Multifamily Investing - A Cash Flow Investment Alternative
With rising property values in question, especially in areas with high price volatility, such as Florida, more and more investors are turning their focus from single family housing to multifamily apartment buildings. Some of the main reasons why investors choose multifamily apartments are because they appreciate the idea of having the tenants pay down the mortgage and the expenses of the property while also enjoying the benefits of real estate appreciation. If purchased and leveraged appropriately the investor can collect a monthly income similar to what most people make in a full-time career. The asset may also act as a hedge against inflation to boot! These multifamily apartments are a basic human requirement so its value swells with inflation.
Multifamily investing allows for greater cash flow and minimizes investor risk as you have several tenants paying rent, comparatively to investing in single family assets where you are relying on one check. This increased cash flow makes it possible to hire a property management company and to pay other expenses associated with owning a multifamily asset. In essence, you are buying an annuity of sorts that is paying you a set of (mostly) fixed and passive net cash flows after expenses.
Apartment complexes have demonstrated to be one of the most stable commercial investments. Even as foreclosures continue to be a concern in the media, people will need a place to stay. Although some will continue to move back in with their parents, the majority will turn to renting apartments, which as a result will increase rental occupancy and demand. This, coupled with the fact that the new Commerce Department figures indicate that the US Homeownership rate is nearing it’s 30-year low demonstrate just a few factors which lead to a boom in the demand for multifamily apartment rental properties.
With the Multifamily class being a preferred property type for most lenders and government agencies, financing is plentiful. Despite the credit chaos reported by retail borrowers, multifamily lenders are still offering high percentage loan-to-values in their financing at attractive rates and terms. In addition, some of these loans are fully non-recourse, meaning that the investor is not personally guarantying the loan. Non-recourse loans are a terrific way to increase return through a leveraged investment while limiting the personal risk that you are willing to commit for a specific project. As investors gauge their risk acceptance and other matters involved in owning other commercial asset classes, multifamily loan programs will continue to look more appealing. I have negotiated non-recourse multifamily loans for myself and others. In fact, my brokerage provides a loan negotiation service to its clients where we maximize your positive leverage and cash flow.
The multifamily asset class has long been the favorite of commercial real estate investor as it comprises of strong fundamentals and large returns. And it's the class with the most available financing for acquisition and development. It was probably no mistake that the multifamily market was the first to recover after the Great Recession and has continued to churn out increasing levels of supply. Such success has led to increasing concerns of oversupply and overbuilding. But so far those fears have proven to be unfounded. In fact, a recent Freddie Mac Multifamily Outlook report cited despite oversupply and high market value concerns the multifamily rental market has continued to stay on track and has many more years of growth.
One of the principal features sought after when acquiring a multifamily asset is location to amenities. Are they within walking distance? Is public transportation close by as well? Do you know your walk score? Tenants that reside in apartment complexes are simply dependent on certain amenities that need to be available. Depending on the class of the property (ABC) there will be different required amenities by the tenants.
Speaking of class, I would recommend, in some situations, to gentrify your property if possible. In this instance, gentrification means buying and renovating a multifamily property in urban neighborhoods, in a manner which increases its property value and should allow you to charge more rent and increase your cash flow—which is what your property’s value is based on. This, however, can even affect your amenity needs. For instance, if you are gentrifying a C-class apartment building, that public transportation amenity may not be as required by the majority of tenants as increased rents typically bring wealthier residents who have personal transportation. There are plenty of value-add opportunities in the market that can benefit from gentrification.
Knowing your subject property’s area is key here. Knowing what properties are performing and at what level is key in judging comparables nearby. Working with a good multifamily broker is highly advised. Working with a broker who has the time to assess your needs and follow through with them is paramount. There are many big box brokers out there that are just trying to get another transaction under their belt—as opposed to building a long-term relationship in which they can all prosper. Our brokerage sets a limit on how many clients a transactional agent may take on, so they never lose that personal touch and relationship our company’s vision requires.
With regards to due diligence, make sure you do yours thoroughly. Never, ever trust the seller's declared cash flow without verifying the numbers behind the statement. I have seen buyers acquire a 10 CAP property, then a few months later, realize it was only a 7 CAP property because they relied on a seller's pro forma in lieu of actually verifying stated items. Moreover, there is much more than cash flow to verify. The list is rather extensive. Just to name a few are environmental duties which can result in strict liability for the investor, engineering reports, warranties, vendor contracts and tenant estoppels-these topics require more time than I can allocate for this post. That being said, I am always willing to share my knowledge. Please contact me if you have multifamily due diligence issues.
When it’s time to focus on building your occupancy, your apartment complex will have more noticeable competition. Renters are a few clicks away from finding you (and your competition). You will need to distinguish your multifamily property in a way that emphasizes whatever value you are selling—either way, you will need to be aggressive with your pricing and advertising. In my property management experience I have determined that marketing videos along with phone calls going to a live-person are great ways to bring in leads. Retention, on the other hand, is the other side of the occupancy coin that, if done right with good customer service, will get you to the high 90s in occupancy. Retention and marketing is another set of vast subjects that I will try to cover in future posts.
The multifamily markets are on fire. Just to name a few I have seen around Tampa in the past few months, the 4.57 acre Chart House restaurant site will be redeveloped into a mid-rise apartment building on the water. Feldman Equities has proposed a 52-story tower on the former Tampa Trump site. Along North Rome Ave & North Hyde Park a five-story complex should have 274 units. The Related Group closed on the Tribune’s downtown property paying $17.75MM so they could develop an eight-story 400 unit apartment building. These are just a few properties that may come to pass and it’s not too late to get in on the action.
As the market cycle goes up in some areas it may go down in others. It is important to do your research when acquiring a multifamily apartment complex as buying or selling at the wrong time, in your specific market, can be catastrophic to your finances. Make sure you are utilizing a commercial real estate professional when researching the multifamily space demand in the local MSA you are going to make your investment in.
Still, not every multifamily market is created equal. In a future post I will briefly cover the multifamily market phases and how to determine which one you are in so you can react correctly to the market.
Thank you for taking the time to read my blurb of thoughts and if I can be of assistance to you please reach out.
Lenny Longo, MSIRE