Multifamily real estate attracts both novice and seasoned investors due to its stability, long-term rewards, and the variety of property offerings. As a first-time multifamily real estate investor, you will find that beginning an investment career is challenging and educational. You’ll also discover that support is available in many forms when needed.
Fundamentals for First-Time Multifamily Real Estate First-Time Investors
It’s easy to get intimidated when just starting out on the path to successful investing, but proceeding at a slow and steady pace will help you overcome the challenges. Here, we offer you seven tips as you prepare for your first multifamily real estate investment.
- Plan everything, and then plan some more
The advantages of competent planning cannot be overstated. Careful planning requires a combination of research and soul-searching. Start with a wide view and work your way inward to the fine points. Are you looking for security and a steady income, or are you on your way to becoming a property magnate? Your business plan should reflect your decision. You’ll also need to assess your tolerance for risk and determine how much time you will devote to your investments.
A thorough understanding of your financial capacity and funding options is essential. You’ll need to calculate exactly what you can do with the money you have, and how outside financing works and how to obtain it. You will also need to fully understand and document financial projections and have on hand your tax returns and income statements. With these tasks completed, you can begin your search for your first investment property with confidence and mental clarity.
2. Assemble a quality team
No amount of knowledge can substitute for experience. So, as a beginning investor, consider engaging a broker to help assemble your team. It’s nearly impossible to gather a quality group of people alone, and experienced investors will tell you that it’s also not desirable when just starting out.
While a broker is not required, there are many advantages to enlisting one. A broker not only has deep knowledge of the local market, but also numerous connections that will be invaluable to you. For example, as your deal progresses, you will likely need an escrow service, a property manager, contractors, consultants, attorneys, and others, who will play large roles in your success. Your broker’s recommendations could save you a lot of time and help you avoid disappointment. This is where your preparation will begin to pay off. You will have to explain your goals and limitations numerous times, from a number of perspectives, and do so accurately and with assurance.
3. Choose your real estate market
There are areas in cities and towns favored by families and other spots that appeal more to millennials and singles, specific cultures, retirees, and many more groups that make a neighborhood unique and desirable. You’ll need to be as conscious of a building’s residents as you are of its structural characteristics. For example, single residents may move more often than seniors, and each group will be looking for particular features in their homes that you will have to accommodate.
There are accompanying economic considerations, too. A neighborhood may be transitioning—undergoing redevelopment, for instance. Market cycles must also be considered. The endless flow of peaks, valleys, and recoveries has a strong impact on property prices. A little research combined with advice from your broker will make the cycles and their effects clear. You may want to buy into an area that is expected to develop in the future, or you may want to stake your claim in a town’s current hot spot, for example. Not every opportunity will be right for you, so you will use your analysis to tailor your search only to properties that show promise in meeting your goals.
4. Conduct due diligence and evaluate property performance
It could take a while for you to choose one property of interest from all of your options, but once you’ve done so, it’s time for a new round of research and planning. Obviously, you need to conduct due diligence—thoroughly review the property to avoid unwelcome surprises. For this, you will need the help of professional advisors to uncover any structural problems or legal issues involving back taxes, zoning, etc. This is generally done after a security deposit has been paid.
In addition to carrying out due diligence, you will need to confirm that the property you’re interested in will meet your financial needs and expectations. There are a variety of ways to evaluate a property’s financial performance, and the more of them you apply, the better. Engage advisers, such as an accountant with multifamily real estate experience and an appraisal company, to help. After your analyses, you may want to include your findings in a business plan specific to that property, especially if you are applying for a bank loan.
5. Review operations with an eye on expenses
The way in which property operations are handled is not set in stone. Once you own a property, you can and should optimize its operations. For example, thanks to your thorough research, you will know what your expenses are and can make sure that they’re reasonable and necessary. The property service providers preferred by the previous owner may not be giving you the best possible value, so you might consider replacing them. There may be expenses that can be passed on to residents, as well. This is sometimes the case with utilities. If permitted in your state, a ratio utility billing system allows you to charge residents for water and other un-submetered utility usage by billing them proportionally.
You may also find that you are paying for amenities that no one uses or wants. For example, an unused storage facility, which still requires maintenance, lighting, and heating, could be used more productively.
6. Are you in a position to reposition?
You may find many opportunities to increase revenue from the property by investing in upgrades. This process is known as repositioning. Upgrades can be cosmetic improvements, such as re-landscaping; inexpensive add-ons, including covered parking spaces; or major renovations, such as new fixtures in units. Repositioning your property is justification for rent increases and provides lasting value for a one-time expense. These improvements take planning, though. So, you should determine what changes will be the most effective in attracting or retaining tenants, in addition to knowing what you can afford and what is logistically possible.
7. Consider other financial options
Rather than investing solo, some multifamily real estate first-time investors pool their resources with those of others in structures such as REITs (real estate investment trusts), or through an investment management firm. A real estate investment management firm offers you the chance to buy equity ownership interests in a property that you would not be able to own independently, and provides high-quality management for its properties without requiring you to contribute time or effort. Pooling resources also reduces investment risk.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and multifamily real estate valuation to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
For more articles like this one, check out our investment strategy blog posts.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.