I have seen some troubling images in recent times, all due to the present state of the housing market. I have seen images of wild animals who have taken up residence at abandoned homes, images of neighborhoods that are now virtually empty of their once owner occupants, and stories about groups of former homeowners who have taken to living in tents as they transition forward in their lives.
All of these things are sings of some of the troubling economic times we face and there has been one particular type of real estate that has proven to be somewhat ‘economy proof’. That type of real estate is multi-family real estate and there is a very good reason for this. People need a place to live and cost-effective rental housing is a logical place to turn when times are tough.
The past few years of our economy could easily have been titled ‘The Rise and Fall of American Homeownership’. During the good times, politicians were raving about record numbers of homeowners across our country and people were basking in a glow of economic bliss that many had never experienced before. However, much of this was founded upon sketchy financing programs and basic issues like housing affordability were cast aside.
The result, as we are now seeing, is a current record number of foreclosures and abandonment of homeownership, as people try to regroup and determine how best to move forward in more challenging economic times. Subdivisions have emptied, homes sit empty, yet people still need a place to call home, even if it’s just a stepping stone to a better tomorrow.
What I have found, as an owner of many multi-family properties, is that the same period of time that has caused so much unrest in single family real estate has created a boom in the occupancy and demand for my rental units. Sure, there are also single family homes available to rent, but these are more expensive to rent and also require more maintenance than an apartment.
In short, business is very good as a multi-family apartment owner, and the present economy is showing no immediate signs of a rapid recovery, especially for the residential homeowner. When you are seeking out investment opportunities in real estate, you generally look for properties that can be purchased at a discount, properties with good appreciation, and properties that produce cash flow.
Multi-family properties, when they are purchased properly, offer excellent opportunities for all of these benefits and especially so when demand is high from consumers who are looking to rent. As much as it is a shame to see bad things happening to good people, we as investors must look for opportunities to both profit and meet consumer demand. Multi-family properties offer such a winning combination and are thus worthy of your investment consideration.
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As you may well know by now, private money funding is one of several options you have for funding a commercial real estate deal. The real trick is to know where to find such funding, and then to know how to lock it in so you can properly use it. I’ve used my share of private money over the years and what I’ve found is that private lending success comes from two key things: how you present yourself and how you present the deal.
Presenting yourself to a private lender needs to revolve around your professionalism and your commitment to the types of deals you do. For this reason, a simple summary proposal is a nice touch, when you first begin visiting with a particular lender. In such a proposal, you can provide snippets of your business philosophy, history, experience, etc. You can also show examples of how you would handle a particular deal, giving a lending prospect a quick idea of what it is like to do business with you.
There are several ways to put together a summary proposal and there are a similar number of things you could call it. The bottom line is that if your business is worth telling people about, it’s also worth putting in writing, and a person looking to learn more about you is less likely to want to read a full-blown business plan that is less relevant to their immediate interests.
Once you have gathered some interest from private lenders (not to understate the importance of this step), the next step is to actually present a deal to them when one comes your way. How you do this will be very important, given that your credibility with a seller will be somewhat dependent on your ability to not only attract funding, but also have it when you need it most.
When putting a project summary together, remember the key components that are important to you when you evaluate a commercial deal for your own business. First, there is the price tag, which should be competitive, relative to market value. Second, there are the market conditions, which should show some stability and also signs of good future growth. Last, there is of course the property’s cash flow, which should be acceptable to all parties involved. Once the basic elements of a deal are in place, then you can really dive in and start negotiating the terms of use for a private lender’s funds.
Don’t ever forget that using private money is serious business, so make sure you have a good team in place to support your efforts, and be sure to treat a private lender’s funds as carefully as you would your own. These two things can really simplify the use of private money and open key doors of opportunity for your commercial real estate business.
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“I read this interesting article in this month’s units magazine. Notice that it’s talking about all of the bargains that are available. People say I got a head start because I bought properties so cheap during the last down turn, well they are right and now it’s your turn to have people say that about you!! Enjoy the article and put in an offer today!!”
For many investors, high-quality properties are available for about 50 cents on the dollar.
While apartment owners trying to dispose of properties purchased at the peak of the market may be feeling indigestion from all the red ink, investors with cash are licking their chops at the number of apartment communities available for purchase at sizable discounts.
“If you have access to capital, you can buy properties for 50 cents on the dollar,” says Del Walmsley, an independent rental owner, investor and Founder of Houston-based Lifestyles Unlimited.
A number of factors are contributing to the abundance of discounted properties. Large companies, such as REITs, need to raise cash and increase liquidity to pay dividends and pay off debt. With secured capital so difficult to come by in the current market, they must sell properties in which they have equity.
Tim Naughton, President, AvalonBay Communities, said at a National Multi Housing Council finance forum in early June that his company has been in defensive mode, raising capital and increasing liquidity. Disposition of properties, he says, is “a backdoor way of tapping the secured debt market without bringing more secured debt onto the balance sheet.”
The difficulty with accessing credit also makes it more difficult for real estate owners who purchased with high leverage at the height of the market (2005 to 2007) to refinance loans that have begun to come due. With lenders calling on those loans, the owners must sell to meet their obligations.
Even “traditional” foreclosures—those caused by ineffective operators—are creating opportunities for investors. Because banks also are pursuing liquidity, they are selling apartment communities they have obtained through foreclosure for low prices. Investors may be able to acquire distressed properties from the owner, through a receiver, a share sale or directly from the lender, the bank or insurance company, says Greg Guerrero, an independent rental owner and Managing Member of Apartment Services Co. in Tulsa, Okla. In addition to foreclosures, some properties may be available through bankruptcy, he adds.
