Multifamily investing enables investors to generate a stable income and enjoy capital appreciation, among other benefits, when executed strategically. However, investing in subpar properties can carry significant vacancy risks, increase operating expenses, and cause lagging net operating income growth. To mitigate these risks, investors should adhere to acquisition criteria that account for certain crucial factors.
Different multifamily property types necessitate tailored financing solutions. Duplexes, townhouses, and small apartment buildings represent opportunities for residential loans due to their scale. Conversely, properties of over 200 units frequently demand commercial real estate loans offering larger amounts, given their operational complexity and capital requirements.
For instance, Dantes Community Partners and Jonathan Rose Cos. - based in Washington and New York, respectively - arranged strategic financing for a value-add multifamily approach. They partnered to acquire Avanti Apartments, a 930-unit complex in District Heights, Maryland, with plans to develop 372 more units. The joint venture secured $164 million in Fannie Mae debt financing for the transaction. As a government-sponsored enterprise, Fannie Mae promotes liquidity in the mortgage market by purchasing and securitizing mortgages, which involves bundling a group of mortgages together and selling them as an investment product to investors.
Property details are integral to assessing the investment merits and potential value-add strategies when evaluating a multifamily acquisition opportunity. Due diligence involves confirming the number of units, total square footage, construction quality, and condition of building systems and components. Evaluating functional and physical aspects illuminates potential capital needs and operational costs. Investors should also understand whether the property is suited to luxury or more affordable workforce housing, in order to decide whether capital improvements are warranted to boost rents or leave it unchanged for affordability.
Dragone Realty Investments, owned by Vito Dragone, exemplified value-add expertise with its Verona Living luxury apartments. The firm allocated $100 million across properties to transform them into upscale rentals. For instance, the Milano Apartments in Oxon Hill, Maryland, feature reimagined kitchens with modern cabinetry, spacious bedrooms, private patios/balconies, and amenities on par with local luxury competitors.
Location is also integral for profitability and investment success. Ideal properties are often located near major attractions like public transit, schools, city centers, and jobs. Another Verona Living asset, Verona at Suitland Metro Apartments, near the Metro station in Suitland, Maryland, affords residents easy commuting and access to many amenities and services. Savvy investors recognize that location outweighs physical attributes alone, as it unlocks the inherent value of accessibility.
Prudent pre-acquisition market research arms investors with critical demand insights. Post-COVID, understanding the increased demand for dedicated workspaces creates opportunities to reposition existing assets. Sometimes, though, research can reveal that tenants in the area go to the office daily, which can help inform decisions. Nonetheless, amenities reflecting work-life integration, such as fitness, parks, and recreation, remain significant as many renters pursue balance.
First-time commercial multifamily buyers should consider forming a limited liability company (LLC) with legal assistance. An LLC protects investors by separating the property investment from personal finances/assets in case of issues like lawsuits, debts, or financial obligations related to the acquisition.
Before investing, multifamily buyers should also consider property limitations and regulations critical to underwriting returns. Research and reviews may reveal rent control regulations restricting annual hikes, potentially impacting yield. The cap rate is one metric that investors can use to assess risk and potential return. The cap rate, derived from net operating income divided by value, indicates the risk-return profile, with higher caps translating to greater risk and potential return. Additionally, rent regulations vary by state, so consulting legal counsel or professionals familiar with local laws is vital.
