In Part I about deals “no money down” we discussed the inexperienced multifamily buyer and reasons for their willingness to enter into a nothing down deal. In this post, we turn to the experienced operator/owner and discuss their motivations for pursuing a high-leverage multifamily acquisition candidate.
In Part I, the motivation suggested for the new investor is to Get In the Game. For experienced investors….
You are already in the game, you know the game well and adding an additional multifamily asset, albeit highly leveraged, doesn’t negatively impact your balance sheet or cash flow. It can be particularly rewarding to acquire an additional asset in a city where you have existing operations.
New and expanded economies of scale including the new acquisition may actually lower your overall costs of operations (on a per unit basis) as management and maintenance personnel is spread over additional units. This is where an “OK” asset can become a driver to increasing portfolio-wide Net Operating Income (NOI). The use of over-leverage, of course, is a two-edge sword.
It’s just not funny how short-term financing is technically really short-term. Really. People wait in line for hours to ride a two-minute roller coaster. That’s what short-term financing is like. We put in the hours and suffer the wait to obtain the debt, and the ride is over in two minutes (OK- it could be a two-year loan but you get the point- it’s still short-term).
The best protection against having a quality deal implode is to secure long-term financing on as much of the debt as possible. From that point, your financing focus can be on replacing any remaining debt with equity. The ancillary debt can be addressed through the sale of fractional interest in the property, from the sale of other assets and/or from cash flow from the purchased asset or other assets.
Cash flow from other apartment assets in the portfolio can be utilized to sustain the newly purchased, highly levered asset (if necessary). But this should be transitional, not a way of life. Cash reserves, cash flow, and impound accounts build a safety net for an owner adding a high-leverage deal into the fold.
In conclusion, while nothing down is not dead, it is a risky business. It’s not for the faint of heart or those that cry easily or lose sleep about rent collections. If nothing down deals were an asset class I would estimate that less than two percent of all multifamily deals fall into this category. So while they do come along, (when they do) its best to be prepared with abilities to manage not only the property but the increased risk associated with high leverage.
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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com