Real estate investors inevitably battle with the same question: How can I grow my ROI?
Even though there’s no surefire answer, some ideas and strategies are better than others.
Today, we’ll explore five of them.
We’ll also touch base on what you should avoid doing if you want to maintain (or increase) your multifamily asset’s ROI.
Let’s start with the basics:
What Is a Multifamily Asset?
A multifamily asset is any property that contains multiple dwelling units. It’s a housing type growing in popularity, especially in larger metropolitan areas.
Multifamily assets tend to be a sound investment because of the potential to generate consistent rental income from a large pool of tenants.
The most popular multifamily assets are apartment complexes, but they can also include:
- Mixed-use buildings
- Live-work units
- Manufactured housing communities
- Student housing
- Senior housing
Besides, the definition of a “family” has changed over time. It’s no longer just a married couple with children.
Nowadays, families come in all shapes and sizes.
And that’s why multifamily assets have gained popularity: They provide affordable housing for a wide range of people, from young professionals to empty-nesters.
Whether tenants are looking for a place to raise a family or downsize after their children have moved out, multifamily assets have something to offer.
What Are the Benefits of Multifamily Real Estate Investing?
The benefits of multifamily real estate investing are vast.
For one, they offer more stability than single-family residences. When you have multiple tenants, there’s less risk if one tenant decides to move out.
There’s also the potential for higher returns.
Since you’re generating revenue from multiple units, your ROI tends to be more considerable than renting out a single unit.
Compared to single-family assets, multifamily assets offer a few key benefits:
- They’re easier to finance: Lenders are typically more willing to finance multifamily properties. Since there are multiple rental units, the property generates more cash flow, making it a less risky investment.
- They’re more stable: Multifamily assets are typically less volatile than single-family assets. There are multiple tenants, so even if one tenant moves out, the property still has other occupants generating income.
- They offer more opportunities for revenue growth: There are many ways to increase revenue from multifamily assets, such as increasing rent, adding amenities, or adding more units.
What Are the Different Classes of Multifamily Assets?
Multifamily assets have different “classes,” which refer to the quality of the property.
- Class A: Class A multifamily assets are the highest quality properties. They’re usually newly constructed or recently renovated and offer luxury amenities.
- Class B: Class B multifamily assets are in good condition but don’t offer the same high-end amenities as Class A apartments.
- Class C: Class C multifamily assets are older properties that may need some repairs or updates.
What Factors Should Be Considered When Analyzing Multifamily Investments?
When analyzing which multifamily real estate asset class to invest in, several factors should be carefully considered. One crucial aspect is the location of the property. The location plays a significant role in determining the success and profitability of the investment. Factors such as proximity to schools, parks, public transportation, and amenities like shopping centers or entertainment facilities can greatly impact the property’s appeal to potential renters.
Another vital consideration is the age of the property. Older properties may require more maintenance and renovations, which can add additional expenses to the investment. On the other hand, newer properties might offer more modern features and amenities that can attract tenants and potentially lead to higher rental income.
The level of rental income generated by the property is also an important factor. Analyzing the rental rates in the area and comparing them to the property’s potential rental income can give an indication of its investment potential. Properties with higher rental income potential may offer better returns on investment.
Additionally, amenities play a role in attracting tenants. Properties with desirable amenities like a swimming pool, fitness center, on-site laundry facilities, or secure parking can be more appealing to renters, potentially leading to higher occupancy rates and rental income.
Lastly, different asset classes within multifamily real estate, such as Class A, Class B, Class C, and Class D apartments, offer varying investment perks. Each class represents different quality and condition levels, and associated risks and returns. Evaluating and understanding the characteristics of each asset class is crucial in assessing the investment opportunities and potential pitfalls.
In summary, when analyzing which multifamily real estate asset class to invest in, factors such as location, property age, rental income potential, amenities, and understanding the distinctions between asset classes must be thoroughly considered.
Why Many Investors Are Drawn to Class C Multifamily
Investing in Class C apartments offers a host of benefits for investors. Firstly, these types of apartments are known for providing excellent cash flow opportunities. Compared to Class A or B apartments, Class C apartments tend to have lower purchase prices, which means investors can often acquire them at a more affordable cost. This affordability allows for higher potential returns and cash flow on investment.
One of the main strategies utilized by real estate syndicators in Class C investments is the value-add approach. This strategy involves implementing operational improvements, renovations, and rebranding to dramatically increase the value of the asset. By upgrading the property and improving management, new owners can attract higher-quality tenants and demand higher rental rates. This leads to a substantial appreciation of the property’s value over time.
Moreover, the value add strategy allows for greater flexibility and control over the investment. Investors have the opportunity to make direct changes to the property, such as upgrading amenities, enhancing curb appeal, and improving overall property management. These enhancements not only attract tenants but also enable rent growth and increased occupancy rates, resulting in a significant boost in return on investment.
Investing in Class C apartments provides investors with the chance to leverage their expertise and bring about positive changes in communities. By revitalizing these properties, investors contribute to the overall improvement of neighborhoods, creating more desirable living environments for tenants and establishing a positive reputation in the real estate market.
In summary, the benefits of investing in Class C apartments include the potential for strong cash flow, excellent return on investment through the value add strategy, increased control, and the opportunity to positively impact communities. These factors make Class C apartments an attractive investment option for real estate investors seeking both financial gains and the ability to make a positive difference in the market.
How to Increase the ROI of Your Multifamily Investment
Now that we’ve covered the basics, let’s get into the tips and best practices for increasing ROI on a multifamily asset.
1. Review Your Expenses
Reducing your monthly expenses by even a few hundred dollars can make a big difference in your bottom line.
