We review the economic conditions in each market across the United States – as most real estate markets operate on a local basis. We look for a rising base in population and rising rents. We often find the best deals in the emerging expansion phase of this cycle – in early 2012 we expect this cycle to occur in the following areas of the Southeast region Charleston, Raleigh-Durham, Charlotte, Orlando, St Augustine and Atlanta.
In 2010-2011 the run on foreclosures and short sales has a lot of competition and some investors seem to be missing the problems in these markets. Most are “all or nothing” type ventures and may need radical repairs or property development. As more and more former buyers real estate are continually priced or credit challenged out of the market — they need to rent. This will create an unprecedented demand for the Multi-Unit apartment building.
Why do we like Multifamily apartment buildings in the emerging markets?
The most profitable type of Multi-Unit apartment investment is the Commercial Apartment Investment. These are classified as anything above 5 units and can be upwards of 100 or more units. The true power of these investments is the leverage of multiple units. The more units the more the value will increase with a small incremental increase in the rent, or reduction in expenses can also add to the value of a building.
The Simple Math:
A 50 unit property’s monthly gross rent is $50,000 less expenses of $25,000 (taxes, common utilities, water, insurance, management salary) this yields a Net Operating Income (NOI) of $25,000 per month – or $300,000 per year. The bank appraisal values it at $3,000,000. As you will still have to make the monthly mortgage payment of $20,000** you would be taking in a monthly profit of $5,000 or $60,000 a year.
After a few small changes in the management company fees and appealing the taxes you save $30 per unit or $1500 a month in expenses and now has an NOI of $26,500 per month or $318,000 per year. A bank may see the value now at $3,180,000, assuming the same capitalization rate of 10%. If your mortgage payments were $240,000 a year, you would have also increased your annual profit from $60,000 a year to $78,000 a year before income taxes.
If you factor in an increase in rent for new rentals and renewed leases of $25 a month or $300 per unit per year. A total of $15,000 increase in income, you could realize a total profit of $93,000 and a total property value of $3,330,000 based on an NOI of $333,000 a year.
$ -20,000 (Mortgage on $3,000,000 property)
$ -25,000 (original expenses on the property)
$ -45,000 (original expenses)
$+ 1,500 (added savings from Tax and Management changes)
$ -43,500 (updated expenses)
$+ 50,000 (original income)
$+ 1,500 ( added income)
$ 51,500 (revised income)
$-43,500 (revised expenses)
$ 8,500 (net profit, monthly) $96,000 per year
With leverage of multi-unit apartment buildings a small rent increase can lead to very large profits in a short time.
These properties come with some other variables that should be considered with the challenges of more units – a professional management company can be contracted to avoid dealing with daily tenant issues and rental of units. The normal payments to these firms are normally a percentage of the gross monthly rents and will increase as rent increases. If you are looking for
a “turnkey” investment, a majority of the properties on the market have these
relationships set up but may not be the most efficient if the owners have not
been involved with the property.
We have multiple opportunities for Investment Partners in emerging markets across the country. If you would like to see some specific opportunities in your market for your situation, please feel free to contact us at firstname.lastname@example.org.
- Leverage offers a quick increase in value and income
- Higher unit count reduces the percentage of vacancy
- Professional Management, can offer the Ease of ownership
- A lower per unit cost gives other opportunities to convert to condos
- Government Subsidy in rental income and tax credits are available for some deals.
- Owners will sometimes offer financing of the buyer’s down payment for a price.
- Higher units may come with more daily challenges
- Higher unit count needs more leasing costs in advertising
- Larger cost of acquisition may come with large down payment
and may need creative financing.
- Using government subsidy for renters comes with more
regulation on unit conditions, renter types and expenses
- Higher costs with repairs and renovation may arise as
property ages and use continues.