MIT 3.0: 2.5 How to Analyze Multi-units Out of State

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MIT 3.0
2.5 How to Analyze Multi-units Out of State – A 21 Unit
Cheat Sheet

1. How to analyze multi-units – mindset
  1. 100 Percent Financed is a company that helps individuals reach their financial freedom goals through real estate investing.
  2. 100 percent financing is using little to none of your own money to invest in real estate:
    • Finance the down payment
    • Cover soft costs
    • Closing costs
  3. Multi-unit differs from single-family in these ways:
    • A single-family is a property that has only one unit:
      1. Single family detached home
      2. Townhouse
      3. Condo 
      4. Residential mortgage lenders only lend money on single-family, duplex, triplexes, and quads.
      5. Residential mortgage lenders do not allow seller financing
    • Multi-unit means more than one unit: 2,3,4+ unit 
  4. Multi-units differ from multi-family in these ways:
    • Multi-family are 5 units and up:
      1. 5 units and up are considered both multi-family and multi-unit.
      2. A 4-unit is a multi-unit but not a multi-family.
      3. Anything between 1 and 4 units are residential. 
  5. In order to close on deals, you’ll need to constantly look at deals and listings daily:
    • Finding deals and finding capital to fund those deals is the most important responsibility you’ll have as an entrepreneur.
    • Develop people skills as well as negotiating skills. 
    • Set in place systems and teams.
2. How to invest in multi-units – benefits
  1. One tenant in a single family is one source of income.
  2. Having multi-units is multiple sources of income.
  3. When purchasing multi-family properties, 80% of the underwriting is on the property itself and only 20% is on the borrower.
    • Lenders will still want to see your income, expenses, and balance sheet.
    • Lenders will want to see the seller’s tax returns and leases for the property to confirm the property is producing enough cash flow.
    • Commercial lenders are okay with you using seller financing up to 10% of the purchase price.
  4. The way to scale is by having multiple units under one roof and not by having multiple roofs scattered all over town.
    • With multi-family investing, you can save time and manpower by not having to go from location to location to repair and manage properties like you would have to with single-family properties. 
    • You have more partnership opportunities with multi-family properties since most investors will not want to partner with single-family properties (this doesn’t include flipping single-family properties).
  5. There’s less risk with multi-family vacancies and the appreciation can be forced, meaning you can increase the value of the property by increasing the revenue and decreasing the expenses:
    • Increase the rents.
    • Install energy efficient light bulbs, water conservation kits, etc.
3. Get started with finding the money
  1. Money:
    • Apply for business credit
    • Contact a commercial mortgage broker
    • Request for seller financing
  2. Model:
    • Look for 5+ units
    • $25,000 per unit
    • A cash on cash return of 8% or greater
  3. Market:
    • 10 Cap
    • C Area
    • Low crime
    • Low income
    • Section 8 tenants
  4. Total investment capital/.2 = Purchasing Power (how much of a property you can afford)
4. Get started with finding the deal
  1. Reach out to 20 different agents including dual agents:
    • Find agents on Loopnet, Co-Star, Trulia, Zillow, and by networking:
      1. Let them know what you’re looking for
      2. Share your 3Ms
      3. Call agents weekly to build rapport, show credibility, and to check available inventory
  2. Send out direct mail to sellers.
  3. Apply the 1% rule to all deals (The monthly rent should be 1% of the purchase price).
  4. Place deals that meet the 1% rule in the Deal Analyzer.
    • Analyze for cash flow, cash on cash return, and value.
5. 21 units in Wilkinsburg – real deal
  1. Review the OM (Offering Memorandum).
  2. Take data from the Financial Summary and Income & Expenses, key info in the Deal Analyzer:
    • Property address, # of units, notes, url to listing, rental income, vacancy rate reserve of 5%, taxes, property ins, utilities owner is responsible for.
  3. Go over each and every expense in the OM, compare the expenses to the description in the property overview section.
  4. Follow up to confirm if the landlord pays any shared utilities with tenants.
  5. Property management fee depends on the property management company, (typically 6-10%).
