Investing in Multifamily Properties Makes Sense 

Investing in multifamily properties offers a real advantages over single family homes.  The one that is most important to understand is determining property value.

The value of a Single Family Homes (SFH) is driven largely by the value of the homes closest to the home.  Closest means both proximity as well as style.  As you might imagine with so many foreclosures even great homes in great neighborhoods are experiencing significant drops in value.

The value of multifamily properties is driven largely from what is called Net Operating Income (NOI).   NOI is simply revenue less ordinary operating expense.  Other factors influence the value but NOI is the driving factor.  Therefore it is possible to drive the value of a multifamily property up by either increasing revenue or controlling cost.

Cost reduction/control methods include but are not limited to the following:

  • Analyze expense ratios to national averages and investigate any large variances.  An example of this would be an abnormally high water bill may indicate water pipes that leak.  Fix the leaks, reduce the costs, and raise the property value.
  • Too many personnel on the property payroll.  Banks tend to do this when they take over a property.
  • Managing the management company.  Understand the methods commonly used to cheat owners.  Trust but verify what they are reporting.
  • Decrease tenant turnover by offering incentives for the tenant to renew their lease.

Revenue can be increased by several methods such as:

  • Understand what market rents are for similar units/property types.  If warrented raise the rents to local market rates.  We did this for one of our properties.  The current rents were $40 per month less than the next closest comparable property.  We had 80 rented units so when we implemented this increase it generated and additional $3,200 per month or $38,400 per year.  At a 10% cap rate, the value of this property increased $384,000 ($38,400/.10) that day!
  • Adding services that tenants will pay extra for i.e. laundry rooms, vending, storage, pet policies, etc.
  • Increasing the percentage of the property that is occupied.  Taking a property from 80% occupied to 90% occupied can dramitically increase the property value.
  • If the property comes with extra land, put it to work with additional rental units, self storage facililities, or some other type of commercial property.

These are some of the strategies investing in multifamily properties makes sense.  We use to drive multifamily property values higher thus allowing us to provide our investor partners returns that are generally higher than they can earn with most other investments.

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