Find problems, fix problems.
Single-family properties are a great way to make money, there’s no doubt about that.
But multifamily investments change the game significantly and are a much safer, faster, and lucrative means of building up your wealth portfolio.
But you’re probably wondering, how do we actually make money in the multifamily Mindset?
Well, it’s pretty simple actually.
It comes down to adding value to our investment by capitalizing on value add opportunities.
A value add opportunity is a small problem within a multifamily property that we can correct or fix pretty quickly. Unlike the single family real estate, we won’t be going in to buy new properties, completely gut them out and totally refurbish them. In the multifamily mindset we’re looking for small things throughout the estate we can adjust and manipulate to add value to our investment.
And that doesn’t have to be a physical rectification either, with the majority of multifamily investors, building up their profits by simply adjusting rent prices, reducing expenses, and increasing occupancy levels.
It all comes down to this simple formula whereby if we increase the cash flow of a property, we’ll increase its overall value.
In this post, we’re going to take a look at how you can increase your profit through these means, but first, let’s quickly split the difference as to why multifamily investments are greater than the single-family investments.
Why is a multifamily investment infinitely more lucrative and safer than a single-family investment?
Most people in the real estate business start out in the single-family world. Here we traditionally look for larger opportunities to renovate and refurbish properties to add value and sell these properties on for a profit.
But the one issue with the single-family mindset is the lack of control you have over your property’s value. Here your property’s value is often relative to comparable properties in your neighborhood.
This can be slightly annoying if you spend 6 months, and a ton of cash, gutting out and doing up a house, only for your neighbor to sell their house for a lower than market price value.
Because of the comparable pricing fixtures, this will ultimately cause your property to drop in value, something that you have no control over.
This is why multifamily real estate is more secure, as you as the owner will take full control over the value of your property through the amount of cash flow you generate from your rental income. Your neighbor’s house prices, therefore, won’t impact the value of your property, meaning you’re in complete control.
Plus your expenditures to improve the value of your property will be significantly less if you’re smart about how you scale up your property’s value.
Here are the three main value add opportunities within a multifamily property we can use to increase our cash flow.
Profitability in multifamily real estate comes down to cash flow. How much are you pulling in and how much are your expenditures?
When we’re looking to purchase a new property, we target the multi-unit estates, which we can see haven’t had a rent increase placed on their tenants in a while.
Although no one likes a rent increase, as a landlord, you won’t make any money if you’re not charging your occupants the fair market value for their lease. Which is why when we find a property with low rents, we invest in it and then raise the rent to the standard market value. This will ultimately increase our cash flow.
Although this sounds pretty ruthless, it’s imperative to make a profit and at the end of the day, people can’t take a ride on your business.
The value of your property is intrinsically dependent on your rate of cash flow, so without the right money coming in, you won’t add any value to your property.
The same principle stands with occupancy. If your apartment isn’t fully occupied then you won’t be utilizing the whole worth of your estate, and won’t be able to increase your cash flow or increase your property’s value.
We look to purchase properties that are around 80%-90% fully occupied. Any less than that and we’re taking a bit of a risk on our investment.
We’ll then hire a management company to come in and raise our occupancy as much as possible. As a result, you’ll thereby raise the amount of rental income you’re making and add value to your property.
When we calculate how much cash flow we are taking, we have to look at how much we’re laying out on expenses too.
Your balance sheet will always have a significant outlay of maintenance costs and insurance fees as a property manager.
That’s why we look to find properties that have an expense outlay of over 50%-60%, which we’ll then whittle down to around 45% with the help of a property management company who can advise us on where we can save cash on maintenance, insurance, or any other uneccessary expenses.
The fewer expenses we are paying out on, the more money we’ll inevitably make and the greater the value our property will be.
How do we calculate the value of a multifamily property?
It’s all about the cash flow. The more cash you have coming in over your expenses, the better your property will be valued.
You need to firstly work out the Net Operating Income (NOI) of your property.
Simply put this is your profits minus your expenses. Your profits are ultimately how much rental income you’re making per month, and your expenses can be anything from your taxes, to your maintenance costs, or your insurance outlays.
This is why we are looking to bolster occupancy rates, boost rent prices, and reduce the amount we’re spending on expenses.
Let’s say we made $75,000 in rent last month. But we also spent $20,000 on insurance and maintenance work.
Subtracting our expenses away from our rental income will give us our NOI which is $55,000. This is our cash flow. But in order to figure out our property’s value, we’d then multiply this by 10 to give us a value of $550,000.
Now let’s put this into perspective.
During the pandemic, the average price of rent across America increased by 4%. Plus the average monthly rent for a one-bed apartment is currently $1,600 per month.
4% of $1,600 is $64 dollars, meaning we can increase our average rent price by $64 dollars to bring it up to market value.
Now let’s say we have a 100 unit apartment building we’d like to raise the rent on.
If we add on $64 in rent, to each flat per month we’ll get $6,400 worth of extra income per month. Spread that out over 12 months and we’ll boost our cashflow by $76,800 per year.
That’s a ton of money. But it doesn’t stop there.
To find out how much value we’ve added to our property just through a $64 increase in rent, we can multiply $76,800 by 10 to give us $768,000.
This is the value our rental increase has added to our property and is why the multifamily approach can be seriously life-changing.
The bottom line
With the multifamily outlook, we’re not looking to reinvent the wheel. We’re finding small simple things we can do to improve the cash flow in each of our properties, to bring in greater profit and ultimately boost the value of our properties.
Compared to single-family real estate, here we force the appreciation ourselves by taking control and not relying on generic real estate market trends, or how much Gary next door sold his house for.
This is why multifamily real estate is one of the fastest, most secure, and most lucrative ways to build up your wealth portfolio.