Founder of Vive Fundis a unique multi-family investment firm that specializes in curating high-quality assets for investors.
Many new investors to the real estate industry are unaware of the myriad opportunities in multifamily housing. This is often because they are intimidated by the size of the investment or they don’t know what they can do. As mentioned in Part 1, single-family real estate may appear more welcoming to new investors, but the information needed to acquire such real estate and convert it into an income-generating asset is not necessarily what it seems. It’s not as easy as it sounds. Done well, investing in multifamily homes can provide a way to increase your return on investment while reducing management hassles. But before investing, take the time to research and understand the ins and outs of multifamily investing.
Multifamily investments are typically orders of magnitude larger than single family investments, but there is a crucial difference. The value of a multifamily property is proportional to the income it generates. There are other factors, but income generation is important. Deterministic factors of multifamily project value include income, extrinsic and intrinsic valuation, efficient local management, and operational efficiency. This may sound daunting to new investors, but it’s not. Here is a brief explanation of the concepts that determine these values.
• Income: We often hear that there is as much ‘art’ in real estate investing as there is ‘science’. The science part consists of elements determined by a set of indisputable attributes, such as income from investments. Rental income and ancillary income, such as money earned from vending machines and business services (color printing, photocopying, notaries, etc.) are gross income from multifamily property. You can easily determine your income by perusing the balance sheet of your assets. Similarly, expenses and depreciation are also classified on the balance sheet, and income is the difference between total income and total expenses. (Please note that it is beyond the scope of this article to delve into complex accounting details. Please consult your financial advisor for more information.) Experienced investors should consider this is used as the basis for evaluation. The base can be adjusted up or down due to various factors. Some factors that affect the valuation are irrelevant, including potential job growth in the neighborhood, tax laws, local rental housing laws, and competing real estate. Internal factors that affect ratings include unit upgrades, facility upgrades, and more.
• External evaluation: Multifamily properties can be valued highly by external factors. These include assessments by GDP growth across the region, major employer transfers to the region, employment creating nearby greenfield or brownfield projects, and other externally controlled factors or events. . All of these events can create jobs and support higher rents, thus increasing income for multifamily housing and, in turn, increasing property values.
• Essential Appreciation: Properties with outdated appliances, carpets, etc. rarely reach their full rent potential. Multifamily properties can increase rental income if owners invest strategically in upgrading each unit. Increased rental income increases the value of multifamily properties not only in the short term, but also in the years to come.
• Efficient management: We have found that managing multi-family assets takes less time than managing single-family assets. For example, a commonly used rule of thumb in the multifamily industry is that for every 100 units he employs 1 full-time office employee and he employs 1 full-time maintenance employee. Therefore, 100 properties can be managed by her staff of two. Assuming rent is $1,500 a month, her two employees in a fully rented building bring her $150,000 in earnings. Achieving this scale in the single-family home market requires the attention of multiple single-family investors and full-time investors.
• Operational efficiency: Reducing operational overhead is a key metric that contributes to the overall financial health of a multifamily property. Decisions that affect operational efficiency include staffing, outsourcing of some operations, and various investments (laundry, vending machines, business services, renting common areas for parties, storage facilities, co-marketing). and non-rental income from
Assets owned by investors in close geographical proximity may be able to share maintenance work and possibly office staff. We’ve found that talented employees are a strength of multi-family homes, but sharing talent across properties can significantly reduce overhead.
Increased non-rental income is often overlooked, but can create a significant revenue stream. For example, properties with “dead” space can generate income by building storage lockers. The renter often stores excess belongings in local storage his rental business. Why not make this revenue in-house?
One of the major drawbacks of multifamily investments is the loss of control of the limited partners. However, in the initial investment phase of a multifamily investor’s foray, it is often the safe path until they acquire greater investment capacity.
Competition for prime properties is fierce. New entrants to multifamily housing should be prepared to accept a series of “defeats” before closing the deal, as real estate investors have discovered the potential for multifamily scale-up. The temptation for newbies is to “bid” the competition. But be aware that finances may not support this. Be patient, aim to open small deals and use the momentum to win bigger deals.
Another area to pay close attention to is the high maintenance costs that can occur in multi-family homes. For example, if a roof needs to be replaced due to constant water leaks, this can cost thousands of dollars and affect the financial viability of the project. Some of these costs may not appear at time of acquisition. Contingency plans must be taken.
Finally, day-to-day management of an apartment complex takes time and effort. When you have many properties under management, the variety of needs to manage each property can be overwhelming. Having a good team at each facility is essential. Managing each team requires preparation.
Overall, we found multifamily investments to be the most effective for adjusting income levels. Getting the same income stream as a single-family home requires more time to deal with acquisitions and the management issues that come with them.
The information provided here is not investment, tax, or financial advice. Please consult a qualified professional for advice regarding your specific situation.
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