When most real estate investors hear about multi-family properties, they usually think of rentals, or cash-flowing investments. However, multi-family properties, especially 2-4 unit buildings, can be equally attractive as quick house refurbishments, or “flips.” As a flip, a multi-family project can generate high-quality, preferred-equity type returns in a relatively quick timeframe.
The purchase evaluation and property enhancement strategy taken by the real estate operator can differ from one-family home refurbishment. To explain the differences for our investor network, iFunding turned to Mr. Malico Watson of the Orange Group, a real estate operator based in Milwaukee. The Orange Group has funded four properties through iFunding in the last six months, with one fully-funded in under an hour. In the last two years overall, they have sold 35 properties, both multi-family and single-family, and will flip or buy-and-hold units. They also provide property management services.
Q: What’s the difference between refurbishing a single family home versus a multi-family property, in terms of investment criteria?
A: First, they are similar in terms of selecting properties based on a sound foundation, potential for improvements we can introduce, attractive neighborhood, and good value for money. The difference however is in the buying. Most single family homes are bought by individual families, with a longer-term plan for residence and hopefully value appreciation. The buyers of multi-families are investors or landlords themselves, with a focus on operating costs and multi-year rental income potential.
Q: How does this affect the refurbishment plan?
A: We find that residential, single family buyers, have a keen eye for the finishings. A marble counter-top in the kitchen, the type of wood used on the cabinets, and having two sinks in the master bedroom make a difference. Houses should fit a common style but it’s OK to have unique features. With a multi-family acquisition by an investor, they will pay more attention to the age and efficiency of the mechanicals like the boiler. We’ve done a few conversions from oil to gas energy, for example. The investor also will be interested in the insulation and heating bills if they are paying for them, and a layout that is suitable for a wide base of potential tenants, since they may turn over at some point.
Q: What is your turnaround strategy when you plan to flip a multi-family property?
A: As you can see with the properties we have funded on iFunding, we refurbish the common areas and the units, then usually we’ll rent out the units ourselves, and finally sell the rented property to an investor. And, we’ll offer our property management services, which the investor can use turnkey, or they can choose their own property management. Our service, however, has an extensive track-record of upkeep in the same community. Having that available can significantly speed up the average sale time for a multi-family plot.
Q: How important are property management services for someone who is holding a property for a longer time period?
A: Property management is one of the most important decisions to get right. You want a service that has qualified staff available to visit a property at any hour of any day. Those staff should have deep skills in repair and have proven that they’ll treat tenants with honesty and care. And you want to be sure that the staff professionally handles the administrative side, such as collecting rent and paying common utility bills.
We typically offer management services for 7% to 10% of rent, plus $29/hour and materials for any special repair. This is a fair price for a quality service in our area. We tell investors to beware of services charging, say 5%, because they are likely skimping on how many people staff the office and how experienced they are. When issues can hit, for example during a flood or snow storm, you need a bench that can visit multiple properties at the same time.
We also do quarterly inspections of each property under management. We find that tenants take much better care of the premises if they know someone will be dropping by and compare how the place looked between, say, September and January. And they are that much more satisfied by the attention to upkeep from the landlord.
Property managers also can give an investor guidance at the outset of an acquisition, similar to an inspector but with a keener eye to operating costs. For example, we had a rental investor come to us with a property she had just acquired from another source, sight unseen. The returns looked fine on paper, but when our management team was asked to examine the property and provide a quote, we pointed out several factors that would affect her costs, including cracked pipes and water leakage. The units were showing their age and were going to cost more to upkeep than expected, hurting the cash-flow potential for her investment. If she had come to us earlier, we could have pointed her to sturdier and more profitable properties, including several we had on offer ourselves.
Q: What types of investors do you see purchasing multi-family units?
A: I’d say roughly half have significant real estate investment experience before. Others are first timers that may have inherited the property through an estate, or are just getting their feet wet and like the idea of income-generating properties. The lending banks also will refer business to us based on our history of operation in the state.
Over time, investors come to see the potential in multi-family units for scaling their investment. It’s one property to oversee, but generating income from multiple tenants. The Orange Group has kept to an attractive size investment- that is, 2- to 8-units – for a wide range of real estate investors.
Q: In your opinion, how do multi-family properties fit into the crowdfunding market and your relationship with iFunding?
A: There’s certainly a place for both single family projects and for multi-families, if the operator in the deal is experienced in turning multi-families around. The other way to look at it is whether you, as an investor, are more interested in a flip with quick returns, or long-term cash flow. I think that the responses to our flips, including a recent two-family unit that was fully-subscribed very quickly, show strong demand for the quick refurbishments.
This particular two-family deal only required a small amount of investment, in the low five figures, and had a target turnaround time of four to six months. To entice tenants to rent as soon as it’s ready, we have used move-in specials that include 6 months of no maintenance to the tenant, and 6 months of guaranteed rent rates. Then with rentees and property management in place, our flips have been usually very quick to rent through our broker/agent service.
Some investors may be thinking of a fast return on investment through a crowdfunding site as much secure to them then a long-term hold, though both have their advantages. When you combine a low-investment-amount flip, with iFunding’s approach to offering preferred equity going first to the investors only, then profit-sharing on the rest of project, it’s compelling to look at equity-based flips of multi-family units as great crowdfunding investments. In fact, I’d like to do as many of these projects as I can with iFunding.