Investigating Growth via Multifamily Properties
Many investors start out in the single family sector and then transition into the multifamily sector.
This often evolves from success, management capacity, or economies of scale. And today, growth in multifamily construction, lack of houses, market trends, and the modern amenities which renters are demanding means multifamily is entering portfolios.
Rising house management costs, lower ROI, taxes, affordability, demographics, and affordability round out the reasons for interest in multifamily. And sometimes houses get sold simply because the sales price is too much to pass on. Other times, rents can’t be raised, renovation is too costly, and the current renters are creating damage and wear and tear.
The trend to multifamily might be considered normal or even natural.
Single Family Portfolios
Single family house management can be a big challenge too if the landlord can’t reduce maintenance expenses, control rising financing costs and property taxes, or protect razor thin profit margins. Expenses are higher for small portfolio single family and even inflation can bite house owners much harder.
These landlords must use technology to cut costs and keep tenants happy, but perhaps the real salvation is growing your portfolio.
For that reason, rental property investors have investigated new ventures and the possibility of scaling up with less expensive apartments or multifamily units. More units is how small companies grow to mid sized.
As this chart from FRED shows, multifamily construction is double that of 4 years ago. With growing supply comes opportunities to invest in units.
Multifamily New Construction (in 1000s). Screenshot courtesy of RED.
Multifamily offers advantages in scaling up, utilizing technology, reducing staffing costs (efficiencies), and to explore new housing markets in a bigger way. Readers do wonder which cities might be best to invest in rental properties and which might generate the highest yields.
Yet, buying, selling and opening up to risk is kind of sketchy.
From Single Family to Multifamily Assets
Robb Bollhoffer of 29th Street Capital in a recent video interview with Juniper Square discussed his company’s journey from single family to the multifamily property management sector.
His firm is ambitious with big growth with a change in the types of properties they invest in.
He discussed the importance of technology and mentioned their intent to build their own property management platform. We wish him good luck, however creating a reliable solution is very costly and requires a great deal of skill and effort to keep up to date. Anyone considering a venture into the property management software space might not have assessed the challenge sufficiently.
You can manage your growth by focusing on what you do best
When you leverage a powerful property accounting, operations, maintenance and tenant communications platform like ManageCasa, you’re doing what you do best. Why reinvent the wheel, outlay big money, when the monthly cost is so low and the software is completely managed and updated for you?
Bollhoffer’s firm has moved into the built to rent market and they’re using financing to flip assets when they can.
Costs: Single Family Market May Never Recover
The fact that renters can’t buy is what guarantees their new business model will be successful. They’re playing the market’s weakness which will take decades to resolve if ever. And conversely, homeowners can’t sell because they can’t afford to refinance another home, and there’s nowhere for them to move to.
He also cited personal safety as an additional issue with single family property renters. Many renters also want to avoid home maintenance and to have more amenities. Multifamily has its attractions.
His company found cap rates weren’t good and they couldn’t compete with other firms to purchase. So 29th Street moved out of SFR into the MFH market. They sold their old holdings and moved into more profitable assets.
Yet moving from SFR to Multifamily comes with challenges. Bolhoffer discussed his company’s strict control of expense and credit use this year. He’s concerned about rent control and difficulty with evictions. He cites occupancy and retention as issues too.
Multifamily is a different space. You’ll need expertise in the apartment/multifamily space to choose worthwhile units or buildings at a workable price and find a great property management company you can rely on to service them.
Explore Opportunities with Good Questions
There’s no better way to explore than using good questions:
- should you buy in far off cities where better deals in promising cities for renting might be had?
- where will you get reliable, accurate data and forecasts for those cities/neighborhoods?
- what are the tax implications when you buy, sell, and finance?
- will buying and selling costs make it impossible to upscale for the next few years?
- is a recession a good time to buy properties at a more reasonable price?
- how do you source multifamily properties?
- how do you finance the acquisition? (down payment, 100% cash purchase?)
- will you need to evict all the tenants at once or rehab one unit at a time with tenants in place?
- how will you conduct property management?
Obviously, the path to upscaling into multifamily rentals is complicated with plenty of perils.
Yet, like many owners and even property management companies, some cities and states have a brighter future. You may have avoided locations such as Nashville, Atlanta, New Jersey, Philadelphia, or Phoenix, yet these locations have high growing demand from renters.
Swiftlane reported last year it’s top 5 list for multifamily: Nashville TN, Atlanta GA, Austin, Phoenix AZ and Dallas.
11 Tips for Upscaling
Upscaling for investors is an ambitious project. Perhaps the best route is to look for a property investment consultant to guide you. Here’s a few tips to consider:
- plan out what your profit model will be regardless of what you buy
- research a potential property management company you’ll work with
- assess the exact costs of taking over and making the units rent ready
- assess/project your cash flow during this period
- get reacquainted with the details of where the profit is in scaling up
- work with your real estate tax accountant about how to prevent big tax bills/losses
- adopt a property accounting solution to document your transactions and generate accurate reports and aid in forecasts
- assess how much time you and your staff have to manage new properties
- buy new multifamily units gradually based on what you can handle and operate
- ensure you have enough budget for repairs to the new units
- inspect units before buying with an experienced and assertive property inspector using a good inspection tool (will help in price negotiations too)
At the end of this exercise, you’ll either see the merit, or realize it’s a fool’s paradise and return to optimize how you manage your single family properties.
Review the rent you charge. Many landlord report not raising rents appropriately given the rise in costs. Consider making some changes in your business so you can improve. Upgrading the home, adding amenities are ways to legitimately raise the rent. Before you enter crisis, explore your options.
Discover more about ManageCasa’s superlative property accounting software tools and how they’ll help you optimize all aspects of your money management.
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