By Lee Kiser,
As a multifamily broker, I’m asked a lot of questions by first-time investors. Here are five things every new investor should know before getting started with multifamily properties.
1. Don’t confuse where you would live personally with where you should invest in apartments.
It’s not about what feels comfortable to you — it’s about the quality of housing you can provide the market and at what rate that determines whether or not it’s a good investment. Too many people new to investing in apartments say, “But I wouldn’t want to live here.” My response is usually, “That has nothing to do with it. What matters is who would want to live here?”
2. Find upside in rents.
It’s not all about the current rent price. Sometimes a unit is very outdated and simple renovations (kitchen cabinet replacement, new appliances, new tile in the bathroom) can have a significant impact on rent. Other times, the building is in good shape but owned by the same landlord for 30 years who never wanted to make waves (if they have long-term tenants, that’s a tell-tale sign their rents are too low). Look at the investment for what you can turn it into — not necessarily what it currently is. There are lots of new tools out there for helping investors determine optimal rent. I’m an investor in Enodo, an algorithm created to determine not only optimal rent but also the incremental rent you can charge for each individual improvement to the building or unit.
3. It ain’t all about upside in rents.
You’ve got to look for upside in expenses, too. What I mean is that changes to the building or operations may result in expense reduction or efficiencies that reduce costs. What happens if you invest in a new high efficiency solar hot water system? One client I know got a three-year payback on this investment and, after that, annual savings. What if you find a new manager who costs 5% more than your previous one, but who can do more leasing and minor repairs and it reduces your overall costs from the previous year? Find efficiencies that reduce costs and it will improve your investment.
4. Use a team of professionals.
Make sure you use a broker, attorney and lender when evaluating multifamily properties for investment. These professionals can guide you through local practices and customs and help you determine the most important items to review during due diligence. Items you will need to look into are physical aspects of the building and the financials, especially the cash flow of the apartment building. After you’ve acquired the property, consider hiring a property manager. New multifamily buyers should consider a property manager who is able to handle everyday tenant and repair issues, an expense that may cost roughly 3–10% of rents.
5. If it were easy, everyone would do it.
No matter how smart you are or how much you prepare, becoming a first-time landlord will be fraught with mistakes and missteps. Just know this is part of the process and be ready for it. You’ll take lumps on your first deal that you won’t later. Consider the costs of these mistakes in your first investment and philosophically live with it as the cost of your “Landlord Grad School.”
If you keep the above in mind and approach investment in multifamily carefully and methodically, you’ll be very happy with the wealth-building nature of this asset class.