Multi-family properties are an excellent way for new and experienced investors to diversify their real estate holdings.
The wide variety of multifamily properties available means investors can choose a sprawling 200-unit property, or a smaller 5-unit, depending on their investment goals. And although they are less volatile than the retail and office market, multifamilies still offer plenty of value-adding opportunities.
At the same time, it can be pretty frustrating sifting through the chaff to find your ideal multifamily income property…
… unless you identify from the start the three characteristics of the ideal multifamily property.
Evaluate the physical features of the multifamily property
The properties that offer the greatest potential for profit are those that require a simple face-lift in order to increase their value. A bad paint job and outdated carpets can easily be remedied if good layouts, open hallways, and large closets are on the other end of the scale.
Keep looking for ways to value-add to the property, and you’re bound to find a property that will increase its equity and ultimately, your bank account.
Aren’t units sub-metered? Has the maintenance been put off? Does the landscaping look like a 7-year-old decided to build a fort? Great – that means with a few basic repairs and a good paint job you can improve the appearance of the property and increase the base rent.
Consider the unit ratio
The unit mix is the mix of apartments of various sizes in the complex. The best multifamily properties are those where there is a variety of apartment sizes to choose from.
Apartments range in size from studio to 3 bedroom apartments; larger sizes are usually limited to single-family homes. Efficiency apartments combine living, sleeping and cooking areas into one space, and are occupied by one person. A studio apartment is nearly the same size as an efficiency but usually, has a larger kitchen.
These unit types tend to have a more transient base and therefore a high turnover rate, and therefore there should be as few of these unit types as possible.
The next size up is one bedroom units. These are ideal for retirees, couples, and college students; the larger tenant pool means that vacancies are easier to fill. Of course, this depends largely on where the property is located. A college town vs a primarily family-oriented suburban area will have different demands in terms of the market.
That’s why many investors prefer to have a two-bedroom apartment as part of the unit mix. Two bedroom units have a lower turnover than one-bedrooms and have the added bonus of allowing tenants to upsize or downsize without leaving the complex. They are easy to rent out, and cost-effective since larger families can’t move into them, and tenants tend to remain longer periods of time.
Know the location well
The location of an income property is a crucial component of determining whether or not an investment is likely to succeed.
Neighborhoods are “graded” according to the desirability of the area. For example, a Class A neighborhood has the newest buildings, best schools, little to no crime, and highest quality tenants.
Class B neighborhoods are similar but are one step down. Generally, the rating system goes to D, and includes + or – ratings. So a neighborhood can be a B- or a C+, depending on various factors.
Determining where on the scale a neighborhood is can be somewhat subjective, but the system is a useful way to compare locations and properties.
Keep in mind that a property is an A neighborhood isn’t necessarily a better investment choice than one located in a B or C neighborhood. Since properties in A neighborhoods are generally new with very little (if any) improvements needing to be made, it can be very hard to add value to a property there. You’ll pay top dollar for a property that due to the high level of amenities and expenses, might offer very low cash flow after all is said and done.
On the other hand, a B- property in a C neighborhood could end up being lucrative once various renovations are completed. If the property were brought up to a B, then it would attract higher class tenants who will be willing to pay higher rents for the difference in quality compared to other similar properties.
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Tags: commercial income properties, commercial properties, commercial real estate investors, Multifamily income properties, Multifamily Investment, Multifamily Investment Strategy