INTRODUCTION TO REAL ESTATE

A Brief Overview of Multifamily Real Estate in the U.S

February 2020

SAR CAPITAL LLC

Table of Contents

Section 1 Introduction to Real Estate

Section 2 Key Considerations for Investing into Real Estate

Section 3 Risk Considerations

Section 4 Appendix

Section 5 Terms to Know in Real Estate

1 Introduction to Real Estate
What is Multifamily Real Estate?

• Multifamily Real Estate investment involves investing in a wide range of apartment complexes located around
North America. While many real estate investments do involve a huge amount of capital, they are best known
for their stability with producing monthly cashflow as well as the appreciation of the asset invested in.
Multifamily Real Estate investments are intended for passive and financially sophisticated investors who are
willing to sit and wait for the returns on the investments to be made. The “bond-like volatility” of this type of
investment makes it almost comparable to keeping your capital stored in the bank, earning interests
periodically. 1

• Multifamily Real Estate investment for most involves looking at rental apartment complexes that generally
have a history of generating positive cashflow over the years. These investments typically experience
appreciation in the assets of the apartments (most often seen as selling the property with a higher value than
originally acquired for). Additionally, these investments are conducted in “well-known” housing markets
throughout the U.S.

• Multifamily Real Estate investment is strongly backed by many financial institutions and government
agencies, making it easier to do things like finance portions of the investment, a common practice throughout
the industry. 2
1 Please refer to Appendix: Section 1 for more details on the type of returns with Multifamily Real Estate compared to traditional investments
2 Please refer to Appendix: Section 2 for more details on financial institutions and government policies regarding Multifamily Real Estate
 Why Invest in Multifamily Real Estate?

Stable Cashflow § Rental units being desired more than ever brings stable cashflow to majority of the deals put on the market.

Property Track Record § Access to previous financials and performance documents generated throughout the years the property has
started to generate income.1

Asset Appreciation § Allow investors to seek profits made on the sale of a property as a result of the appreciation that the asset
will endure.

Financing § Access to low interest-rate financing options with a high loan-to-value principle allowing capital to be
Advantages/Leverage leveraged into buying bigger deals.

Transparency § Allows significant access to minor details and a diverse range of documents involved with the property
before determining whether to invest or not.

Downside Cushion § Multifamily Real Estate has the ability to stay strong when housing markets or economies fall
§ These allow creditors to be relieved from any pressure that banks or any source of loan put as a result of
their means to protect their capital.
There is no guarantee that all apartments will exhibit all the characteristics shown or mentioned above. In the worst case scenario, investors may lose their entire invested principal if the value of the property drops or if any case the income of the
property does not exceed the debt service and expenses required by the property.

1 Please refer to Appendix: Section 3 for more details on the different types of paperwork used with multifamily real estate investments
Common Real Estate Investment Strategies

Investing in § Purchasing a property with tenants renting already.

Multifamily Rental
Properties

Buy and Hold § Purchasing a property, holding on to it, and selling it when the market has changed in order for value of the
property to appreciate. With multifamily real estate, the appreciation can also be due to the increase of the
property's performance.

Wholesaling § One of the few forms of investment in Real Estate that doesn't involve buying the property. Find a property
that is currently available on the market and market the property to potential buyers such as investors or
home buyers.
Fix and Flip § Purchasing a property, fixing and renovating it, then selling it to potential buyers such as investors for a
higher price.

Real Estate Investment § Investing money into Real Estate Investment Trust, which is a company that owns and operates income-
Trust producing real estate.
Multifamily Real Estate Industry Analysis

Investments into the multifamily real estate industry alone in 2019 has exceeded $150 billion worldwide. This industry
is particularly hot as investors and companies realize that many people cannot afford homes as their values get more
expensive. In fact, Freddie Mac reported that in the last three years alone, the cost to own has already increased by
23.8%. This is one of the big reasons for why people live as renters. In fact, more people rent these days than ever
before, and that number is continuing to rise.

