What are some of the most important things to look at when evaluating multifamily property investments?
If you’ve been following my journey, you know that I began adding multifamily apartment buildings to my portfolio last year. While there are many similarities to single family property investing, there are some new terms and quirks to learn. Below are some of those I’ve found most important.
How Utilities Are Paid
Utilities are a whole different beast when you move into the multifamily investing world. You need to know who is paying them, what their status is, and how to handle a float to make sure the lights stay on. In a multifamily project, you might have community utilities such as a pool, lobbies, security office, laundry, and exterior lighting. That’s all in addition to keeping on top of individual units. Depending on how big your property is, you could have a $12,000 to $24,000 light bill each month. And don’t forget water, sewer, and trash removal. You need a reserve to be able to keep up with these bills, even if the rent isn’t coming in. Getting the lights or water shut off in a community can create a monumental level of financial and legal issues. At the property my partner and I recently acquired, we’re billing the tenants back for the utilities. This helps our bottom line, which ultimately increases the value of our property.
Where will the tenants come from to fill this property? Make sure you are not relying on one employer for your rents—because you never know what could happen. If you have multiple employers around your property, that helps mitigate your risk in the event one decides to relocate or simply shutdown.
Take a good look at current versus market rents. There could be great value to be uncovered there. You may also have to be patient and be prepared to soak up some costs if current tenants have long leases at out of date rates. Once those leases expire, you can gradually increase the rents to market rates.
Multifamily properties are typically compared and sold based upon cap rates. That is the NOI divided by the current market value or seller’s asking price. In order to accurately calculate the cap rate, you must know these values. You must research them yourself. The lower the cap rate is, often the more desirable the property and or location is. If the cap rate is up between 11-13%, then you’re most likely in a questionable area.
Net operating income (NOI) is your cash flow from all rents and other income producing services (like laundry) after subtracting your operating expenses, including property management. There may be significant room for improvement here if you can get the expenses down and increase the income.
Obtaining these financials is very important because they break down the actual income and expenses of the building over the last 12 months. Purchasing a property on actuals is ideal versus a pro forma.
What are some of the things you’ve learned about multifamily investing? What are some things you’d like to know?
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