Investing in Residential & Multi-Family Real Estate (Series: Real Estate Investing 101)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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Thank You To Our Sponsor
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Bill McGuinn – Sugar Felsenthal Grais & Helsinger
Panelists:
Tammy Kelly – Redwood Capital Group LLC
Scott Weinstein – Field and Goldberg, LLC
Sean Weppler – Weppler Law Group LLC
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ABOUT THIS WEBINAR:
Investing in Residential and Multi-Family
Real Estate
Apartment buildings and other residential and multi-family housing can provide a stable
income to an investor. This Financial Poise webinar discusses some of the pros and cons of
being a landlord. It provides a basic overview about how to find and assess opportunities,
obtain financing, negotiate a deal, and manage a multi-family investment. The accounting,
tax, and legal aspects of being a landlord are part of the discussion.
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ABOUT THIS SERIES:
Real Estate Investing – 101
Real estate has always been a popular asset class for investment. After all, as the adage
says, “they’re not making more of it.” More and more investors are turning to real estate as
an investment class.
Investors considering making an investment in real estate have a variety of choices: retail,
office buildings, industrial, raw land, and, of course residential. This Financial Poise
webinar series covers several types of real estate classes that one may choose to invest in,
explaining where to look for opportunities; how to diligence them; possible funding
solutions; and best practice for execution.
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EPISODES IN THIS SERIES
2/14/19 Episode #1:
Investing in Commercial Real Estate
3/14/19 Episode #2:
Commercial Leases, their provisions and pitfalls to avoid
4/18/19 Episode #3:
Investing in Residential & Multi-Family Real Estate
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #3:
Investing in Residential and Multi-Family
Real Estate
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TYPES OF INVESTMENT
RESIDENTIAL PROPERTY
• Single family home/condominium
• Full time rental or partial use/partial rental
• Multifamily
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POTENTIAL ADVANTAGES OF MULTI-
FAMILY AS COMPARED TO SINGLE-
UNIT INVESTING
• Cash flow
• Rental diversification
• Economies of scale/ affordability of professional management
• Use of more leverage
• Less competition (not competing against owner-occupiers)
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FACTORS TO CONSIDER IN
SELECTING A MULTI-FAMILY
BUILDING
• Location – proximity to public transit, schools, shopping
• Amenities of property
• Condition of property
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ECONOMIC DUE DILIGENCE TIPS
• Determine market rates for similar properties in same area
• Determine vacancy rates in area
• Determine costs for repairs/painting when typical tenant vacates
• Estimate operating costs
✓ Fixed expenses – obtain copy of seller’s insurance policy, property tax bill,
utilities bills, management company bills
✓ Variable expenses – obtain property’s financial statements & compare to
actual invoices. Consider cost to eventually replace roofs, HVAC, etc
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OTHER EXPENSES TO CONSIDER
• Advertising
• Cleaning and maintenance
• Commissions paid to rental agents
• Home owner association/condo dues
• Insurance premiums
• Legal fees
• Mortgage interest
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• Taxes
• Utilities
• Management fees

ACQUISITION / DISPOSITION COSTS
• Transfer taxes
• Title insurance
• Loan fees (tax and insurance escrows)
• Move in- move out fees
• Legal fees
• Due diligence costs (inspection, environmental, etc.)
• Survey
• Broker’s commission
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CONTRACT CONSIDERATIONS
• Earnest Money and how it’s held
• Contingencies
✓ Due diligence
✓ Financing
✓ Other (permits, licenses, approvals, etc)
• Representations
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CONTRACT CONSIDERATIONS (cont’d)
• Closing costs
✓ Who pays for what
✓ Prorations/reprorations of taxes, rents, income and expense
• Representations and how long they survive
• Title survey requirements
• Closing mechanics and deliverables
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KEY CONSIDERATION
• Tenant turnover
• Collections
• Maintenance
✓ Rule of thumb – any building with 20+ units will support cost of professional
management and a live-in manager; 10-20 units will usually only support a live-
in manager; < 10 unites usually require owner to manage
✓ Potential for appreciation
o Discounted price
o Fixer upper
o Rezoning potential
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FINANCING
• Commonly based on property’s ability to generate income as opposed to buyer’s
credit
• Sometimes such investing is encouraged through favorable financing regs
• Leverage – pros and cons
✓ Average down payment = approximately 30% of purchase price
✓ Amount of equity invested can change risk profile
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WHAT IS EQUITY?
• In real estate, the financial value of someone's property over and above the
amount the person owes in debt.
• For example, assume you buy a home worth $100,000. If your mortgage is for
$80,000, then your loan to value ratio is 80% (because your loan of $80,000 is
80% of the home's total value).
✓ Calculate the LTV ratio by dividing the loan value into the property value:
80,000/100,000 = 0.8.
