Vesta Capital Group’s investment goal is simple: Provide investment opportunities that yield strong, consistent returns on investment. To achieve this goal, Vesta Capital Group focuses exclusively on multifamily investment properties. Read below to learn more about why we believe in this particular type of investment asset.
Depending on your investment goals and strategy, multifamily investing can offer a number of advantages over single family investments.
Owning a multifamily property can both help temper the income losses associated with vacancies. Vacancies in a multifamily will certainly reduce the amount of income but unless there is 100% vacancy at the property, there will still be some income. A group of single-family properties offers the same amount of buffering against individual vacancies. However, multifamily properties often provide economies of scale benefits that a group of single-family properties cannot. For example, in multifamily properties there are multiple units under each roof. When that roof is replaced, its cost is spread across multiple units. Similar expense saving can also be realized with contract services such lawn care and pest control.
Purchasing both single-family and multifamily properties require time, effort, and money. While purchasing a multifamily often takes even more time, effort, and money than purchasing a single-family property, after one transaction you might own 50, 100, or 500 units. Yes, the time, effort, and money to close on a multifamily property is usually more than what’s required for a single-family property, but like other expenditures, when that time, effort, and money are averaged out over all units in a multifamily property, the expenditures “per door” are almost always less than what a single-family property would require.
Unlike single family properties, the fair market value of multifamily properties is not dependent on comparables (comps). Regardless of the condition or performance of similar properties around it, multifamily properties are valued individually based on the market’s capitalization (cap) rate, and the amount of net operating income (NOI). The cap rate varies from market to market and from property type to property type. NOI is the amount of cash left after all expenses are deducted from the gross income of the property. Note: The NOI does not include debt service.
The fair market value of multifamily properties is calculated with following formula:
Value = NOI/cap rate
Consider a multifamily whose NOI is $78,000 per year and whose market has a 6.5% cap rate.
Value = $78,000/.065 = $1,200,000
Strong markets and higher-class properties will typically have lower cap rates, which means an investor will pay more for each dollar the property generates in NOI.
The advantage to the investor in how multifamily properties are valued is that it gives the investor a degree of control over the value of the property. If an investor is able to increase income and/or decrease expenses on a property, the value of the property will increase.
Considering the same property above, if an investor were to increase income and decrease costs in such a way that resulted in an extra $19,500 per year (just $1,625 per month), the value of the property would increase by $300,000!
Value = $97,500/.065 = $1,500,000
This modest increase NOI might be achieved through a modest rent raise, better marketing to decrease vacancy, and a switch to contract services that are cheaper each month. The possibilities for how to increase NOI are almost limitless!
Market appreciation is the increase in a property’s value based on the growth of a market. Each year in a strong market, the value of properties will typically increase. As the saying goes, “A rising tide lifts all boats.”
Because market appreciation has the potential to add to the overall returns on an investment, Vesta Capital Group looks for properties only in strong markets that have large, stable populations and diverse industry.
The principal of a loan is the amount that is owned on the loan. As with a home mortgage, most monthly payments on a commercial loan have a portion of the payment that goes toward interest, and a portion that goes toward paying down the principal. The more the principal is paid down, the less amount of money at sale will go toward paying off the remaining loan. While this doesn’t represent a return on investment, per se, it results in a larger amount of money going back to investors at sale, which means they can invest a larger amount in the next deal.
Cash-on-cash return is the ratio of annual cash flow to investors (after all financial obligations such as expenses and debt payments have been satisfied) to the amount of money that the investor invested in the property. Cash-on-cash return is expressed as a percentage. If, for example, an investor invested $50,000 into a property and the property generated an average of $5,500 per year in cash flow, the cash-on-cash return for that investor would be 11%. Some of Vesta Capital Group’s investments focus more on value-add opportunities while others are focused on maximizing cash-on-cash return. Regardless of the investment strategy, over the life of an investment, Vesta Capital Group typically strives to provide an average cash-on-cash return of at least 9%.
For many investors, real estate investments come with numerous tax benefits. The tax benefits of real estate investing will vary from investor to investor. You’re strongly encouraged to discuss tax implications of investing in commercial residential real estate with a tax professional.
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