in single family properties. Interesting initial result, which prompted further investigation. This is where the unintended consequence revealed itself.
Why Would A Portfolio Combining Multi-family and Single Properties Perform Better?
The answer to that question was both surprising as well as enlightening. It proved to be a real lesson from which investors at all levels can learn. It wasnt that the owners of these mixed portfolios were smarter, wealthier or more experienced. It turned out that the difference was that when you own multi-family properties you are literally forced (by finance companies, CMHC, property management companies and government regulations) to run your portfolio like a business.
These outside agencies force the investor to put checks and balances in place which include regular reporting, maintenance upkeep and professional management. There are market norms that are monitored and measured, providing the investor benchmarks against which to measure their performance. And some of these outside agencies will want to know that you will be meeting or beating those benchmarks.
All of these controls, in place before ownership as well as after, force even the least detail-oriented investor to monitor their portfolios, and if they also own single-family along with their multi-family properties, these systems and the underlying analysis is transferred over to them, which makes the whole portfolio perform more like a business.
You Will Be Forced To Be A Better Investor By Adding Multi-Family To Your Portfolio
Following a system and having a business mindset makes your portfolio perform better in both upswings in the market as well as downturns. Systems, especially those that are step-by-step and proven, will make you a better and more successful investor thats the bottom line.
We know it, but so do the financing companies, quality property management companies and government regulators. They want to ensure that you are using systems because when you are successful, so are they. It just took the most recent economic downturn to make investors acutely aware of this fact. That is why when adding multi-family properties to your life it feels like your hands are more tied, but over the long haul you will discover that your results improve.
Multi-Family investing can add some stability to your portfolio, however it is not as simple or as inexpensive as investing in single family properties can be. I urge you, before you make the foray into your next multi-family property, that you ensure you have learned the process, language and proven systems so you not only protect your valuable reputation but you also build it along with your portfolio.