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GENERATING AN OPERATING PROFORMA
• Revenue: Rent and other income (parking, utility reimbursement, etc.)
• Expenses: Property Taxes, Insurance, Repairs & Maint., Turnover Costs (leasing &
make ready), Landscaping, Utilities, Contract Work, Legal, etc.
• Net Operating Income: Revenue less Expenses (NOI: Purchase price creates a
cap rate value)
• Financing Expenses: Interest, Principal, Reserves
• Capital Expenses (roof, windows, appliance replacement, major repair, etc.)
• Cash Flow: NOI less financing costs and Capital Items – when created for a
predicted investment hold period, a DCR analysis can be completed.
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CAP RATES
• If you collect $1,000,000 in rents and other income (i.e. vending machines) and
pay $600,000 in expenses (excluding major capital expenditures), your “Net
Operating Income” is $400,000
• Once you have the NOI, divide the price or value of the property into it. For
example, if you have $400,000 in NOI, and you paid $4.8 million for the
property, the Cap Rate is = 8.33%.
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CASH ON CASH RETURN
• If you have a mortgage, your return isn't the money you collect in your NOI. It's
what you have left after making your mortgage payments
• To calculate your after-debt return, called a cash-on-cash return, you divide that
net cash flow by your down payment. If you put $700,000 down on that $2.4
million property, you would owe $1.7 million
• If your annual debt service was $130,000, and you took it out of the $200,000
NOI, you would end up with a $70,000 annual cash-on-cash return
• When you relate the $70,000 to your $700,000 down payment, you would end
up with a 10 percent cash on cash return
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ALTERNATIVE TO CAP RATE
• A Discounted Cash Flow analysis assumes an investment for a period of time,
and discounts it back at an investment rate. This can be analyzed as an IRR or
Net Present Value. Ignoring the NPV for now, the IRR allows one to determine
the return of an investment over a period of time. The calculation includes the
initial investment, a projected end value for the investment and all of the
distributions in between. While it has some faults, it can be a more accurate tool
than a cap rate.
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HOW DO YOU CALCULATE NOI?
Net Operating Income Formula
Potential Rental Income
- Vacancy and Credit Losses
Effective Rental Income
+ Other Income
Gross Operating Income
- Operating Expenses
Net Operating Income
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KEY CONTRACT PROVISIONS
• Contingencies – inspections and attorney review
• Tax proration – make sure you understand local taxes, payment and reassessment
dates
• Seller reps and warranties
• Required condition of title
• Default and remedies
• Amount of Earnest Money required and who holds
• Proration of Rents and assignment of Security Deposits
• Assignment of leases and collection of rents following closing
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TITLE AND SURVEY CONSIDERATIONS
• Boundary line issues – (Insured over by title?)
• Easements (must be reviewed and understood)
• Liens - should be released at closing
• CCR – covenants, conditions and restrictions of record – should be reviewed and
understood
• Condo or homeowner’s association documents – any restrictions on leases/sales.
• Tax status.
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HOW TO TAKE TITLE
• Personally?
• LLC, Partnership or corporation
✓ Advantage is limitation of liability to assets of the entity
✓ Holding title personally is never recommended
✓ Lender issues with holding in an entity
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CONSIDERATIONS IF SELF-MANAGING
• Leasing strategy – How will building be kept occupied? Cost of leasing.
Understanding Landlord-Tenant laws.
• Repairs and maintenance – Do you have time? How will tenant issues be
handled?
• Property tax assessment monitoring and appeals.
• Capital Improvements/Construction: Who will monitor and assist when larger
items need to be addressed?
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MULTIPLE PROPERTIES
• With multiple properties – several issues should be considered:
✓ Should all be titled in the same entity or should new entities be formed for
each – isolating liability for each property in each entity
✓ Location – Ideally they are close to aid with ease of management
✓ What insurance coverage is available across properties – even if held in
different entities
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SUSTAINABLE GROWTH
• Steady economic growth and key drivers will keep the multifamily market moving
forward in 2016.
✓ Multifamily rental demand kept pace with the large wave of new supply in 2015 and
will remain strong into the foreseeable future.
o Favorable demographic trends, strength in the job market and reduced
affordability of owning a home will continue to fuel strong demand for
multifamily rental units.
o As more supply enters the markets, the national vacancy rate will increase
slightly, but it will remain less than the historical average through 2016. As a
result, rent growth will remain strong until new supply can catch up with
demand.
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SUSTAINABLE GROWTH (cont’d)
✓ In 2015, 306,000 multifamily units were completed and entered the market – the
most in a single year since 1989. The level of new multifamily supply is expected to
remain elevated over the next few years, given that the number of new construction
permits rose again in 2015.
✓ The labor market added 2.7 million jobs and is near full employment as the
unemployment rate finished 2015 at 5 percent. The strengthening labor market will
put upward pressure on wage growth in 2016.
