By: Max Grossman, Director
Investing in multifamily real estate can be a lucrative venture, but it requires careful evaluation to ensure you’re making a sound decision. Here are some key factors to consider when evaluating a multifamily property for investment:
Location is a critical factor in real estate investment. Consider the property’s proximity to amenities like shopping centers, schools, and public transportation like bus routes or CTA stations. Also, look at the local job market, crime rates, and future development plans for the area. A desirable location can attract quality tenants and contribute to property value appreciation. Being in tune with the submarket economic drivers and likely sources for potential tenants will be important in understanding who you are catering to in any given neighborhood.
2. Physical Condition
A thorough property inspection can reveal potential issues that might require costly repairs. Look at the property’s structural integrity, the condition of major systems like plumbing and electrical, and the state of individual units. Also, consider the age of the property and its compliance with current building codes. Porches, roofs, and boilers are some of the larger capital expenditures associated with an investment property. Having a long-term maintenance plan in place will be important to avoiding costly repairs down the road.
3. Financial Performance
Review the property’s financial statements to understand its income and expenses. Key metrics to consider include the Gross Rent Multiplier (GRM), the capitalization rate (cap rate), and the cash-on-cash return. Also, consider the property’s vacancy rates and rent collection history. Be sure to understand what soft costs come along with operating the property (maintenance and repairs, unit turnover costs, costs of leasing, marketing and advertising, etc.) in addition to the utility and management costs.
4. Tenant Profile
Consider the current tenants and the property’s tenant history. High tenant turnover can be a red flag, indicating potential issues with property management or tenant satisfaction. On the other hand, long-term tenants can provide a stable income stream. Understand what type of unit mixes and unit quality attract certain types of tenants. Studios and 1-bedroom apartments will likely attract shorter-term tenants vs. 2 and 3-bedroom apartments.
5. Market Trends
Understanding local market trends can help you predict the property’s future performance. Look at factors like local rent rates, occupancy rates, and the supply and demand for rental properties in the area. Is there a shortage of quality rental products available in the submarket and do you have a plan to be able to provide it? Understanding where rents are headed and the caliber of product prospective renters are expecting for any given rental level is important in evaluating opportunities and how much value you can add.
6. Growth Potential
It is important to evaluate the property’s potential for value-add opportunities. These opportunities could include physical improvements, operational efficiencies, or rent increases. A property with strong growth potential can offer higher returns on your investment. To understand potential rental income, compare your property’s condition and rents to the top products in the market. This will also show you the standard your property should meet to achieve those rents.
7. Financing Options
Finally, consider your financing options. The terms of your loan, including the interest rate and down payment requirements, can significantly impact your investment’s profitability. Having relationships with multiple banks and lending entities will be important in securing the best terms possible for any potential investment opportunity. Building a network of quality lenders who are eager to help you grow your business is crucial. Shopping around for the most attractive terms is a key part of any underwriting process.
Evaluating a multifamily property for investment involves a careful analysis of various factors. By taking the time to thoroughly evaluate a property, you can make an informed decision and increase your chances of investment success.
Please note that this is a general guide and the specifics can vary based on factors like location, market conditions, and individual property characteristics. Always do your due diligence and consider consulting with a real estate professional before making an investment decision.