Prioritizing Residents in Multifam Isn’t Just Nice, It’s a Smarter Investing Move
Prioritizing Residents in Multifam Isn’t Just Nice, It’s a Smarter Investing Move.
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The past two years reflected a risky period to be a property investor, with ongoing eviction bans, increased inflation rates, and of course, the uncertainty surrounding new tax laws that investors and property managers have to navigate through and execute.
In 2021, the national median rent increased by 11.4 percent. The Federal Reserve recently shared that 2022 can expect an increase in the interest rate at least three times, with an approximate increase of 0.9 percent.
Proposed Changes to 1031 Exchange Laws Could Change the Face of Real Estate Investing
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When the Biden administration considered changing the tax laws surrounding 1031 exchanges, it spurred an initial panic because of the effect it would have created by placing a cap on gains above $500,000 per year on an investment property exchange. This would deal a devastating blow to real estate investors.
However, while the current 1031 exchange laws remain unchanged, the decisions investors and/or property owners are faced with in determining whether to invest in single-home or multi-family properties is crucial.
Earlier this month, the Washington State Legislature is looking at passing legislation that would potentially allow for multifamily housing in areas now designed for single-family homes to stay as they are.
The law, dubbed “Substitute Senate Bill 5670” and “House Bill 1782”, would allow duplexes up to six-unit buildings to be constructed in some neighborhoods, making this issue an utmost concern in 2022 as local zoning codes could be upended.
The time in which the bills could be considered ended on February 15, while lawmakers continue to wrestle with other legislation that includes police reform bills, transportation, firearms, and of course, the election process.
Leveraging Economies of Scale Leads to More Profit, Happier Residents, and a More Resilient Long-Term Investment
Both single-family homes and multi-family properties can make attractive real estate investments, but multi-family properties typically offer a better return on investment along with several other advantages.
While more capital is required to close these types of deals, their scale means the returns are also greater. And because of the structure of the property, relatively small increases in rent can add up quickly because there are numerous units, unlike investing in single-family homes. Economies of scale also come into play for renovations because investors can benefit from volume pricing, reducing their costs while still increasing property value.
Ultimately, this provides a substantial, long-term profit for investors. But it’s not all about the money for some investors.
“It’s not a zero sum game,” says Patrick Grimes, CEO and Managing Partner at Invest On Main Street, a private equity firm that manages large multi-family real estate syndication in apartment buildings.
Grimes, who lost everything during the 2008 real estate crash, started over, re-engineering his approach to investing. With over 15 years of experience in active real estate investment, has a portfolio which includes controlling ownership in over 2,000 units in emerging markets across Texas and the SouthEastern United States.
“When you invest based on a very specific criteria and create a service-focused culture within your management team, you can ensure that everyone impacted by the transaction wins. That includes the buyer, seller, and even the apartment building’s residents.”
The cost-savings per unit, or economies of scale that comes with having a larger size property or an increased number of tenants occupying units, helps to guide whether or not a short-term gain outweighs the benefits of a longer-term approach which aims to increase rental income.
“Cutting corners might mean a little more money in the short-term, but that approach also drives the rental income down,” he says.
Resiliency is the Key
At the end of the day, Grimes believes investors should take a more balanced approach. Instead of trying to squeeze every penny of profit out of a deal, they should look for ways to improve the quality of life for their residents while earning a healthy profit.
“You can do it if you approach each deal with that mindset from the start,” he explains. “but it’s nearly impossible if you don’t start from that mindset.”
And when you do that, your margins go up and your costs, generally, go down, because you don’t have to work as hard to keep residents. It’s also easier to attract new residents to a nicer property.
This leads to properties that thrive in economic conditions that would run other properties into bankruptcy. This kind of financial prudence is important in the best of times, but it’s critical in economic uncertainty. Most experts agree that we’re already facing a shaky economy and that it’s going to get significantly worse in the coming years.
Grimes says his losses in 2008 made it indisputably clear how important this is. “Gains are great, but they only count if you keep them.”
Look Beyond the Profit…
It’s important as a company to look at the communities being served and align with professional associations, organizations, and 501(c)(3)’s that help drive your overall mission to continue providing value.
Household brands such as Patagonia donates a portion of its profits to environmental causes, aligning to the company’s overall mission in giving back to the planet in addressing the climate crisis. Through its self-imposed Earth tax, 1% of every transaction goes to supporting environmental nonprofits working to defend the air, land, and water around the globe.
Others like Black Rifle Coffee Company, which recently went public on the New York Stock Exchange (NYSE), is working towards hiring over 10,000 United States military veterans as part of its advocacy program for transitioning veterans, while RELX Group and Salesforce give their employees an allotted amount of PTO to volunteer for the charity organizations of their choice.
Consumer-facing brands have been doing this for decades, and Grimes says he’s looking forward to seeing more investors follow suit.
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