Factors to Consider Prior to Investing in Multifamily Properties

 

When looking for a new multifamily apartment project to invest in, you have many elements to examine. Start with a thorough investigation of the market location. The location should be within a family-friendly community, near schools, hospitals, and establishments, and should be generally safe.

Next, analyze the occupancy and rental vacancy rate of the project, and then review the project’s current amenities and proximity to transportation, grocery stores, dining and recreation. Finally, a careful analysis of the financials and the property condition will help you to find ways to increase the net operating income of the project. Read on to find out more factors to consider when investing in multifamily properties.

Market Location

The current location is a very important factor to consider when investing in a multifamily apartment project. The high growth and high yield areas surrounded by well-maintained areas appeal to renters. It is important to evaluate the economic drivers and employment growth of the area. Online market research can provide guidance on the detailed demographics of the average age, household income, average household size, and the percentage of renters compared to home owners. If there is stable employment and job growth expected in the primary market, there will be a strong likelihood that the demand for apartments will be in high demand. How are the school ratings? Poor overall public and private school ratings can deter tenants.  You should also review the current occupancy trends in the market. Are occupancy percentages for comparable apartments located within close proximity to the subject high? A healthy occupancy percentage is 95% and above. 

Analyze the Occupancy and Rental Vacancy Rate

After reviewing the rent rolls for the subject property, there are several factors to look into and consider. A brief list of risks that may affect market value are:

  • The property has had a history of low occupancy
  • The local market has seen a decrease in population
  • The local economy has suffered recently
  • The property offers significant concessions to maintain occupancy
  • The NOI has recently decreased from prior year

If the occupancy percentage is lower than those of comparable properties, it could be that the management company that is currently in place is not doing a good job of maintaining the property, which is leading to renters to vacate the project and move to comparable ones with better management. There are several reasons that a property could have high vacancy rates. The management could be poor, and not complete repairs in a timely manner. If tenants become frustrated, they will look elsewhere. This could be a great buying opportunity to purchase at a discount and replace management. An investment in capital improvements to the project could justify an increase in rents and increased demand to renters as it will become more desirable. Common areas should be clean and tenants should feel comfortable and welcome. An apartment with a clean exterior with managed landscape and walkways is essential to attract new tenants.

If you find that concessions are given that decrease the rents below market level, this could reflect that there are issues with keeping the property occupied, or that management is enticing potential renters to fill vacancies to increase occupancy levels. Concessions need to be subtracted from gross rental income to determine the net rental income. If the concessions result in decreasing rents end up being in line with the market average, there is generally no concern.

Review Apartment Amenities

Increasingly renters desire their apartment to be located in close proximity to neighborhood grocery stores, cafes, pubs and restaurants. In the past, it was more common to see a multifamily property in a secluded area, but that trend has given way to the walkable, bikeable property.  Is parking available for tenants and their guests on site?

Transit-oriented developments are in high demand. Commuting by public transportation through bus or trains has become increasingly popular amongst the renter population. In addition, many affordable and senior apartment buildings are now constructed within a mile of public transportation lines. These transit-oriented properties command higher rents and can expect to maintain higher occupancies than a comparable property with similar amenities.

With properties that are increasingly walkable and bikeable, renters now desire a host of modern amenities:

  • Fast internet connections
  • Sound proof walls
  • In-unit washing machines and dryers
  • Balconies
  • Fitness Centers
  • Pet friendly communities

Find Ways to Increase the Net Operating Income (NOI)

There are several areas that can be analyzed for a buyer to reduce the current expenses and increase the NOI of an existing multifamily apartment project. Look for ways to minimize or eliminate the number of concessions that the current management has given to rent the units. Review the rent rolls to see if there is a high turnover of renters and if there is, improve the screening of potential renters in order to control bad debt that includes evictions and uncollectable debt.

You can also look for ways to reduce utility costs. Start by contacting the utility companies for a free energy audit.  Reduce the water usage by installing low flow toilets, shower heads, and aerators. Next, install energy efficient bulbs and fixtures with light and motion sensors to cut down on electricity usage. Insulating the building to keep heated and air conditioned air temperatures stable is also a great way to save utility costs. Finally, consider investing in capital improvements to reduce future expenses by replacing inefficient systems and appliances such as:

  • Low energy, high efficiency kitchen appliances
  • Old, inefficient heating and air conditioning systems
  • Old faucets
  • Old windows

If you would like to discuss a potential or current multifamily project, contact an expert at LSG Lending Advisors to discuss your project.

 

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