Why do wealthy, successful, smart people invest in multifamily real estate? It’s because it can be incredibly profitable!
Multifamily investment firms that deliver extraordinary returns to their investors focus on adding value to their properties. They do this by either physically improving the property or by making management improvements. Both strategies strive to improve the net operating income of the property, and as a result, the value of the property.
In conjunction with adding value to the property, most multifamily properties include the use of debt to help pay for the property. This is known as “leverage.” The use of that leverage significantly improves the returns investors can earn on their multifamily property investments.
How to Add Value to a Multifamily Property Investment
Adding value to multifamily investments almost always requires that you increase the net operating income of the property. You can do that by raising rents as well as decreasing expenses.
When we invest in multifamily properties, we almost always start with some level of physical improvements. The key to success in maximizing value creation through physical improvements is to complete the improvements from the “outside/in” by carefully selecting improvements that will yield the highest return on your investment.
Everyone knows curb appeal matters in real estate. Excellent curb appeal impresses prospective residents as they drive up to the property and tour the common areas and amenities. Making these areas of the property attractive will have a very positive emotional effect on prospects, and, as a result, they will be much more likely to lease an apartment.
Once a prospect is emotionally connected to the property, you need to make certain the inside of the apartment is also attractive. Remember, the prospect is already ready to lease because of their experience up to that point. All you need to do is not let them down when they enter the apartment.
On the management side, it’s all about service. So many times, we see people invest in multifamily properties only to forget that these multifamily properties are actually businesses. Like any business, delivering excellent customer service is critical to your success. Once you are able to deliver excellent service, then the focus can turn to improving efficiencies and cost savings.
Invest in Multifamily Properties and You Can Earn 20%, 25%, Even 30%+ in Annual Returns!
Once we add value to an investment through physical and management improvements, leverage serves to amplify the returns to investors. Let me explain.
Leverage, when used carefully and effectively, serves to amplify your return on equity. Let’s compare two scenarios and see what leverage does to an investor’s return on equity (“ROE”).
Make sense? In Scenario Two, I took out a loan and only had to put in $3 million equity, instead of the whole $10 million. By doing that, I incurred interest expenses (I assumed 4% for this example). But even with interest expense reducing the amount left over for the equity investors, their return was still much higher than the all-cash investment.
That’s how leverage, when properly used, amplifies our return on our projects.
To wrap up, we add tons of value to a multifamily investment through both physical and management improvements. That increase in value is then amplified through the careful use of leverage. The result is extraordinary investor returns which is why we believe everyone should invest in multifamily real estate.
