BACKGROUND
In today's turbulent and uncertain economy, many individuals and
institutions are finding real estate to be a particularly interesting
investment sector. While this is scarcely a new phenomenon, participation
in this market sector has been increasing significantly.
One attractive strategy is the ownership of moderate and moderate-lower
income multi-family rental housing situated in primary and secondary urban
centers — ownership of established properties with verifiable earnings
records. Professional property management is a critical element of each
facility. This strategy is based upon the continuing shortage of good
housing in these income brackets and areas as well as a history of low
vacancy rates.
A MULTI-FAMILY REAL ESTATE STRATEGY
An attractive strategy is direct ownership in forthcoming real estate
acquisitions — 10 up to 100+ units. This may be appealing for an
individual (or perhaps an affinity group, e.g., family members or
professional colleagues) seeking direct ownership in a multi-family
(apartment) facility. The experience of many has been that a prudent
direct multi-family property can yield more attractive operating as well
as long-term returns than alternative opportunities.
Unless one has both strong experience as well as adequate time to search
for, undertake the often-extensive "due diligence," and subsequently
manage this kind of investment, it is prudent to work with a seasoned
associate. A knowledgeable multi-family real estate strategy will
encompass:
Ongoing searches to identify possible real estate acquisitions that appear
to be stable and attractively profitable.
Once an attractive real estate acquisition is identified, an objective
financial and marketing analysis is undertaken to eliminate any potential
acquisition that fails to meet your "hurdle" performance criteria.
Depending upon your preferences and goals, current criteria generally seek
cap rates of not less than 8% and "cash-on-cash" returns of not less than
12%, loan-to-value (LTV) ratios of 70% to 80% (depending upon whether
recourse or non-recourse financing is used), and debt service coverage of
at least 1.25.
Following an acceptable analysis, a Limited Liability Company (LLC) will
often be established to ultimately take title to the property. One's
seasoned associate may be designated the Managing Member of the LLC, i.e.,
acting as "project manager." If consummated, the individual owners(s) will
participate in the net income of the project in conformance with a
stipulated schedule in the Operating Agreement of the LLC. This Operating
Agreement will also address other issues such as exit terms to meet the
goals of the owner(s).
The LLC will then present an Offer and undertake the subsequent "due
diligence," e.g., professional property inspection, professional
appraisal, title search, ASTM E-1528-00 Environmental Transaction Screen,
and lead paint and asbestos inspections, if required.
The satisfactory completion of "due diligence" will lead to the
anticipated execution of a Purchase and Sales Agreement. If the due
diligence examination uncovers problems or deficiencies that cannot be
cured, the negotiations should be terminated.
Following execution of the Purchase and Sales Agreement, negotiations will
be initiated to secure the mortgage financing meeting the individual or
institutional owner's financial goals.
All due diligence analyses and reports are made available to all
participants to facilitate timely decisions. It is desired that all
negotiations move expeditiously. This is almost always in the best
interests of the Buyer and the Seller.
All conditions of the transaction, viz., terms, interest rates,
amortization, and payment schedule, are to be designed to meet the
individual or institutional owner's financial goals.
While understandably subject to the constraints of the Seller, the target
is to complete a transaction within 60 to 75 days of the initial
commitment to proceed.
OTHER OPTIONS
In lieu of the strategy summarized above, a prospective investor may
prefer a very different kind of ownership in forthcoming real estate
acquisitions to meet their individual or institutional goals; e.g., a
private real estate syndicate, a limited partnership syndicate,
tenant-in-common (TIC) agreement, or a real estate investment trust. In
many cases, §1031 tax-deferred exchanges are to be accommodated.
AVOID INVESTING FADS
Disappointments and uncertainties in the securities markets over the past
five years have driven many investors into the appealing characteristics
of real estate markets. However, markets are always changing. Today, with
much more money chasing real estate investments, many professionals feel
important sectors of the real estate market are fully-priced — perhaps
over-priced. There are always good investment opportunities, but these are
more difficult to find in 2005 than they were just a few years ago. A real
estate acquisition is not a sure fire winner! The best advice to the real
estate investor is to be very cool, never become enamored of any possible
acquisition, work the numbers dispassionately, and team up with an
independent associate with a strong track record. Of course, this is the
best advice in any market!
Sell 
