5 Best Multifamily Properties: Qualities of a Sound Real Estate Investment
By Harlan Mayer, Portland Real Estate Agent and Principal Broker with Meadows Group Realtors
If you ask 5 investors what they look for in a sound real estate investment you will get 5 different answers. Of course, income is always at the top of the list and everyone always mentions location. As an investor, the central question is: what are the other factors that help one select a property that will produce reliable and consistent income? A solid approach to finding good income real estate is to find the 5 best multifamily properties in the area and price range you’re interested in and use them comparatively to distinguish real opportunities in today’s multifamily market.
One of the most effective ways to find better multi family is to use a search tool that has neighborhood commercial elements to it, such as our site www.RealEstatePDXInvestments.com.
The reason I suggest you find 5 opportunities (which in a low inventory market can be very difficult), is comparing and contrasting may help you find “hidden value”. One of the primary tools that investors use to compare and contrast investments is the CAP (capitalization rate). The definition of the Cap rate is: a rate of return on a real estate investment property based on the expected income that the property will generate. The cap rate is used to estimate the investors potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.
NOI (Net Operating Income) / Sales Price x 100 = Cap Rate.
Determining the correct expenses to subtract from the gross operating income is often what separates an effective investor from one who spins his or her wheels. Often investors will use an arbitrary percentage like 34% or 42% to value any property – sometimes varying the percentage because of location and sometimes not. This is more of a shotgun approach. Each property owner has his own motivations or her own bottom line they are dealing with. Some of these owners keep great records and will share them, and some have incompetent property managers looking over them. It is important to remember that it is the job of the investor to do the proper due diligence and find opportunities to perhaps lower expenses or discover a way to increase rents to augment expenses. This is where other factors start to become more important.
In my opinion, one of the most important factors to consider is square footage. If the property is not located in a very central location, larger square footage is often the best opportunity to ensure that one has increasing rents over time. Sometimes 4 bedrooms can rent faster than 2 – depending on the location. More bathrooms means not only can you fit more folks into the unit, there is also more potential opportunities to improve the property and add more value over time. Multifamily tenants are often people who love to live in low-maintenance units, but everyone likes a larger living room or kitchen. This does not disqualify smaller units – it’s just seems to be a strategy that reduces vacancy risk over the term of the investment.
My experience has shown me that sweat equity will always at the top of the real estate investing list – even in one’s primary residence. Oftentimes investors make the mistake of thinking if they hire a property manager, that they do not have to be as active in the process of managing the property. The owner is, and will always be the property manager even though he’s hired someone to do most of the rent collecting, tenant interviews and general maintenance. The most important part of the owner’s job is to identify and execute a business plan, generally laid out year by year, and improve the property over time. This is how equity is invariably built in a multifamily investment, or any real estate investment for that matter. Therefore, having bids performed during the due diligence period when analyzing a multifamily property is invaluable and can result in a new vision that will make that property into a producing and productive investment that can be held for a longer term.
These are some of the more important factors that come up in a multifamily investment search, however each investor has their own motivations and focus.
To discuss the Portland multifamily market in more detail contact Harlan Mayer, Principal Broker and Portland Real Estate Agent at: 503-288-3979 or Email me!