Part of the excitement of investing in real estate is finding the properties that are just right for you. It’s not easy, but it wouldn’t be so satisfying if it were. To simplify the search process a little, here’s a look at some of the essential steps to help you evaluate and identify a multifamily investment property.
Considerations for Evaluating a Multifamily Investment Property
When you find a property for sale, how do you evaluate it? You need to gather a tremendous amount of information that falls roughly into four areas:
1. Understanding the transaction. Most transactions are far more complex than a simple purchase or sale. You need to understand the seller’s motivation as well as your own. There is nothing inherently suspicious about selling a property—it’s an activity we approve of wholeheartedly. But try to get an idea of what is going on with the sellers behind the scenes. Why are they selling? Are they in a hurry to sell? That could give you an advantage in negotiations. Or are they trying to offload an underperforming holding? It can be helpful to look at factors such as vacancy rates, deferred maintenance, and operating costs.
You need to understand your own needs in detail, as well, to judge a potential deal. How does the property fit into your existing portfolio? Will you get the return you want in the time you expect to hold it? Detailed analysis is required to find out.
2. Doing the math. This is absolutely crucial, and it’s a tall order. There’s an impressive array of acronyms to decipher, equations to calculate, and “rules” to follow, and behind them all are mathematical and economic principles of varying complexity. For example, consider price per door, IRR (internal rate of return), NOI (net operating income), NPV (net present value), and CAP (capitalization rate)—if you can’t calculate these yourself and interpret the data you come up with, it’s recommended that you seek the help of an investment adviser. If you fail to consider them correctly, you will be operating in the dark and at risk of making an investment mistake.
3. Analyzing past performance and future potential. The key to successfully analyzing a property’s performance is asking for the right information and, again, doing the math. Ask for a profit and loss statement and the property rent roll. If a property’s performance indicators are not stellar, that should be reflected in the negotiation process.
Performance issues do not have to scuttle a deal. The solution to the problem may be apparent. Are the rents at market level? If not, they can be raised. Is the manager or management company reliable? That can be changed. Is the neighborhood in decline? Becoming hip? In the former case, negotiate hard. In the latter, you may want to consider repositioning the property.
4. Doing due diligence. If your evaluation leads you to pursue a purchase, there will be a whole new round of questions to ask. These will be narrowly focused and of a technical nature. The general outlines of due diligence are well known, including title search, physical inspection, and review of leases. There will be a number of specialists involved, but they are relatively easy to find and can be counted on to provide actionable advice.
The investor has two challenges here. The first is to set the parameters of due diligence verifications to ensure you don’t miss anything. The second is deciding what you want to do with the results received. How much deferred maintenance are you willing to accept? Everyone has their own limits.
Working with a Multifamily Real Estate Investment Expert
If all of this fills you with perplexity rather than the thrill of the hunt, there is a simple solution: leave it to experts. Even if you are a seasoned investor, a real estate investment management company will have resources and a staff with a combined experience that exceeds any individual’s.
The advantages of having a team of experts working for you cannot be overestimated in a complex process like buying an investment property, where much is at stake. A firm that specializes in multifamily real estate can be especially effective in helping you make an informed decision.
Another option is to buy a share in a property owned by an investment firm. That property would already be thoroughly vetted. As an investor, you would have assistance throughout the transaction and there is often in-house property management in place. Those are major benefits that should be considered when evaluating and choosing an investment property.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management 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.