RG 031 – Multifamily Analysis: Identify the Red Flags Before Submitting an Offer with Kevin Tracey

Reed Goossens
July 6, 2016

Identify the Red Flags Before Submitting Your Next Offer with Kevin Tracey

 

About Kevin:

  • Australian expat;
  • Investing in US real estate since 2009;
  • Left his job in advertising to go full time with real estate investing;
  • Started off his RE adventure by flipping repossessed houses in Florida;

 

Kevin Tracey Reed Goossens

 

Unrelated to real-estate:

  • Kevin help start touch rugby leagues in New York and San Francisco;
  • He represented the U.S. at the touch rugby world cup;

 

What I Learned

Kevin used to work in advertising before a friendly connection helped him start flipping repossessed houses on the side. This created enough seed money to leave his day job and become a real estate investor full time.

In this podcast he explains exactly what to look for when analyzing a multifamily deal, when to walk away, and how to increase your property value.
There are several things you need to consider when approaching a multifamily deal but before you begin you need to do your research on the local market. This means that you should know:

 

  • Average rental prices,
  • Size of the job market,
  • Local rental laws (eg rent control) and
  • Projections for job growth in local services.

 

Once you’ve confirmed you’re buying in the right market ask the seller for:

  1. Their current rent roll; I always compare the rent roll (market rent) with what I find on either rentometer.com or google apartments for rent in the area where the deal is located, (you will see if the rent roll is fake, or not).
  2. Current expenses;
  3. T-12 (the trailing 12 month Profit and Loss statement); probably the most import item to ask for;
  4. You can even ask for previous 2-year tax returns for the property. Some property owners will give this to you; most will not, but no harm in asking; This will show exactly what the owner has been reporting to the government;
  5. Rental Agreements with the current tenants: Again another good litmus test to see if the owner has running the property effectively;
  6. Normally a seller has a record of past rental costs and future predictions, however if this isn’t available Kevin suggested com. Any information you find on this site should be supplemental to the details from your mortgage broker and your research knowledge;

 

The main mistake investors make is trusting the information given by the seller; always make sure you analyze all rental and expenses figures and run them past your broker. If possible try to make a relationship with an insurance broker as well, so that you can run the insurance and taxes information past them and get an insurance quote before you make an offer. This is especially important if you’re in an area like Florida which is prone to floods.

 

After the insurance, taxes and expenses have been checked and cleared then it’s time to make an offer, at this point you have 10-15 days contingency to perform due diligence. Kevin recommends the 4 point inspection report done by an external company – Plumbing, Electrics, Roof and Air/Heating. If any of the four come back with problems Kevin recommends that you think twice about the purchase, or you can obtain a quote to replace/fix the problem and then re-negotiate with the seller.

Any changes you make when you first purchase are called “capital expenses” (CAPEX), however when you budget, don’t forget the other normal expenses.

 

  • Repairs & Maintenance: Budget 10% of the gross rent as for maintenance and repairs (these are the on-going repairs you need to make to the property; this is not the capital improvements you will do when you first purchase the property. Rule of thumb Maintenance and Repairs shouldn’t be between 10-13% of gross income.
  • Property Management: 6-10% for 4units or less, 4-7% for over 4 units (Rule of thumb)
  • Taxes and Insurance (Rule of thumb between 2-5% of gross income): This is when you need to have a good relationship with a local insurance broker to ask questions;
  • Full Time Employees: If you are buying a large multi family ie: over 40 units, you may need a full time onsite employee. Typically rule of thumb is that you need one full time employee for every 50 units; (150 units = 3 full time employees). NOTE: If you have full-time employees make them a salary and make them pay rent like other tenants. DO NOT subsidies their rent as payment. This will avoid any issues if you have to fire them.
  • Utilities: This can be a hard one to gauge; on small multifamily (under 4 units), and depending on the state you are investing in, you as the landlord may not have to pay for utilities (maybe water). On my large multi family properties I like to see between 8-12% of the gross income allocated to utilities. Again, this rule of thumb really does depend on the number of units in the property.
  • Admin Expenses: This expense will only apply if you have full time employees; Approx. 3-5% is average.

 

Expenses (maintenance + insurance + management fees + taxes + payroll + admin) = Net Operating Income.

 

Net Operating Income – mortgage and debt services = Cash Flow

 

At the end of the day I want to see an expense ratio in the order of 40-50% on large multi family deals; anything over that is an indication of deferred maintenance.

 

Takeaway tip: Do your own analysis based on the information given to you by the seller, at the same time give the same information to your local property management company (they can’t be connected to the property) and have them do their own analysis of the PnL for the T12. Then compare notes.. you have another set of eyes on the deal.

 

Top Investing Tips

Most successful habit – Constantly analyzing at least one deal at any time, and looking at a new deal every 2 weeks.

Most influential tool in your RE business – A really good broker and a good relationship with them.

Most exciting project right now – Currently under contract with a 67 unit building in Sacramento.

Who is your most influential person –  Friend and mentor who is a venture capitalist and has lots of experience with investing

Best US deal to date – One of his first deals -a 4 unit multifamily which has tripled in value since he bought it.

 

Contact kevin.tracey@oleanderinvestments.com

https://www.linkedin.com/in/kevin-tracey-b180455

 

Until Next Week, Happy Investing!

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