Source: Forbes —
Many new investors in the real estate space are unaware of the myriad opportunities in multifamily, often because they are intimidated by the scale of the investment or they are unaware of avenues they can take. As I mentioned in part one, while single-family real estate can seem more comfortable for new investors, the input required to acquire such properties and convert them to an income-producing assets is not always as easy as it seems. Multifamily investing, if executed properly, can offer avenues for good returns on investment with less management hassle. However, before investing, do take the time to research and understand the ins and outs of multifamily investing.
Multifamily investments are usually an order of magnitude larger than single-family investments, but there is also a crucial difference. The value of a multifamily asset is proportional to the income it produces. While there are other contributing factors, income production is key. The deterministic factors of the value of a multifamily project include income, extrinsic and intrinsic appreciation, efficient localized management and operational efficiencies. While this may sound daunting to new investors, it is not. Here is a brief explanation of these value-determining concepts.
• Income: One may often hear that in real estate investment, there is as much “art” as there is “science.” The science part consists of the elements that are determined by a set of undisputable attributes, such as income from the investment. The rental income and ancillary income, such as money derived from vending machines and business services (color printing, copies, notary, etc.) are the total income from a multifamily asset. A perusal of the balance sheet of the asset allows for easy determination of income. Similarly, expenses and depreciation are also categorized in balance sheets, and the difference between total revenue and total expenditure is the income. (Please note, it is beyond the scope of this article to delve into the intricacies of accounting minutiae. Consult your financial advisors for details.) Experienced investors use this as the base for valuation. The base can be adjusted up or down due to various factors. Some factors that affect valuations are extraneous, such as neighborhood job growth potential, tax laws, local rental housing laws, competing properties and others. Some of the internal factors that affect valuations are unit upgrades, facility upgrades, etc.
• Extrinsic appreciation: A multifamily asset can appreciate due to extrinsic factors. These include appreciation due to overall local GDP growth, relocation of a major employer to the area, employment creating greenfield or brownfield projects in proximity, and other factors or events extraneously controlled. All of these events can generate employment and support higher rents, thus increasing multifamily income and consequently leading to asset appreciation.