Intelligent and Trustworthy Real Estate Investing.
Intelligent and Trustworthy Real Estate Investing.
Multi family is a counter-cyclical industry that does well, even in a bad economy. Unlike single-family homes, the demand for apartment units has reached record-levels. Affordability Gap, growing economy,ever rising lending requirements and shortage in housing units keeps the demand for apartments rising to new highs.
GENERATES CASH FLOW
Investing in Multifamily properties, when managed effectively, generate significant cash flow which will cover operations, capital improvements and debt servicing…not to mention profits for investors.
FORCED APPRECIATION
Well-selected “value-add” properties provide terrific opportunities to generate higher income, lower expenses, and long-term appreciation. Each of these goes right to the bottom line and results in higher property value.
TAX BENEFITS
Numerous tax advantages make multifamily real estate investing a smart decision. Opportunities for savings such as tax deferred income, accelerated depreciation, cost segregation studies, 1031 exchange and step-up in basis make this an extremely tax-efficient investment.
DIVERSIFICATION OF INVESTMENTS
Why keep all or a majority of your investments in the stock market at such a precarious time in our economy? Real estate is much more predictable and less volatile with no wild swings in value as seen in the stock market.
LEVERAGE 401K OR IRA
Investing in Multifamily offers the chance for investors to take control of their retirement plan and not rely solely on the stock market.
INFLATION HEDGE
The value of multifamily assets will increase at a constant rate as rents rise to match inflation. Other investments do not have this built-in inflation protection.
Multifamily properties historically maintain a structurally lower vacancy rate than other product types and generally exhibit greater resiliency in holding their values during market downturns. Demand can still increase for apartments in economic downturns when homeowners turn to renting to preserve capital and renters cannot afford to buy. Lenders offer superior terms due to investor familiarity with this asset type, and there is a wider availability of financing options.
The relatively high turn-over of apartment units (vs. office buildings, commercial space and single family homes) allows project management to continually improve the assets as tenants move, increasing rents and therefore increasing value.
The compelling story behind apartment demand remains the continuing narrative of the echo boomer, or millennial, generation driving absorption for rental housing. Strengthened job creation and maturation of this age cohort produced robust demand for apartments, reminiscent of the impact of the baby boomer generation in the late 1980s. Approximately 1.6 million millennials, an age cohort with the highest propensity to rent, will come of age in the next five years. In addition, the number of young adults living with family members remains well above the long-term average and will unwind over the next few years as unemployment falls, further lifting housing needs. Historically low vacancy rates, demand momentum and the undeniable demographic support from the millennial generation will continue to unfold; all which signals that rent gains and values will not abate anytime soon. The powerful determinants of demand shaping this cycle do not appear close to tailing off.
The momentum of the market is underlying the strength of multifamily investing, new jobs, new construction, new infrastructure and beneficial tax and business climates drive the momentum. Seeking out those emerging markets is key.
Other techniques that we use are “value plays” and “forced appreciation”; understanding what makes values increase. Multifamily properties’ value relies exclusively on the net operating income (NOI) they produce. This presents an opportunity for skillful managers to increase the Gross Income through adding new sources of income achieving this by increasing rents through attentive management and upgrading tenant quality, while decreasing expenses. The enhanced NOI drives value upward to the benefit of our investor(s) through both yearly returns as well as equity growth.
The project sponsor qualifies for all loans so no guarantees are required of our investors. Because investment is via limited liability companies , investor liability is limited to the amount of their investment.As such investors outside assets are protected.
A recent trend shows Wealth Management firms are currently moving many of their investors towards multifamily investment opportunities like those offered by us. The earning potential in the commercial real estate market is climbing in key states like Texas, North and South Carolinas, Phoenix, Florida and Colorado.
Private Equity firms and individuals are seeing high returns in the multi-family sector due to the simple need and demand for housing in larger markets and highly populated areas. The investment opportunities to build, develop, acquire and / or renovate multifamily complexes are producing attractive investment gains.
The following criteria are used to identify undervalued multifamily properties for acquisition, value optimization, management and disposition.
Age: The 18 to 34-year-old market segment comprises 22% of the U.S. population
Income: Renters who earn $35,000 and less annually
The retiring Baby Boomers are scaling down and are enjoying carefree multifamily community living.
Multifamily residential apartments
Roofs with pitched construction
Minimum Occupancy 80% with the exception of properties that require renovation, providing properties are well located and present value enhancement opportunities
Size and Price: 100+ units in the $5MM – $15MM range
Returns: 7%-10% Cash on Cash, minimum Debt Service Coverage ratio of 1.3
Type: C- to B+ properties located in C- to A areas
Location: Emerging market areas with indicators for strong near and long-term economic growth
Choosing the “right” multi-family apartment complex to acquire is a critical aspect of the project. That is why we are diligent in our exploration and focus on opportunities in Emerging Markets, where jobs and local economies are expanding. We follow jobs!
