Apartment living is becoming more and more popular, and not just as a temporary option.
According to Freddie Mac’s 2019 housing survey, nearly 40% of renters report they won’t own a home – up from 23% two years ago – and 80% say renting is a better fit for their current lifestyle.
Many generations are choosing to rent, from Gen Zers just entering the workforce to baby boomers nearing retirement – and even high-income earners who can afford to buy a house.
Being a busy professional with spare money, you might be inclined to become a successful real estate investor. This will enable you to generate passive income even if you are a stock market lover. We suggest you build a multifamily apartment portfolio of properties that is based on logic and cost analysis.
Here are a few metrics for building a profitable multifamily portfolio of properties that you should consider. These would help in creating a consistent income source :-
Understanding the classification of a multifamily property is essential before investing. Classification grades a property based on a combination of geographical and physical characteristics. With the help of classification recognition, determine the level of risk or potential return associated with the property acquisition with greater accuracy.
Multifamily Properties Can Be Broadly Classified As:
Class A properties command the highest rent and highest price per square foot. Found in the Central Business District and sometimes in class B areas, these are a suitable investment option with low volatility for passive investors. They may offer you the lowest returns
Class B properties are a step down from their predecessors and are professionally managed. However, due to their excellent maintenance, class B properties are referred to as ‘value-added’ properties. These have updated amenities, renovations, and improvements done for up-gradation.
Class C which are more than 30 years old and located in a workforce housing location, these properties need renovation and have outdated amenities. They command lower rents than class B properties as they are located in low to middle-income areas. These may have a higher returns but risks are higher too compared to class A and B
Class D properties are located in the fringe market and are relatively older than 30 years. These properties need extensive renovation and are laced with no amenities for residents. As a busy professional and investor, you would face operational challenges that cannot be met without proper management know-how. If you are starting out it is better not to start with this class
Class B and C provide the best value add opportunities and give an ability to increase your returns. The key is to identity these properties in better areas and invest in them to watch your capital grow faster
Now that you know the classification of multifamily properties, choose the right property as an investment option. You can make more money without getting into a rat race. Also, the category determines your ability to obtain financing for the property.
It is important to do your due diligence before you buy a property. Not all the properties are made equally. Analyze the repair and maintenance costs incurred for the maintenance of the multifamily property in the past. Get multiple bids from contractors for different repair estimates. The deteriorating condition of the building implies a burden on the investor’s pocket. It is crucial to do a cost analysis first that ensures if the property you are considering as an investment option is worth investing in for the long run. Getting this data also helps you to create your future budget.
The multifamily real estate investment market experiences constant changes. Therefore, as a busy investor, you should know the current market conditions. Check out supply versus demand graphs, demographics, population, employment growth, median income, crime and position in the property’s real estate cycle as these factors primarily affect your investment venture’s success.
If you are genuinely interested in a multifamily portfolio, there is the option of diversification. To minimize your overall portfolio risk, you can invest in different types of assets in different geographical locations, as at least some of the properties will outperform the others.
It is crucial to perform sensitivity analysis that figures out the worst-case scenarios for investing in a particular property. The study determines different factors that affect each property return and how they affect profits. With the help of this analysis, you can weed out non-performing properties from your portfolio and focus on profit-making investments.
Other property metrics like cash on cash return, return on investment, net operating income, capitalization rate, debt service coverage ratio, and expense ratio should also be evaluated for every property in your multifamily portfolio.
When you consider a multifamily investment portfolio, these metrics might intimidate you. However, consulting and mentoring services from Blue Ocean Capital can help the multifamily real estate investing process. We are here to partner with people and our passive investors to make this process effortless with property suggestions, depreciation, tax benefits, cost segregation, and more strategies. Start making more money from real estate investing now. Contact Now!
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