“When the tide goes out, you see who’s swimming naked,” Guerrero summarizes. “When economic conditions become tough, inefficient properties fail.”
The number of apartment properties falling into financial trouble is far outstripping the number of distressed communities resolved through sale or otherwise, according to a June report from real estate research firm Real Capital Analytics. Outstanding apartment distress is up $8.1 billion year-to-date and totaled $16.8 billion at the end of May, according to the report. Another $750 million of apartment properties had gone into default or foreclosure through mid-June, the report adds.
Those distressed apartment properties are having an impact on prices, though they do not entirely dominate sales. “The percentage of distressed sales in the apartment sector is up considerably this year,” the report states, “but still only averages between 10 percent and 15 percent of total volume.”
Local Banks Lending
With so many lenders no longer in the apartment market, it may be difficult for investors to find capital to take advantage of these opportunities. But that difficulty in finding financing also means investors may face less competition in bidding for properties, Guerrero notes. Nevertheless, he says he still faces competition in his market. “It’s always a matter of what the market will bear,” he says. “Some people have paid amounts that are greater than I’ve been interested in paying.”
Walmsley says money is still available from local banks to investors who are known and well-regarded in their community. “It’s not what you know, it’s who you know,” he says.
Walmsley asked his mortgage broker to take his financial statement and shop him around to about 50 banks. When the broker finds a bank who might be interested, Walmsley goes in to talk to the banker, who sizes Walmsley up to see if he would make a viable business partner. “It’s going to come down to whether the investor has enough money, enough background, and enough credibility to pull a deal off,” he says. It’s most important that investors have prior experience in apartment investment, he says. “It’s more about you than it is about your credit score.”
Instead of putting all his money in one bank, Walmsley also is putting his money into other banks with which he hopes to do business.
More Equity, Less Debt
Real estate loans that are available may be more conservative—investors might have to put down 30 percent in equity instead of 20 percent, for example. But investors who are hesitant to invest 30 percent equity in a purchase are missing an opportunity, Walmsley says.
A community that cost $2 million last year would require a 20 percent down payment of $400,000. That same community might cost $1 million this year, so even a 30 percent down payment is only $300,000. Even if the NOI of that community is less, the investor will still see cash flow because of the lower debt servicing payments. Plus, the community has the potential to rise again in value.
Special Offer article written by Jeffrey Lee of Units Magazine.
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Huntsville, AL .. August 28-30 2009
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Despite the current slump in the housing market, it can be an attractive time to acquire funding for a real estate property. I made my move into the real estate business at a time when it was “risky” and not a sure thing, but I have comprised systems that allow me to not only survive the slump, but profit from it. We all know the time to buy is not when you hear everyone saying it a great time to get in the market. We want to get in before that. I had a mere $800 to my name when I decided I to make real estate work for me. There are many ways to go about funding your next real estate deal, but today I would like to focus on grants, private investors, sellers, liquefying assets, and loans.
Grants:
The government dishes out millions of dollars each year in grants to those seeking funding for real estate ventures. This is mainly because one of the government’s main duties is to provide housing for U.S residents. Not only are the grants there to help the brokers, but also acts as an outsourced entity for the government. There are not only federal grants for which you can apply, but also state level grants as well.
Private Investors:
If you can be provided with an opportunity to sit down with someone who is willing to entertain putting forth a little investment capital for a possible venture, wear your best suit and tie. Have a professional proposal detailing your outlying costs and show the bottom line of your profit margin. Chances are your investor will be looking for a faster return on their money than a financial institution will.
The seller (can you believe this?):
Yes, you can possibly obtain the money needed for a property from the seller. It may benefit the seller more to finance your purchase than to maybe face foreclosure. In some instances the seller is willing to add additional money to the price of the property to account for the down payment and the closing costs. This additional money may need to be covered in a certain time period such as a deferred down payment. It will increase your interest to carry that extension on your balance; however it will buy you some time to earn more capital.
Liquefying any assets:
If you feel strongly about entering in to the market and have tried other avenues to obtain capital; you may think about liquefying any available assets. You can cash in any stocks, bonds or other savings. Also you may contemplate turning over your 401K in hopes that you can replenish your retirement fund with a much more lucrative investment in larger sums. Especially if you can invest then into a CD account which yields higher interest. However, seek professional guidance before making this move. We always need to think through our investments from how to get a deal to the proper exit strategy!
Loans:
If all else fails, it is still possible to obtain an investment loan from a bank or credit union. You may be required to possess a higher credit score and/or have substantial collateral to convince the bank to fund your venture. In this instance you may or may not receive the full amount necessary, and will also need to consider the interest rate that will be assessed above the loan. This will be essential when completing a bank proposal.
The right way to fund a deal is different for each circumstance. As a professional investor it is important to be able to use all the tools necessary to get the deal done. Understanding all your options enables you to be the investor that gets the deal done. Once you establish yourself as a closer the deals will start to run to your door.
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Huntsville, AL .. August 28-30 2009
Even now with all the economic issues the county is facing, when banks are not even lending to each other, its possible to attract more financing than you deals to finance!
Fortunes are made in times like this. When everyone else is frozen in the headlights of this bad economy, you can be the exception!
You can take a simple step to ensure your financial future. Simply call 800-559-8590 and ask for the “Free report on Attracting Financing” We’ll get it right out to you with no strings attached!!!
I look forward to hearing YOUR success stories about how you thrived during the recession of 2009.
– Dave
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