Take a close look at your monthly operating costs, such as mortgage payments, property taxes, insurance, and repairs and maintenance.
Are there any areas where you can cut costs? Is there anything you can do to reduce expenses?
For example, you might get a better deal on insurance by shopping around. You might also be able to reduce repair and maintenance costs by signing a contract with a quality vendor.
Some other ideas include:
- Refinancing your mortgage to get a lower interest rate: This can save you hundreds of dollars every month, which can add up to significant savings over the life of the loan.
- Renegotiating property taxes: If your property taxes are too high, you can negotiate a lower rate with your local tax assessor. Sometimes, you can get the tax assessor to lower your taxes if you can prove that your rental property is worth less than what they’ve assessed it at.
- Cutting back on luxury items and amenities: Not all amenities are necessary. If you have amenities that aren’t being used or are costing you more money than they’re worth, consider cutting them back or eliminating them altogether.
2. Increase Rent
Increasing your rent isn’t always easy, especially if you’re currently in a lease. Still, you should consider market rates when setting rent prices.
If your rent is below market value, you leave money on the table.
Use sites like Zillow or Rentometer to compare your rents to similar properties in the area.
You can also talk to a multifamily property management company to get an idea of what other landlords are charging for rent.
But be smart about it — don’t price yourself out of the market. If you increase your rents too much, you could end up with vacant units.
To increase your prices without turning off potential tenants, consider:
- Increasing rent gradually: Rather than raising rent all at once, you can gradually increase it. This will help you keep occupancy high while still slowly growing your revenue.
- Adding new amenities: You can charge more for rent if you add new amenities, such as a gym, a dog park, or a pool. Just do your research to ensure the amenities you’re adding are ones that tenants will actually use and be willing to pay for.
- Renovating units: Remodeling units can be a great way to add value to your rental property and make it more attractive to tenants. But ensure you don’t overspend on renovations.
Above all, ensure your current and potential tenants understand the value they’re getting for the rent you’re charging. If you can show tenants that your property is worth the price, you’ll be more likely to keep occupancy high and increase rent.
3. Add More Units
The more units you have, the more revenue you can generate.
Consider building additional units if you have a vacant lot next to your property. You could also convert existing space, such as a basement or attic, into extra living space.
Adding more units is a great way to increase your rental income without increasing rents.
Of course, adding more units is a big undertaking, and it’s not something you should do without doing your research first. Make sure you understand the zoning regulations in your area and get all the necessary permits before starting any construction.
4. Increase Occupancy
The key to increasing cash flow is to keep your units occupied.
Any time a unit is vacant, you’re losing money. Even though you’re not getting any rent, you still have to pay for utilities and maintenance.
To keep your units occupied, focus on providing a quality living experience for your tenants.
Ensure the units are well-maintained and that any repairs are made promptly.
You should also consider offering amenities that will make your tenants want to stay, such as a gym, a pool, or a community garden.
Improving your marketing and offering incentives can also help.
For example, you could offer a free month of rent for tenants who sign a lease for 12 months or longer.
You could also offer a reduced security deposit for tenants who move in within 30 days.
Some other ideas include:
- Offering a free moving truck or storage unit for tenants
- Giving a percentage off the first month’s rent for referrals
- Giving a gift card to tenants who renew their lease
- Free cable or Wi-Fi for a year for new tenants
These ideas will require an upfront investment, but they could pay off in the long run.
Another great way to increase occupancy is to provide high-quality customer service. If tenants feel like they’re being taken care of, they’ll be more likely to stay on the property and recommend it to others.
For example, you can:
- Respond quickly to maintenance requests: If tenants have a problem, you should try to fix it as soon as possible. This will show tenants that you’re responsive and care about their needs.
- Be available: If tenants need to contact you, make sure you’re available. This can be anything from answering the phone to responding to emails quickly.
- Be friendly: Tenants will be more likely to stay if you’re friendly and easy to work with.
As a syndicator, you might not have direct control over occupancy. Still, you can work with the property manager to ensure they’re doing everything to increase it.
5. Improve Your Financial Reporting
Understanding your finances is critical to increasing your ROI. That is, tracking all your income and expenses and having a clear picture of where your money is going.
You should also set specific financial goals. What are you trying to achieve with your real estate investment? What ROI are you aiming for?
This information will help you make better decisions about spending your money.
But financial reporting isn’t only crucial to you, the syndicator. It’s vital for investors, too.
Your investors want to see how their money is being used and what return they can expect. They’re also interested in the financial health of the property and the syndicate.
To keep your investors happy, send them regular updates on the property’s performance and progress. And be sure to include detailed financial information.
Here’s where syndication software, like Groundbreaker, comes into play.
How to Better Track Your Real Estate Investments With Groundbreaker
If you’re looking for a way to better track your real estate investments, Groundbreaker can help.
Groundbreaker helps you manage your real estate fundraising, portfolio reporting, and investor relations better.
Some of our top features include:
- CRM: Get access to a CRM designed specifically for real estate investors. This will help you keep track of your contacts, conversations, and investments.
- Fundraising management: Keep track of your fundraising progress and see how much money you’ve raised from each investor.
- Portfolio reporting: Get a clear picture of your portfolio performance with our reporting tools. You can see how your investments are performing and where your money is going.
- Investor relations: Stay in touch with your investors and keep them updated on your progress. You can send them updates, share documents, and track their real estate investment.
To learn more about how Groundbreaker can help you increase ROI on your multifamily asset, you can read our product overview page. Or, if you’re ready to get started, you can schedule a free demo today.