ARE YOU READY TO PLAY MONOPOLY?!
You have experience with the little green house and are now ready for a red hotel!
Multi-family properties are becoming more and more popular as a successful real estate investment. They are the top performer against not only single family homes but against other commercial investments as well. With the highest rent growth, lowest vacancy rate and strong absorption rate, it’s no wonder more and more people are catching on to this trend.
This type of investment is for the more experienced investor, someone who has dealt with at least one single family home. Think of it like a game of Monopoly, you have invested in the little green houses and now you are ready for a big, red hotel.
Self-Directed IRAs are a great way to invest in this type of investment. We will help you set up an account, purchase the property, deposit rent into your Self-Directed IRA, plus you can use money in a Self-Directed IRA for any repairs needed for your investment property.
So how should you invest your Self-Directed IRA to potentially have the highest rate of return? Within the multifamily investment options, apartment buildings showed the most promise: the first half of 2013 was dominated by the apartment sector, followed by office properties, retail, industrial, hotels, respectively. This information comes from CCIM’s Third Quarterly Market Trends report, which is now available and super exciting for those interested in invest in multifamily investment properties (this report is produced by the National Association of Realtors® in conjunction with and for members of the CCIM Institute. CCIM.com)
“90% of all millionaires become so through owning real estate.” – Andrew Carnegie
LOCATION, LOCATION, LOCATION
One of the oldest rules in investing is finding a good location. Multifamily properties are put into different classes depending on a number of different qualities, including location. Classification is determined by the condition of the property, cost of rent, location, amenities offered within the building, quality of building materials, elevator performance, nearby transportation services, ceiling heights, parking, freeway access and much, much more. Multifamily buildings are categorized by what is in the vernacular versus a formal definition.
Class A properties are the most favored investment properties. They are large apartment complexes, usually built within the last 15 years, which feature many amenitiesand charge higher rent. These top notch properties are going to require multiple maintenance employees; a professional, on-site management; an on-site leasing office; full-time accountant and other staff.
Some class A properties are in class B areas because they do not meet all requirements to be a part of this “cream of the crop” classification. For example, a building may be newer but the rent is too low for class A , or maybe the rent is high enough, but the building is not large enough.
Class B complexes are well-maintained and are historically occupied by the middle class apartment dweller. These buildings are typically 15-30 years old, not a lot of amenities, well-kept and are usually in the middle class part of town. Quality management and maintenance attracts more quality tenants.
Class C properties are usually in low to moderate income areas, or blue collar neighborhoods. The buildings are 30-40 years old, not a lot of amenities and have had one or two rehabs. With this type of investment, you need to be prepared for more tenant turnover, more repairs and more maintenance.
Class D complexes are in very bad neighborhoods with a high crime rate. Class D investments are usually purchased because they are cash flow machines. They require intense management and heavy security.
A premium deal is finding a Class C property in a Class B area that you can reposition, or a Class D property (due to its condition) in a Class C neighborhood.
Buy a poorly managed apt complex with rents below market, improve management, raise rents, increase the value of property and your return greatly increases.
Another great strategy is buying a large apartment complex and waiting for the right market to convert it into condos.
“Risk comes from not knowing what you’re doing.” – Warren Buffet
Investments are all about the bottom line…how much are you going to make? How much money are you going to be able to put back into your Self-Directed IRA, building your retirement nest egg? Well, that’s where capitalization comes in handy!
The capitalization rate is a rate of return on a real estate investment property based on the expected income that the property will generate. An investor uses the capitalization rate to estimate the potential return on the investment. Calculating the rate is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.
Capitalization Rate = Yearly Income/Total Value (investopedia.com)
Now that you understand, capitalization rates or “caps”, let’s go back to our CCIM report and take a look at the stats for the third quarter: apartments retained the lowest cap at 6.3%, followed by office and industrial properties which tied at 7.1%, industrial properties 7.7%, hotel properties 8%.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full and managed with reasonable care, it is about the safest investment in the world.” – Franklin Delano Roosevelt
WHAT ELSE SHOULD YOU CONSIDER BEFORE INVESTING?
(Below stats mentioned in this section of the article are from CCIM’s Quarterly Market Trends report).