EMERGING MARKETS ARE CHARACTERIZED BY
There are many indicators and a lot of research that goes into identifying an emerging market in the US. We start out by performing thorough market research that includes the following areas:
Property owners who have suffered through years of a contracting buyers’ market frequently don’t recognize early signs of recovery. As investors, they are still feeling the pain of the previous cycle, characterized by decreasing rental rates, oversupply, and rising vacancies and unemployment. It can take local investors as much as a year or more to realize that their market has begun to turn around. This is a prime buying window. We monitor indicators of emergence.
When national attention is focused on a particular market, smart investors are already selling their properties. A common investing mistake is to jump into ‘hot’ areas reported by social media/blogs. At any given time – regardless of what the national economy is doing – certain cities are in a local expanding cycle, not a ‘hot’ cycle.
For a city to move to the next phase of the market cycle, it must take action to grow jobs. When jobs are finally created, people begin to migrate back into a community, population grows, vacant properties start being filled and rents start to increase, oversupply stalls markets and triggers the decline of emerging markets. We track job growth and shrinking supply.
We take pride in building relationships with local listing brokers to get their “pocket listings” and access to other Bank Owned Properties (REO). Our searches include soliciting existing investor (owners) who have met their target threshold and may be ready to review offers
Candidate assets undergo a thorough due diligence process to confirm the physical and legal status of the property and to confirm valuations to ensure achievable investment strategies.
Early in the asset evaluation phase, the debt and equity financing strategy is developed based on a number of factors such as property type, magnitude of renovations, expected hold period and investor objectives.
Well-located assets purchased below replacement cost assist in attaining appreciated asset goals.
Product selection involves a systematic, routine evaluation to identify favorable demand characteristics, i.e., job and population growth, demographic shifts, supply absorption rates and positive local legislation.
Markets with supply constraints receive most favorable underwriting. Markets with signs of oversupply such as surplus land, changes in zoning and increases in building permits are avoided.
A Path of Progress is where the greatest amount of building and development is currently occurring, or soon will be. What is now Orange County was a Path of Progress between Los Angeles and San Diego.
A Path of Progress is where:
One of the critical things to understand when it comes to investing in multi family apartments is the formula that is used to determine the value of each complex. Unlike single family houses, where the value is determined based on the structure of a comparable property, the value of an apartment complex is based on the amount of income it generates on a yearly basis.
Think of it as a business rather than a building. The more income it generates, the more it is worth. When we purchase an apartment complex, we are looking for specific opportunities to increase the cash flow in different areas. These are called “Value Plays” or “Value Adding Components”.
VALUE PLAYS SOLVE PROBLEMS CAUSED BY
A single Value Play opportunity can help generate target returns. Here are some examples of Value Plays:
In an emerging market where a lot of new jobs are being generated, the annual market rent increases by 3-4% to support the new demand for housing. One of the next steps will be to show you the impact that each of these value-add components can have on the value on an apartment complex (remember the more income we generate, the more the complex goes up in value).
NOI is the gross revenue minus all reasonably necessary operating expenses. The value of a property is determined by the NOI and the capitalization rate (Cap Rate) for a particular geographic area.The Cap Rates are provided by local Realtors who keep a pulse on the local market.
Here is an example property that has an NOI of $499,000. The geographic area has a 7.5% Cap Rate (provided by past sales). The formula for determining value is NOI/Cap Rate= Value. Thus, an NOI of $499,000 and a Cap Rate of 7.5 yields a value of $6,653,333. Thus the “strike price” for the proposed purchase is ~6.6 Million dollars
Like stated earlier, implementing the value add plays brings maximum benefit between the 2nd-4th year. Let’s assume,in the example above after implementing the value add play the NOI rises to $610,000 at the end of 4th year.
The value of property changes as follows.NOI of $610,000/ 7.5% Cap Rate = $8,133,333 . Keep in mind the mortgage will also be paid down during the 4 year hold period, thus adding additional equity that can be shared with investors on resale.
Real estate markets and Cap Rates fluctuate. A 7.5% Cap Rate today, may sell for a higher Cap Rate later if market conditions have changed and financing is less readily available. New properties coming to the marketplace can depress rents and increase vacancies, causing a reduction in NOI. Thus, it is important to invest with seasoned sponsors who specialize in multi-family investments to ensure that all such factors are taken into account during acquisition, operations, and timing the optimum resale period for a specific property.
We are actively looking for interested investors. You may qualify to invest with us as either an accredited or sophisticated investor according to SEC guidelines. Click the “Start Investing” button below to fill out our investor form and find out if you qualify to join our multifamily investment team.
