Multifamily investment is the preferred strategy for those investors who want to add a component to their portfolio that is less volatile when compared to the stock market.
When it comes to commercial real estate investment, there are two main types of properties that one can invest in: residential apartment buildings, and commercial strip malls. As the name implies, multi-family properties, also commonly known as apartment complexes, are buildings with more than six rentable spaces.
Real estate is also a better investment for those individuals who wish to take an active role in growing their equity, rather than passively putting their money into a fund to be managed by someone else. One of the beautiful things about real estate investing is that there is more than one strategy that can be successfully used to build equity.
So what can multifamily property owners do to build equity in their investment?
Keep Vacancy Rates Low: Vacancy rates are in many ways what define the success of your investment property. In a stable market, of course, investors would like to have 0 percent vacancy, but it is location dependent and usually ranges from 2 to 6 percent. During unstable market conditions, this rate can increase and in some situations, it can hit 15 percent. Having a strong property management company can make controlling vacancy rates much easier. There are many different factors that can lead to high vacancy rates just as there are specific things that can be done to lower them. Keeping vacancy rates low means your investment will remain profitable and equity will continue to build.
Balance Between Expenses and Building Maintenance: The paradox between proactive and reactive maintenance is that you need to have a plan or strategy with your property management company to decide what’s urgent, what’s important, what’s nice to have and what long-term capital enhancements your building needs. If you are planning to sell the building in the next 6 to 24 months, you will need to have a different conversation with your property management company to set a strategy that is attractive to investors.
Maintain a Healthy Revenue Stream: The following is a good equation to explain this: Rent – Rental Incentives – Vacancies + (Interest Income + Laundry Income + other income such as vending machines in common areas) = healthy income.
Appreciation is an increase in the value of an asset over time. This can occur for a number of reasons, including increased demand, weakening supply, or as a result of changes in inflation or interest rates. This is captured by a well-known factor known as the CAP rate.
There are 3 ways to look at CAP rates:
Prevailing CAP rate, which is the fair market value.
Lenders CAP rate, which will affect your max lending amount.
Owner CAP rate, which is the value of the building from owner’s perspective.
CAP rates also are location and NOI dependent. (CAP = NOI/Purchase Price). As you can imagine NOI is a major factor in influencing the CAP.
Many investors might find this information to be a little confusing. This is why employing a competent property manager is so crucial. They can help you to navigate the tricky waters of day-to-day property management, and answer any questions you may have about more complex financial issues.
Looking to hire a licensed property management company?
Braden Equities Inc. has been successfully managing condominium buildings in Edmonton since the 1970s. A lot has changed since then, but our commitment to the residents living in each building we manage has not. Contact us today.