Vacancy Rate – The percentage of units unoccupied. Multifamily properties had the lowest vacancy rate by far! Offices had the highest vacancy rate in the third quarter at 15.70%, retail came in at 10.60%, followed by industrial properties at 9.30%. Multifamily properties had only a 3.90% vacancy rate.
Net Absorption – The amount of inventory or units of a specific commercial property type that become occupied during a specified time period in a given market. Multifamily properties knocked it out of the park in this area as well. Retail had the lowest net absorption at 2,955 unit followed by office and industrial properties. Multifamily properties had an absorption rate of 75,996 units.
Rent Growth – The projected trend of market rental rates. Multifamily properties win again! Retail rent growth is reported at 0.40% follo
Job Market – The total number or percentage of vacant jobs open to those seeking employment. You want to make sure people (aka your potential tenants) are working inthe area of your investment. Is work available to them, what type of work, is there nearby transportation or highways for them to get to work? You can find more detailed information about your investment area from Census.gov.
New Construction – The total number or percentage of multifamily units that are projected to be built. Is there new supply of properties coming into your investment area? You can find more detailed information about your investment area from Census.gov.
“Investing is not risky. Investing is fun. Investing can make you very, very rich. More importantly, investing can set you free, free from the struggle of earning a living and worrying about money.” – Robert Kiyosaki
INVESTING IN HOMES VS. MULTIFAMILY PROPERTIES
Multifamily properties give you more “bang for your buck” versus investing in a couple of single family homes.
For example, staffing expenses can be reduced when everyone is in the same place. One maintenance company or one person can take care of all of the needs of a multifamily property in one place versus a maintenance company or person traveling to 3 or 4 of your single family homes. This concept applies to other areas of your investment: pool cleaning & maintenance, lawn care, exterior repairs, roofing needs, etc. Plus, when you use your Self-Directed IRA account to invest in multi-family properties, you can use retirement funds for each repair needed.
Another benefit is that you may have an LLC set up for each of your single family homes versus having one LLC for the entire multifamily building. At Accuplan, we will help you set up a Self-Directed IRA with an LLC attached for a little extra protection.
One of the biggest bonuses of investing in multifamily properties is vacancy. When a single family home is unoccupied that’s it! Your investment is bringing in $ 0 a month until you can find, interview, screen and get a deposit from a new tenant. That’s not the case with multifamily properties; you may have other units supplying income.
One BAD tenant can destroy your entire single family home investment. It will take time to repair damage to the inside and/or outside of a single family home and get it back to a good rental condition, plus there is NO rent coming in until this is done. With a multifamily property other units may be paying rent during repairs, plus common areas are usually shared so you don’t have to worry about the exterior being destroyed as much.
Property damage like vandalism, theft, and burglary are more likely to happen to vacated single family homes than a multifamily property.
“More money has been made in real estate than in all industrial investments combined.” – Andrew Carnegie
WHAT RESEARCH TO DO BEFORE INVESTING IN A MULTIFAMILY PROPERTY?
Research and knowledge is obviously the key to any type of investment. When it comes to multifamily properties, here are some of the things you should research and know about the neighborhood or your investment.
*Is the local employment market trending upward? You want positive trends in employment, population growth, vacancy and rent.
*Is there a new supply coming into the market? Check out the National Association of Home Builders website at www.nahb.org
*Is the local government pro-business?
*Are local based businesses hiring?
*What are the employment conditions in the area? What types of workers are there? Census Bureau offers data at www.factfind2.census.gov
*Check out household formation figures.
*What public transportation or roads or highways are nearby?
*Ask the seller for historical profit & loss statements, rent rolls, and service agreements with third party vendors for the past two years or longer. Double check this information by walking around to current tenants and asking about rent, past rent, issues, etc.
“You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if you can’t write an intelligent answer to those questions, don’t do it.” – Warren Buffet RECAP
So, are you ready to invest and “play monopoly” with the top performer of the third quarter?
At Accuplan, we help investors just like you use your retirement funds to invest in real estate. We will help you set up a self-directed IRA and an LLC (if needed) so you can invest in not only single family homes, but multifamily properties as well.
You can also visit http://www.accuplan.net/self-directed-ira.htm to learn more about how to invest with a Self-Directed IRA or chat with one of our experienced Self-Directed IRA Specialists.