On the Why Multifamily page we outlined why Vesta Capital Group focuses on multifamily properties. But how do we invest in multifamily properties in a way that leverages all of the potential benefits that this asset type can offer? The following sections describe some of the characteristics and opportunities Vesta Capital Group looks for in multifamily properties.
Vesta Capital Group strives to purchase properties at a discount with respect to market prices. If we’re successful in doing this, we ensure that we have equity in the property as soon as we close on the deal. We look for properties that seem to be mismanaged, have above-average expenses or below market rents, or other factors that indicate a solid investment opportunity.
Most properties are rated on a scale of A through D. This rating is known as a property’s asset class. A-class properties are nice, newer properties in the most desirable locations. A-class properties often have amenities such as a pool, club houses, high end finishes, and concierge services. On the opposite end of the scale are D-class properties. D-class properties are typically older buildings in higher crime areas with a more challenging tenant base. We buy B- and C-class properties in B- and C-class neighborhoods. These property classes represent the middle level of quality for residential investment properties. They cater to working class individuals and young professionals. These property classes capture individuals moving up from D-class properties, and those whose financial changes require them to downgrade from an A- or B-class property into a lower-class property. Because of this, B- and C-class properties are in demand in both strong and weak markets.
Every city has at least one path of progress. The path of progress is that part of the city where new shops, restaurants, and residences are popping up. The path of progress typically sees large investments by the local government in the form of new or improved roads, parks, and investment perks. Multifamily properties in the path of progress can mean higher appreciation rates compared to other areas in the city, a higher quality tenant pool, and increased stability in the neighborhood and broader market.
The valuation of multifamily properties is directly tied to the property's NOI which is the difference between the net income the property generates and the total expenses the property incurs. Assuming all else remains the same, increasing rents increases the property’s income. Increasing income increases the NOI of the property which in turn increases the overall value of the property. Opportunities to increase income include:
As stated above, increasing the amount of income a multifamily property generates increases the NOI of the property. Reducing expenses has a similar (and often greater) positive effect on the NOI and value of the property. Opportunities to reduce expenses include:
Vesta Capital Group invests only in strong, stable markets that have populations of 100,000+, solid job growth, diverse industry, and strong rental demand. The market characteristics that we require helps ensure that our properties have not only a large base of potential tenants but are also resilient during market downturns.
We acknowledge that we don’t have all of the knowledge to handle all situations we might encounter. To ensure our success, we maintain strong relationships with other real estate professionals: investment advisors, other investors, CPAs, attorneys, real estate brokers, mortgage brokers, and property managers.
We take continuous education seriously. In pursuit of this value, we engage in workshops, conferences, and a formal coaching program through Michael Blank’s apartment investing community (link).
Every property presents a unique set of opportunities and challenges. As we underwrite an asset, we consider all the characteristics of a property: the property’s asset class, the condition of its market and neighborhood, recent and upcoming capital expenses, current tenants, and current management’s strengths and weaknesses. We then examine all of the opportunities related to these characteristics to determine how to maximize the returns on investment. Some properties represent repositioning opportunities: making big changes to property, physically or through management, to force appreciation. Other properties are stable properties that represent solid cash flow through continued efficient management. And still other properties present both appreciation and strong cash flow opportunities.
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