Many investment firms are changing their investor pools. Where once all investors were institutional partners (think: billion-dollar funds), many are now choosing a smaller group of 20 or so accredited investors. This could bode well for those considering investing in the multifamily market. Here’s what we’re seeing for the second half of 2018 that can help you navigate your next—or first—building investment.
Expect to Pay More for Materials and Subs
Your multifamily building purchase will no doubt include capital improvements. Keep in mind that materials are at a premium right now, and prices for drywall and sheets of plywood have gone up demonstratively because of the high demand for housing. Construction labor is also in high demand, and subcontractors can basically go wherever they want, make their money and live where they please. It’s a construction worker’s market right now.
As a result of these dynamics, we’re looking to buy properties 10 years old or newer in markets that have good bones—meaning properties with cosmetic value and that only need light upgrades. To mitigate materials and construction prices on projects and value-add items, be sure to factor in labor and payroll.
A More Mature Cycle
We’re now working with more high net worth and more accredited investors, rather than fund or institutional partners. Part of why there’s such a demand for real estate is that many of our potential partners want to be more diversified outside the stock market. True, these partners are dealing in real estate—given that it’s a tangible asset—but there’s also a tremendous tax advantage. This might be a good reason to move a significant portion of your portfolios over to real estate.
Verify, Verify and Control
You need to be accredited or have high net worth, and there needs to be a good fit. For instance, we look for investors that share our philosophies about real estate and growth. That said, we always maintain control of the deal, regardless of how much money our partners invested. Through this control, we can monitor the investment and help it stay on track. Remember: When investing in properties, partnering with a knowledgeable, experienced firm is key.
Always Spread Out in Multiple Markets
Simply put, by investing in multiple markets in highly affordable areas, there’s a comfort level to the overall investment in terms of locations and income. The percentage of income that you put into rent for a multifamily property should not exceed more than 33 percent, and if it does, it’s time to get serious about selling, because that’s not a metric you want to battle. If the market turns, that’s the first thing to go. As a best practice, invest in multiple up-and-coming markets like Raleigh and Portland, where rents are steadily increasing.
Jump into the Pool
By pooling money with others, you get all the advantages of real estate—including the fact that you can get professional asset management. Because you’re pooling money, you get a larger percentage by spreading. Per unit, it’s relatively inexpensive and it might be more profitable than investing in one unit in one city. One way to accomplish this is through crowdfunding—a newer trend that is appearing more and more in investment opportunities.
Karlin Conklin has more than 18 years of experience in multifamily real estate, and has sourced, capitalized and helped in the repositioning of 6,500 multifamily units, raising over $300 million in equity from institutional partners, Tenant-In-Common (TIC) investors and high net worth individuals. Her transactional volume exceeds $1.2 billion.