We already know that a major factor in any purchase of a multifamily apartment is location. Since a majority of multifamily investors look at multifamily apartments as a long-term investment, evaluating the current economy of the location as well as the area’s future potential is important. Key factors to consider include the current demand, pricing trends, access to public transportation, walkability, school district ratings, and local crime rates. These and other aspects are important in deciding on a location to invest in.
Analyzing Apartment Buildings for Sale
Another key component is the number of units and buildings that the multifamily apartment complex consists of. If there are two buildings consisting of 100 units each, the maintenance and expenses could be much lower than five buildings of 40 units. Evaluating the number of units, unit mix, and average rents for unit type compared to like units in the market is important. By analyzing these components, you can get a feel if the rents are near the market average or below the market average. Apartments that are renting well below market may need capital improvements to increase the rents to market and not risk losing occupancy by current renters.
A market study or recent appraisal of the property will reflect the average occupancy of the market and the occupancy of the project. Looking at the current rent roll and 3-year occupancy history of the project can provide insight that is very beneficial. If the occupancy level is below the market average, there could be an issue with management, the property is not maintained properly, or the amenities are poor. Analyzing the condition of the property, current expenses, and management style are all very important.
If the rents and occupancy are below average, it is important to evaluate the amount of capital improvements that would be needed to bring the project in line with the comparable properties. It is important to understand the amount of improvements needed per unit type and mix, and if the increases in rents to market make the investment worthwhile.
Expenses and Fees from Property Management Companies
There are several expenses to analyze when looking for a multifamily apartment to purchase. Management fees are generally 4 to 5% of gross rental income for the project. When reviewing the historical financial statements, look for any large variances in the expenses and maintenance costs of the project. Many owners input large capital improvements under maintenance and expenses that make the annual expenses of the project appear to be much more than normal. If an owner has a roof replaced on a building or a one-time major repair, this will cause a very large variance in the expenses. A very high expense ratio could be caused by a number of factors. There could be inefficient management, inefficiencies with the building systems, and old outdated appliances. Buildings that are not updated have inefficient heating, water usage, and electricity that can be significantly reduced through improvements and repairs.
Many owners also have their own management companies. They are in a great position to understand the averages and analyze where income can be increased and costs can be decreased. There are many great management companies that have a track record of success that ownership can choose from that do not have an interest in the management of the property. Evaluating different aspects of the investment, and working with individuals that are experienced in the current markets are important factors to consider prior to making your purchase.
LSG Lending Advisors is happy to help you during the decision making process. Contact us today for a free phone consultation!