Multifamily real estate investing can be exciting and profitable, but it requires hard work and comes with risks. As you look for your first property, you’ll need to conduct research and weigh liabilities against opportunities so that you can weed out properties that might cause you to lose money. To meet your personal real estate investment criteria and position yourself for success, you’ll want to consider the demographics of the area, including the neighborhoods that offer the best potential; learn how to choose the properties that can best be developed, acquired, or repositioned; recognize serious structural and other property issues; and get your finances in check (you'll need plenty of cash).
To Meet Real Estate Investment Criteria, First Research the Demographics
As a new investor, you will want to begin the search for your first property by researching demographic trends—data that can give you insight into specific towns and neighborhoods—including average age and income of residents, multifamily property values, and any other statistics that could have bearing on your decision.
Historic growth performance is very important. Downtown Los Angeles, for example, was the fastest-growing area in the nation between 2000 and 2016. Median home values there increased over 700 percent, household income grew over 95 percent, and the area saw an 857 percent increase in the number of residents holding a bachelor’s degree. On the east coast, the median household income in Washington D.C. rose from $37,000 to nearly $97,000, for a 163 percent increase in that same timeframe. Multifamily property investors who did their homework in those areas fared well.
Learn to Choose Properties that Offer the Best Potential to Develop, Acquire, or Reposition
The three primary methods of investing in real estate are through development, acquisition, and repositioning. Each option requires a different strategy and comes with its own unique benefits.
Development. If you are looking to become a real estate developer, the more education and experience you have under your belt before starting out on your own, the more prepared you will be. You will want to seek schooling, training opportunities with consultants, and get advice from professionals who can help you conduct extensive market research and walk you through the development planning phase before obtaining financing. Financing is a critical and ongoing aspect of real estate development. You’ll need a lot of capital and knowledge of the various loans you’ll need to consider. To lower risk, some developers team up with others in joint ventures.
Acquisition. When acquiring an existing multifamily property, look for one that promises high income potential and that doesn't have a lot of issues. Additionally, acquiring a building with residents already in place reduces risks and translates to a steady cash flow. Financing is also simpler when acquiring a property than it is when developing one. As with any real estate project, always be prepared to engage in challenging talks and negotiations while defending your interests.
Repositioning. Strategies for repositioning multifamily real estate vary depending on your investment goals, and include the following:
- Strengthen operations of the property by improving management effectiveness, attending to deferred maintenance, and optimizing cash flow. For example, many multifamily property owners hire a professional management company, which is often faster to respond to emergency repairs and more efficient at screening new residents than you could be on your own.
- Consider the multifamily asset class of the properties you review. You might be able to reposition a Class B property in an area containing a number of Class A buildings, for example. By putting your resources into renovating and upgrading a Class B property to a Class A property, you could demand higher rent, increase the overall value of the building, and create equity in the property.
- Target specific residents with great amenities. Extra parking and additional storage will attract families, for example. A wellness center and smart-home technology features will appeal to millennials—a generation of renters having a large impact on the multifamily market.
Recognizing Structural and Other Serious Property Issues
One of the best ways to avoid heartache and headaches as a first-time multifamily property owner is to ensure that the property you’re interested in doesn’t have any structural or other serious and expensive issues before you purchase it. Foundation problems, significant electrical or plumbing issues, and the existence of mold are all red flags. A walk-through only goes so far, after all. So, once you’ve chosen a property, get it thoroughly inspected by a credentialed professional.
Get Your Finances in Check
Lenders that finance multifamily properties typically require high down payments and set terms and conditions that can be difficult—but not impossible—to meet. Plus, there are a number financing options available to multifamily real estate investors. As you make your way into the market, consider working with a multifamily real estate investment management firm that has the resources and experience to help you plan and succeed.
Whether you acquire, develop, or reposition your first multifamily property, you can expect a lot of hard work and learning opportunities while pushing to meet your real estate investment criteria. Moreover, under the right set of circumstances, you can also expect to generate steady income as you strive toward your financial goals.
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.