Investing in Multi-family housing - what should a buyer look for?
Lydia Taylor January 26th, 2008
Thinking about buying a large multi-family investment property? Multi-family investment is a large commitment above and beyond rental homes. Before embarking into real estate sales, I spent six years managing multi-family units across North and South Carolina. I had thousands of tenants- many of my apartment complexes housed a hundred or more residents. The secret of my success? I made absolutely sure I had great on-site management teams at every property. While I know that it can be a full time job looking after these types of investments, I’m also fully aware of the income potential.
First and foremost you have to decide what your expectations are when investing in multi-family housing. Are you going to collect a check, or are you going to try to break even?
If you are in search of a monthly check to put in your pocket, then you have to really work to purchase the property at the right price, factor in all expenses, and have a little set aside for the unexpected. Then you should be willing to manage the place yourself. This means collecting rent, handling capital projects, renting units, general maintenance, managing a separate escrow account for deposits, and doing all of that within a budget.
On the other hand, many investors buy apartment complexes with the goal of ‘breaking even’. Confused? Let me explain. Think of the apartment complex as a long term investment. Keep all your income generated invested in the property, rolling it back into the business. Allow the property to build equity over time and provide a tax write-off for you. Eventually when it comes time to sell, your tenants have built up equity on the mortgage and you walk away with a nice check! Even better, most people who choose this way allow a management company to handle the affairs of the property. They step away, allowing the management company to take care of day-to-day operations. Measured against leaving your money in a bank making simple interest, or sinking your money in a mutual fund, this is a retirement plan that can offer manageable risk with higher rewards than conventional methods.
Decide from the start if you are willing to get a new management company, run the place on your own, or just avoid buying it in the first place. To protect your investment, good management is essential. The good news is that a poorly managed property can be identified pretty quickly.
As a regional manager, here are some of the things that helped me evaluate on-site management:
- First make sure that the entrance sign is clean, not faded, has no chipped paint, and is readable. If the entranceway has flowers or landscaping, make sure that they are not overrun with weeds and dead plants. This is important because the entrance is what gives the first impression to all prospective tenants. If management cannot get that right, then there will probably be many more problems to come.
- Look for trash laying around the property - especially old trash that appears that it has been sitting there for a long time. This is a sign of two things: 1) the people on the property don’t have respect for the place in which they live, and 2) management is not on top of making sure that trash is picked up in a timely and effective manner. Even the best managed properties will have trash thrown on the grounds. Well-run places will never allow trash to linger.
- Check to see if there a lot of ‘do not’ signs (i.e. ‘do not walk on grass’, ‘no loitering’, ‘don’t litter’, etc.) This usually means that the office has lost control, or is reluctant to confront tenants about the issues that they are posting signs about. Signs should be kept to a minimum, because prospective tenants do not want a place littered with signs telling them what and what not to do.
- Look at the grass and see if there are bare spots where foot traffic is walking. This can be a sign of people not caring about the place they live in. However this can also be a signal that management is not taking control of the property. If there is an area that is missing grass due to the lawn being a more convenient path to the mail, office, or amenities, then management needs create a sidewalk for the residents. The goal is to make the place somewhere they want to live, and the least that management can do is prevent damage to the grass and give the tenants a nice walking path.
- Exterior paths that people might use to enter the property on foot need to be closed off. This is for the peace of mind and safety for the residents. Prevent strange people from walking onto the property as a short cut. This can be accomplished with a fence and strategically placed thorny bushes. If these types of measures are not in place, with fences missing or in disrepair, you will need to plan on implementing them.
- Check to see if there are broken down cars and lots of oil stains in the parking lot. Broken down cars send a bad message to prospective tenants, frustrate good tenants, and invite people that have no respect for their surroundings. Oil stains on the parking lot are something that should be monitored. Oil eventually eats up the parking surface and good management will want to prevent extensive damage to the asphalt. See if they let it happen or if they clean oil up with sand or kitty litter quickly. The techniques to make residents stop parking their oil-hemorrhaging cars from parking on-site are very simple.
- While looking at the buildings, check to see if there are numerous broken blinds. This is a tenant issue having to do with care and respect. It ends up being a major headache for managers. However, this can be one of the simplest problems to correct and the most damaging if ignored. To me, this is even worse than not picking up trash (and not picking up trash is an apartment complex sin). The blinds are important because this is something everyone can see from a distance. There is a major apartment complex on a highway in Augusta, and every time I pass by I see junk hanging from the windows and numerous broken blinds. They are broadcasting to every person that drives by that anything goes and they are not fixing things!! This is definitely not a good impression.
- Porch lights should always be in place and working. If there are missing lights we have a liability for the complex owners. If a tenant gets attacked in a dark area because the maintenance staff or management failed to replace a light bulb or fix a light fixture, litigation is sure to follow! Good management makes sure that the property is well lit and that all lights are functioning. Things will happen - regardless of the light - however management has to make sure that the apartment complex itself is not a contributing factor.
- See if there are large groups of people hanging out in the parking lot. Loitering is a problem most apartment complexes have to deal with. However, if there are persistent groups hanging out in areas not intended for public gathering then there is a major issue with management. Groups like this are inviting trouble. People are less likely to harass other individuals on their own, but there is a group mentality in loiterers that encourages people to get in to trouble. For the safety of other residents these groups should be dispersed and encouraged not to come back.
I’ve tried to list some simple indicators I used when evaluating multi-family properties. Hopefully you can use these to identify potential investment opportunities worthy of further interest. Though most of the problems I listed are minor and easily corrected, consider that if the site management and owners can’t get the easy stuff right, there are certainly more major problems yet to be found.
Like any investment, going with multi-family properties is not a fool-proof way to make money. However, if you have the right attitude, carefully evaluate the property before buying, and establish achievable goals, then it is difficult to go wrong with investing in multi-family units. If you think of real estate as a long term investment over time, property appreciation and a focus on building equity will reward you. If you are interested in multi-family housing investment, the links below might help you in your search for a good property. Good Luck!
Multi-family properties for sale in Augusta
Multi-family properties for sale in Richmond & Columbia Counties
