Investing in Multifamily Properties
Here are 8 Ways to Invest for Cash flow in Commercial Real Estate today (specifically Multifamily properties).
It should be noted, there is no one right way to invest in apartment buildings. There are no Guarantees when you buy an apartment building, that you will make money. BUT, if you follow these strategies, you greatly improve your percentages.
1. Buy on Today’s Cash flow. Consider upside but look at Cash today. Leases, tenants and viability long term.
2. What is your Disposition Plan – Once you purchase, have you considered, how you will sell? When will you sell? This could dictate how long of a term you take for your mortgage. It’s amazing how many times I work with investors that go into the acquisition without a clearly define exit plan?
3. Look for Value ad – This is a commonly thrown around term. “I want a value add property”. The problem with that statement, is it’s too vague. Specifically what value ad are you looking for? Major capital expenditures, like new roofs, windows, foundation issues, parking lot issues? Or, are you looking for cosmetic renovations, new flooring, light fixtures, appliances to add value?
I recently spoke with an investor, who owns a General Contracting company. He is looking for buildings with large offices or common area that he can go in and, through proper permitting, increase the number of actual units in the building.
The other question you want to ask is – when will you do the renovations? Ideally, you get better pricing by doing bulk reno’s. But, you run the risk of frustrating your tenants. So, when a tenant leaves is ideal to get in your crews, so you want to be thinking 3-6 months out. What units are going to be vacant? How long will they be vacant?
Looking for buildings with high tenant turn over, unusually high vacancies, and, depending on the area you are in, redevelopment opportunities.
4. Long Term leases – Goes without saying, but having good tenants, with jobs that can pay the rent is critical. Before buying a property, look at where the tenants work. Is there public transit? How many vehicles are in the parking lot (during the day and evening, weekends)? What is the quality of the cars parked there?
I like to understand exactly who my clients (tenants) are going to be in a building before I buy it.
5. Location– Goes without saying location is key. Close to amenities, employment hubs, new infrastructure, public transit. The reason apartments have grown in demand over the past 5 years, is the demographic shifts going on in Canada and the US. Millennials and Baby Boomers make up the two largest segments of the population now and are renting more often and for longer.
6. Financing Consideration: There are important considerations before securing your debt. Broker or bank? CMHC vs. Conventional debt? Can you find Non-recourse (or limited recourse). If you’re buying with partners, are you Joint and Several or Several Liability? Based on your timeframe for owing, are you getting the longest term you can find (with rates rising, that might be the smart thing to do- less room for rates to fall and lots of room for rates to rise).
What does the prepayment penalty look like? I’ve worked on a apartment transaction where the prepayment penalty was more than $2.7M.
Last, can the debt be assumed? If so, are you still guaranteeing the loan or can you be released?
7. Looking for Problems (ie, opportunities) – In commercial real estate, owners don’t generally advertise they are having an issue. Which is why having intel, talking with owners regularly and driving the market is key.
A few ares to watch for opportunities:
- partnership problems,
- Higher than usual vacancy,
- building issues
- Property management issues
- Deferred maintenance,
- Leasing issues (can you get a hold of the property manager, can they sell/sign up new tenants)
- Tenant issues – are you in a war zone? Do you feel unsafe touring the property at night?
- Lack of parking.
8. Finding The Void– where in the Calgary apartment rental market is there a void or shortage? Look for opportunities where there is demand that is not being met. Today, when I look around at the Purpose built rentals in Calgary, there is a shortage of new, quality product. I also see Airbnb starting to grow in demand. I am not the expert at Airbnb, but, we are looking at this for an apartment building I own in Edmonton.
If I can generate $75-$100/night on Airbnb and lease it up 75% of the time, it far exceeds the $825/month I’m getting now.
These are some ideas for investors looking to purchase a cash flowing apartment building.
If you are looking to purchase an apartment building in Calgary or surrounding area – connect with me. The market is stabilizing and there are more sellers today than I’ve seen in the past few years.
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