The U.S Census in 2016 reported that the

growth of renter population has outpaced that
of homeowners in most large U.S cities. In
fact, the total population in the U.S has
increased by around 23.7 million people
during the past decade. The census then
found out that the number of renters has
increased by more than 23 million, and that
of homeowners by less than 700K.
Multifamily Real Estate Industry Analysis

Just with this graph alone provided by

the U.S Census, we see that majority of
the large cities in the States, like New
York or Miami, have adopted the
ideology of renting over
homeownership. Specifically when a
lot of people go to these giant cities for
work, they rent as it will save them
money and time to maintain their
property.
Multifamily Real Estate Industry Analysis

The graph presented on the left further

shows the “evolution” of the multifamily
real estate market. We can see the
number of rental-occupied units almost
double over the past 30 years. It also
further shows the strong growth that this
market has encountered and will
continue to sustain. In Fact, the CBRE's
Research Team written by Richard
Barkham (Ph.D in economics) states that
Multifamily developers will remain very
active in 2020. CBRE Research predicts
that multifamily completions will total
280,000.
Multifamily Real Estate Industry Analysis

The graphs shown below provided by Pew Research all display the positive correlation between certain
demographics. This, in fact, led the research firm to conclude that rental rates in general has increased between
these certain groups throughout the past decade.
 Multifamily Real Estate Industry Analysis

The types of structures renters live in are either apartment

units or single-homes. This is correlated to the fact that a
lot of renters live as a single, meaning that the space they
require is not a lot, allowing them to live in units. It
further ties in with the demographics research presented
by Pew Research, when they state that these days, a lot of
the renters are young adults. In fact, the U.S Census
further confirmed this fact in 2016 when they noted the
exact same trend in the data that they collected.

Source: U.S Census

Multifamily Real Estate Industry Analysis

While both the median asking rent of units

and housing prices seek a proportional
relationship, the rents rise much slower in
comparison with housing value, partially
due to inflation.
Multifamily Real Estate Industry Analysis

Real estate multifamily markets are

solidifying every year. From Houston, the
2nd hottest market in America, to Georgia,
the trend will not end as everyone needs
somewhere to live, and especially when our
population is increasing every day.
Multifamily Real Estate Industry Analysis

There are numerous websites out there, such as Niche.com, which will survey neighborhoods
of different cities as well as grab information from other firms to present a case study on a
particular area. This information is vital in giving a general sense of the market someone
wants to enter into.
2 Key Consideration Factors
Factors to Consider when Evaluating a Real Estate Property

Terms Definition Function

1. Sales Price The price that the property is valued at. This is a general way to measure and
compare the value of the property to the
price that the seller wants. It allows us to
see if properties are overpriced or if we
are getting a good deal
2. Units The number of rental units that the This is super important as it shows us how
property contains. big the property is. Furthermore, it is an
important factor when considering the
management risks involved, as well as the
flexibility of the property.
3. Cap Rate The rate of return the property generates This is a general way to track the
given you pay cash for the entire performance of the property, and a
valuation of the property. number we rely upon when underwriting
the deal.
4. Net Operating This number is determine by taking the This is one of the most important number
Income difference between the expenses and to consider as the net operating income
gross income of the property. determines the capital and return that the
property generates.
More Factors to Consider when Evaluating a Real Estate Property

Terms Definition Function

5. Loan This is the sum borrowed from the bank. This number acts as the figure used to
Principle determine the debt service being paid off
each period.
6. Interest Rate This determines the amount of money The number, similar to previous, acts as a
that is paid back every period. figure used to determine the debt service.
7. Down This is the money put down when buying The number determines how much capital
Payment the property as a way to complement the has to be raised in order to quality for the
loan principle. loan, as well as to afford the property.
8. Trailing 12 This is a document showing monthly This document enables to find any
performances of a property throughout a patterns with the property as well as to
year. Performances includes rents, gross track its performance in different worst-
income, expenses, and net operating case scenarios.
income.
9. Rent Roll This is a document that shows the The rent roll adds onto the transparency
occupancy of each unit in the deal, as factor. We are able to see who is living in
well as to show the rents being paid, the our units before we make an investment
size of each unit, and the condition its in. into it.
Real Estate Fees
Fees Involved Definition Role of Fees
Brokerage Fees Fees provided to brokerage firms and brokers who represent the seller. This can also include The broker fee is paid to complement the broker for the work they have put in,
people like mortgage brokers who would find lenders and aid with the process for finding typically through the form of a commission. Fees will usually be within the limit of
loans. around one percent of the closing costs(which is around 1 to 3% of the sales price).
Appraisal Fees This fee is usually paid when borrowing capital from lenders. The lender will require the This is part of the bank’s process to make sure that they are not investing in a
borrower to order an appraisal(for around $6000 to $10,000), which will then be delivered as property not worth the value that they are seeking to help finance. The appraisal is
an “assessment” of the property. typically an objective done by an appraiser who spends around 2 to 3 days analyzing
the property.
Management Fees These fees are paid as part of the routine expenses required when managing a property. Most The management fees are paid to complement the work that the property management
properties will already have management setup, as a result already bearing the costs of company and/or property manager has done to make sure that the property is well
management fees. taken care of. They are the first ones who collect rents, and talk with tenants.
Insurance Fees These fees are paid to insurance companies as part of a protection service offered to the Insurance, like having management, is an option that property owners opt for as a
property, in case of any unexpected incidents ranging from damages because of earthquakes way to protect their property. Insurance companies are usually already protecting
to unexpected lawsuits filed by tenants. majority of the properties for sale.
Due Diligence This is a deposit that is placed after the property is placed under contract. The “Due- The ”Due Diligence” fee is placed generally for the seller to allow the buyer to do
deposit Diligence” period is around 30 to 60 days, in between when the property is placed under more inspection, with the fee being the way to complement it.
contract and when the property closes. During this period, buyers have access to the property
and to do as much inspection as they would like before buying the deal.