  6. Allocate 10% of the gross revenue for maintenance reserves.
  7. Locate the cap rate on the OM (10% & higher).
  8. Take the NOI and divide it by the cap rate = value of the property.
  9. Enter the asking price from the OM onto the Deal Analyzer.
  10. Choose the percentage of the asking price, or type in purchase price.
  11. Enter 20% down payment amount, or 10% if receiving seller financing.
    • Down payment amount will be reduced based on earnest money deposit.
  12. The closing costs are typically 3-5% of the purchase price, check with the agent for an estimate or contact a settlement company for an estimate.
  13. List soft costs: Attorney fees, earnest money deposit $2,000, property inspection, title work, appraisals, travel expenses.
  14. Enter 80% of the purchase price = Mortgage, rate, terms.
  15. If using seller financing, take 10% of the purchase price.
  16. Get the terms and rate from the seller.
  17. Additional sources of debt:
    • Enter any partner info in “Other Finance Instrument”
    • Enter any Private Loan info 
    • Enter any Business Credit payment amount and rate
    • Enter any Promissory Note info with lender
  18. You can use an online mortgage calculator
  19. You can calculate business credit using Bankrate.
  20. Entertain multiple strategies:
    • You can mix business credit, mortgage, partners, or seller financing for deals.
  21. Write an offer, submit an LOI, Contingencies.
  22. Example Deal:
    • There’s a 4-unit property for sale price of $75,000.
    • You talk the seller down to $70,000.
    • You get it under contract for $66,000 based on your findings during the due diligence process.
    • The down payment is 20%.
    •  Soft costs, closing costs, and reserves are 10%.
    • In total, you’ll need $19,800 for this deal.
    • You received $30,000 in business credit, but only need $20,000 of it.
    • This is how to calculate the math on this deal:
      1. The minimum payment on business credit is 1% = $200
      2. Rents are $300 per unit = $1200
      3. The operating expenses per month = $400
      4. The mortgage payment = $283 per month ($52,800, 5%, 30 yrs)
      5. Reserves = $180 ($1200 (Rents) x .15)
      6. Cash flow = $1200 rents – $400 OpEx – $283 mortgage payment – $180 reserves = $337 cash flow per month
6. Does investing in your backyard make sense:
  1. It might not make sense to invest in your area because it’s too expensive and there’s low inventory.
  2. Investing in your area may be challenging since you’re unfamiliar with the area, cap rates, cost per door, and the model. 
  3. There’s also the issue of having a commercial mortgage broker, realtor, and attorney.
  4. If you don’t have the required credit score, you may need to get a partner.
  5. You may end up going through multiple mistakes and losing money.
  6. Consider investing in other areas outside of your own.
7. How to invest in other markets – Pittsburgh
  1. The Pittsburgh, PA market is a developing market:
    • Uber has a headquarter in Pittsburgh
    • Google is expanding their offices in Pittsburgh
    • Major feature films have been filmed in Pittsburgh
  2. The Pittsburgh market is safe, affordable, and has high returns on investment.
  3. 100 Percent Financed has a roster of team members (See vendor list)
  4. 100 Percent Financed knows the market inside and out
  5.  Following this method, you can close on two deals a year working part-time.
Words of advice
  • Soft costs are not a part of closing costs. These include: inspections, entity formation, travel costs, appraisals, etc. 
  • Follow the cash flow cycle:
    • Apply for business credit
    • Remove hard pull inquiries from your credit report
    • Apply for a mortgage loan
    • Find the deal
    • Write an offer
    • Negotiate the LOI
    • Complete the Purchase and Sales Agreement
    • Perform the due diligence 
    • Close on the property
    • Complete a cash flow report
    • When contacting deal finders, do not ask questions; advise deal finders the financials and the physical of what you’re looking for in a property.
    • You will run across deal finders who are skeptics that will object to working with someone out of state:
      • Acknowledge their skepticism, and let them know who this is not for and what you don’t invest in.
      •  Share with deal finders your 3Ms.
      • Thank deal finders for deals they send to you, but let them know your requirements. 
      • Give Agents an overview of how you can help them and how seller financing can give them two commissions instead of one.

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