Formulating a Multi-Family Investment Strategyadmin2020-05-14T17:58:39+00:00
Formulating a Multi-Family Investment Strategy
By: Bobby Larsen, Principal
The apartments sector has risen from an alternative category within real estate investment to a legitimate asset class of its own.
The coming-of-age of the millennial and Gen Z cohorts, aging baby boomers, the Great Recession, and shifts in lifestyle preferences have all contributed to this rise.
The sector’s growth is set to continue because, frankly, everyone needs a place to rest their head, and people are increasingly delaying or forgoing homebuying due to financial and lifestyle factors.
As in any type of investment, those who invest in apartments must approach it with a realistic strategy. This starts with an understanding of the below:
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What does ‘multi family’ mean and what are the different types of multi family developments?
Multi family means apartments.
In the commercial real estate world, the two terms are interchangeable.
There are different forms of multi family developments in which investors can invest. A few of them are:
affordable housing—affordable to those with a median household income or below as rated by the national government or a local government by a recognized housing affordability index
transit-oriented development—a type of urban development within walking distance of public transportation
garden-style apartments—an apartment building having direct access to a backyard or garden, or a low-level apartment building or building complex surrounded by lawns and trees, shrubbery, or gardens.
micro-apartments—one-room apartments that are typically less than 300 square feet but are self-contained, designed to accommodate a sitting space, sleeping space, bathroom, and kitchenette
mixed-use—a combination of uses in one building or complex; when multi family is involved, it usually sits above ground-floor retail, office, or other uses
Each form of multi family holds pros and cons for investors.
The best choice for each investor is the form they know and understand best, after considerable research and due diligence.
How does multi family investment work?
Whichever form of multi family property investors choose to invest in, they are effectively collecting rent as income from that property.
The rent goes toward debt accrued in acquiring, constructing, or upgrading the asset; operating expenses; and profits to be distributed to investors.
Multi family operating expenses can include management of the property, repairs, taxes, utilities, renovations, tenant services, and a host of other options.
These expenses vary by size of property, number of units, neighborhood in which the asset is located, and the amount of money the owner wishes to invest in the property to attract and retain tenants.
Keeping operating expenses low by investing little in a property can end up costing owners more in lease turnover and vacant units caused by lack of appeal to renters.
It’s important to note that every time a tenant doesn’t renew their lease, the owner must invest money in making that apartment presentable to a new tenant, which could include new paint, carpeting, appliances, etc.
The more often this is done, the higher the expense—without the tenant in place to offset the expense with rental income.
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What are some different strategies for multi family investment?
Just as no two investors—or their portfolios—are alike, there is also a variety of strategies for multi family investment. A few of them are:
By market—At Trion, we believe in investing in markets that do well when times are bad, not markets that do well when times are good. Using that strategy, successful multi family investments are less tied to economic cycles and generally can weather downturns.
By property type—Some investors prefer affordable housing because there is always a demand for it, while others swear by transit-oriented multi family because cities are so well populated that vacancies are usually quick to fill. They get to know the market for these properties and become attuned to both the pluses and the red flags for which to watch.
By risk level—Different investors have different levels of risk tolerance. Those who are low on the risk-tolerance spectrum are more likely to choose to invest in well-maintained, well-managed multi family assets in primary markets than properties that need considerable renovations before they can turn a profit.
By price—Most investors know how much they are willing to spend on a multi family asset and only consider properties within that range. This strategy narrows their scope and can save them a significant amount of time weeding out properties that are outside that range.
Whichever investment strategy investors use, it’s wise to vet each property completely before closing a transaction.
That means evaluating the location, the economy, the demand drivers, the pool of potential tenants, and the full gamut of expenses they may face during ownership.
Only after doing so can they determine which multi family properties make the best investments for their portfolio.
P o s t e d b y:
Bobby Larsen, Principal
Bobby founded Vanamor in 2019 and serves as its founding Principal. The Company strategically invests in multifamily communities throughout the United States through syndications and joint ventures with high net-worth, family office, and institutional investors. Under Bobby’s leadership, Vanamor is known as a dynamic, vertically integrated organization, and a leading investor of middle-market multifamily properties located across the United States. The Company embraces technology to enhance community living as well as reduce operating expenses across its portfolio.
With over 12 years of real estate experience, Bobby has led the acquisition of approximately 12,000 units with a total value in excess of $3.5 billion in California, Washington, Portland, Arizona, and Nevada. On average, investor level returns on sold properties have averaged in excess of a 24% annual return. Prior to founding Vanamor, Bobby was the Director of Acquisitions for MG Properties Group where he led the expansion of the company’s portfolio from 12,000 apartments to over 21,000 apartments across the Western United States.
Bobby holds a Bachelor of Science degree in Business Administration, emphasis in Real Estate Finance from the University of Southern California, and an MBA from Duke University.