We purchase large multi-family properties with over 100 units that are underperforming assets.
We pool together funds from multiple investors to purchase the property and then work to get the asset performing again and earning more income.
Once the repositioning of the property is complete and it is earning more income, its value is increased dramatically. This is because – unlike single family homes – multi-family properties are valued by how much income they produce. Once the value is increased, we sell the property at a higher value than we purchased it, allowing us to give back all of the investor’s original money back along with a handsome profit. We normally aim to do this within 7 – 10 years.
Alternatively, after 2 or 3 years, we can refinance the property at the new higher value, returning the majority of our investor’s money while still holding the property and earning our investors continued cash flow into the future.
How do we get an underperforming property to perform? We add value. This may mean that we make improvements to a tired property in need of renovations so that higher rents can be commanded. It could also be that the condition of the property is good but rents have not been raised over time and are below the market rate. In this case we can raise the rents to add value.
We can also incorporate other ‘value add’ strategies such as billing back the tenants for the electricity they use as opposed to the owners paying for all electricity. We can also incorporate charging for covered parking and charging for laundry services etc. We can even install washers & dryers in the units and command a small charge for that.
Finally, we can work to reducing the expenses of the property. This could mean reducing water costs by fixing leaks, adding meters or reducing landscape sprinkling etc.
Multi family properties do not work like this. They are treated as individual businesses. If the Net Operating income of one property is more than the property next door to it, it will be worth more money. If the NOI is less, it will be worth less. Comps play a part, but the NOI is the predominant metric.
Buying an apartment complex is like buying a small business.
The business produces income (rent) and has expenses (electricity, water, property taxes, insurance etc.)
The business is measured on it’s Net operating income (NOI).
The NOI is the rental income minus the expenses. If we can increase rents and lower expenses, we increase the NOI. Increasing the NOI vastly increases the value of the property using the following formula:
Value = NOI / Cap rate
This is what allows us to refinance and pull money out or sell the apartments for a profit.
Sometimes multi family properties need improving. This could be as simple to adding a coat of paint to the exterior to renovating all or some of the units. This allows us to collect more rent and improve our NOI.
Other value add strategies that include the NOI are:
- Charging tenants for their own electricity & water.
- Charging extra for covered parking.
- Installing washer dryers in units and charging extra for them
- Reducing the property expenses
NOI $1,173,600 / Cap rate 0.051 = $23,011,765