✓ Despite the Federal Reserve’s decision to increase interest rates in December 2015,
multifamily property price growth will remain strong and capitalization rates will
not be significantly affected in the short-term.
✓ Multifamily origination hit record volume in 2015.
✓ Source:
http://www.freddiemac.com/multifamily/pdf/freddieMac_mf_outlook_2016.pdf 3
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SUSTAINABLE GROWTH (cont’d)
✓ Source:
http://www.freddiemac.com/multifamily/pdf/freddieMac_mf_outlook_2016.pdf
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HISTORIC GROWTH RATES
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ABOUT THE FACULTY
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Bill McGuinn – wmcguinn@sfgh.com
Bill’s real estate practice extends to the acquisition, development, sale, leasing and financing of commercial,
office, residential and retail properties.
In his affordable housing practice, Bill has represented owners and developers of thousands of housing units in
numerous states with multi-layered financing including taxable and tax exempt bonds, low income housing tax
credits, HOPE VI, Community Development Block Grants, Neighborhood Stabilization Program funds, Tax
Credit Assistance Program and Tax Credit Exchange Program.
Bill has also represented developers of conventionally financed projects, both residential and commercial. He
also guides buyers and sellers, landlords and tenants through all aspects of their respective transactions.
Aside from real estate matters, Bill has worked with numerous closely held businesses on a variety of matters
including representing business in obtaining credit facilities, structuring start-up organizations and the
purchase and sale of a number of business entities.
Bill is an avid sailor and participates annually in the Chicago Yacht Club Race to Mackinac. Bill has also
competed in the Transpac, racing from Long Beach, California to Honolulu, Hawaii.
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Tammy Kelly – Kelly@RedwoodCapGroup.com
Tammy is a Senior Vice President of Asset Management at Redwood Capital Group.
Ms. Kelly, CCIM, CPM is responsible for oversight of all asset management, including budgeting and capital
expenditure requirements, as well as all strategic dispositions. She also assists with sourcing and underwriting the
firm’s investments. Ms. Kelly optimizes value by managing with strategic oversight and by identifying and seizing
market opportunities thereby maximizing asset values.
Prior to joining the Firm, Ms. Kelly was Senior Vice President at Blue Vista Capital Management from 2006-2014
where she oversaw a multi-million dollar commercial real estate portfolio consisting of various asset classes. Ms.
Kelly’s asset management responsibilities at Blue Vista included executing on strategy and monitoring asset
performance, as well as serving as the liaison with the Firm’s operating partners. Prior to her tenure at Blue Vista
Ms. Kelly spent a year at Equity Investment Group where she was responsible for overseeing, coordinating and
evaluating the company’s property acquisitions, which consisted of closing over 2 million square feet of retail
shopping centers. From 1999 to 2005, she worked as a senior property manager for both Equity Investment
Group and New Plan Excel Realty Trust where she managed retail shopping center portfolios in excess of 1.4
million square feet, respectively.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/tammy-kelly/
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Scott Weinstein – SWeinstein@fieldandgoldberg.com
Scott A. Weinstein comes to the Field and Goldberg, LLC having developed a broad-based background in
commercial real estate. Mr. Weinstein’s experience includes working with a fortune 500 company where
he handled transaction financing and deal structures. Having served as president, counsel and co-owner
of a successful real estate title company, Mr. Weinstein brings a unique perspective and understanding of
the daily and ongoing business issues clients face and is able to provide practical and proactive counsel.
Mr. Weinstein regularly represents commercial real estate clients in all aspects of commercial
transactions including lease negotiations for landlords and tenants (including franchisees) nationwide on
retail, office and industrial leases; acquisitions and sales of office, industrial and multi-family apartment
buildings, and shopping centers; financing; and condominium deconversions.
Admitted to practice in the State of Illinois and the U.S. District, Northern District of Illinois, Florida and
New York, Mr. Weinstein received his Juris Doctor degree from Temple University Beasley School of Law
and his Bachelor’s degree from the University of Maryland at College Park.
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Sean Weppler – attorney@wepplaw.com
Mr. Weppler graduated from Western Michigan University Cooley School of Law in 2009. He
graduated from Western Illinois University, where he earned a Bachelor of Business with a
concentration in Economics.
Mr. Weppler worked at the Lake County State’s Attorney’s Office before joining his father, Terry
Weppler and rebranding the firm to what is now known as Weppler Law Group, LLC.
Mr. Weppler is a longtime resident of Libertyville and co-founder of the Libertyville office of
Weppler Law Group. His practice focuses on residential and commercial real estate. The firm
represents clients in residential and commercial mortgage transactions, sales, and purchases. Mr.
Weppler also has handled leasing and assignments of commercial and residential real estate
properties, zoning issues and family law issues on a case by case situation.
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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