Reason 5 - Forced Appreciation

[Jorge Abreu]

💥Reason 5 on Why the Wealthy Invest in Real Estate!

💥Unlike single-family homes, multifamily apartments is a business that is valued primarily by its Net Operating Income (NOI), not so much by the comparable sales of similar properties like in Single Family. Through physical and operational improvements, you can increase the value of the property by increasing NOI.

Most value-add syndicators look for opportunities to capture appreciation through capital improvements or through streamlining known operational inefficiencies with current owners. 
One of the first things you will want to look at when considering an investment with an apartment syndicator is the general partners plan to reposition, or force appreciation on, the asset. 🙌

There are three ways to force appreciation; 1️⃣ increase income, 2️⃣ decrease expenses or a 3️⃣ combination of both. Regardless of which approach is used, the result will be the same – an increase in NOI.

💲Let's look at how an increase in NOI will affect the value of the asset. Imagine we buy a 100-unit apartment complex for $5M that has a NOI at time of purchase of $250K, thus a CAP of 5% (NOI/Asset Value). Now say we invest $350K on improvements that garnish an average premium of $75/unit. This increases the NOI from $250K to $340K and thus brings the FMV (fair market value) from $5M to $6.8M (NOI/CAP = 340,000/.05).

👉Investing $350K for a $1.8M FMV increase, a $1.45M return, is a very lucrative move. As you can imagine, a decrease in expenses will affect the numbers in the same way by increasing the NOI.

[Brian Garlington]

Passive like this is the way to go if you want to be hands off. I have and have had my share of rentals from SFRs, Condos, Duplexes and three unit properties and even with a PM to "referee" everything it still comes down to managing the PMs as well as dealing with tenants, trash, taxes and toilets. That's why I am fazing out of residential multifamily and looking into value add Multifamily syndications like what the OP is talking about as well as Self Storage and Mobile Home Parks.