Example of costs for property Example of possible fees listed on a

closing, broker fees, or other fees property’s end of year income
paid during the financing or statement.
purchasing process.
3 Risk Considerations
 What are risks in Real Estate?

§ Every market, asset, or investment will endure a form of risk. Risks, in real estate, is defined as
anything that will contribute to a financial loss. Generally speaking, multifamily real estate is not
subject to the risks and exposures that stock investments may have. In fact, the biggest issue with
stocks is that it is very volatile. The opposite is true in real estate, as the property's stability is
guaranteed by its past performance, quality of the property, and the quality of the market.
§ Real Estate investment risks mainly appear as the result of a lack of detailed research and due-
diligence. With the transparency that property owners and brokers provide, it is essential for
investors to look into the property and its surroundings in depth. This will prevent
unexpected challenges and risks to come into play. Typically, investors who have to consult with
others first(like pitching a property to secure capital) will be much more well-prepared than
investors who already have the capital reserved for such investments.
§ When considering risks, investors should always start by looking at worst-case scenerios(WCS).
These scenerios test the property's performance during a period of economic uncertainty or
recession. A great example would be the 2008 Global Housing Crisis, with many
foreclosures happening throughout the world at that time. That event was a global recession
that tested many mulitfamily real estate properties around the states. Investments that were done
with research, care, and in a strong neighborhood with the right amount of leverage(debt)
typically succeed through that period.
Types of Risks in Real Estate
Type Explanation
Market Risk Investors can't control markets, interest rates, or the economy. There
is always a risk that a housing market may collapse, however, some
places are more protected than others.
Asset Risk This risk is concerned with the actual property itself. Price,
condition of the property, structural and code issues, utility issues,
even crime in and around where the property is located are all
important factors that should not be ignored.
Ways to Avoid
Typically, investing in markets that have a lot of
investments from major employers ensures that
the market is well-sought after and safe to invest
in, especially when giant companies pour billions
to invest there. Doing research on the employment
of that market, population, rental demographics,
and overall market performance is also very
important in order to minimize the risk as much as
possible.
“Do not get emotionally attached to a deal,
because paying more is not winning,” says Don
Wenner, CEO of DLP Capital Partners. “If the
deal doesn’t work at that price then the deal
doesn’t work, or the price needs to be negotiated,
or you walk away.” Investing in an asset falls into
different risk categories: are you paying too
much? Are the tenants happy when living there?
These are all questions that, when answered with
the proper and thorough research, will ensure that
the risk is minimized.
More Types of Risks in Real Estate
Type Explanation
Manager Risk Who is managing your property? What is their background?
How did the property perform when they took over the
management aspects? Third-party management is extremely
useful –but only with the right team who can help manage.
Manager risks can include actions such as managers
stealing money from the property.
Summary: Risks appear in all businesses. With multifamily real estate, the risks are created as a result of
the investor not doing their research properly. Research is key to being successful in this field and it is
something that has to be done in a quality manner.
Ways to Avoid
This is another instance as of why it is very
important to do the resarch and the due-
diligence before you invest in a property.
Finding the performance of a management
company that already manages the property
is very simple, as a simple look at the
trailing 12 would give a general
information. When looking for a new
proprerty management, look at their
background. Look at the properties they
have managed. Maybe even go on one of
their properties and take a look at how good
of a job they are doing. Once again, this
risk can take into serious effect if the
investor does not do their research properly.