How to Create a Multifamily Real Estate investment Strategy

When investing in real estate it’s crucial that you identify your investment criteria. You’ll want to use that investment criterion when communicating with brokers so they know exactly what you want. Given that you keep consistent contact with those brokers, when a deal that fits your criteria comes across their desk they will (hopefully) send it to you. As you build up relationships with many brokers, you’ll build a deal flow pipeline that will serve you well on your journey to scaling your real estate portfolio. More so, having a defined investment criterion will keep you focused and not get distracted by the multitude of investments that the world of multifamily real estate offers. This is not to say that you can’t be chasing let’s say gut rehab and value-add deals at the same time, but rather that you need a concise understanding of how those two deal types align with your investment goals. If you happen to be syndicating deals (i.e. you’re using investor capital to fund your deals), having a set deal criteria becomes even more important because you will need to communicate that to your investors. Investors want to know what it is that you will offer in terms of deal criteria so they can plan how they can allocate their capital appropriately. Nevertheless, what I’ve wrote about so far is the basis of why having a defined investment criteria is so important. As a final note, all of these criterion are interrelated and we need to look at them in relation to one another. With that being said, let’s jump into the six criteria you need to have defined to be successful in multifamily real estate.

Price

The first criterion you’ll want to define is price. Knowing the price of the property you’re looking for narrows down the unit size and class, both of which we will talk about later, of the property you’re looking to buy. If you’re purchasing a property by yourself, it doesn’t take very long to realize you can only afford a certain size. Simply take into account the liquid capital that you have set aside for investments and boom you know what you can afford. If you’re syndicating a deal, the question of price becomes more complicated because an unlimited amount of capital is available out there. However, your experience and network will limit how much capital you can raise. If you’re just starting off in the syndication space, I recommend starting small (I touched on starting small in this post). The reason for this is because it’s easier to manage smaller multifamily properties and the chances that you’ll succeed are greater. If you take on a project that is too large for your level of experience, the chances the deal will go south are higher and losing investors money could hinder you from scaling your syndication firm. Regardless of your experience or if you’re syndicating a deal, knowing the price range of the property you’re looking to purchase is critical for forming a focused investment criteria.

Location

I’m almost sure you’ve heard the saying in real estate, “location, location, location.” While I’m not sure who first stated that, nor does ChatGPT know, it does highlight one of the most important aspects of investing in real estate. There is a reason why I mentioned price as the first criteria and that is because your price range limits the location in which you can invest. For example, if you have $200k to invest, don’t be expecting to buy a class A multifamily property close to the beach. While every state, county, and city command different prices within the market, you know the area you want to invest in best.

At JP Acquisitions, we’ve looked into hundreds of deals in the Chicago market (our “backyard” so to speak) and have narrowed the west side of Chicago as the best bang for our buck. We ultimately realized that the the north side is wildly expensive and the south side typically has high crime rates which we aren’t comfortable with. The west side is this sweet spot in which prices aren’t ridiculously high, the tenant base in that area is reliable, and the cash-on-cash returns are strong. While I can’t speak for whichever area you’re in, make sure to do your research and narrow down a location(s) which you can communicate to brokers.

Cap Rate

The cap rate of a given property is closely related to it’s location. Before diving into this section, I want to remind you that the cap rate is equal to the net operating income divided by the purchase price of a property. In other words, the cap rate expresses what return you can expect on an investment property if you were to pay all cash. Thus, if you’re going to use debt to purchase a building, the cap rate expresses an inflated return because the metric doesn’t take debt into consideration. Having said that, knowing the cap rate range in which the property you want to purchase is in will help you narrow down not only location, but the class of the property and the returns you’re targeting. Remember that different asset classes command different cap rates. For example, Class A properties have the lowest cap rates, while class D properties have the highest cap rates. If you’re looking to yield the bulk of your return via the cash-on-cash metric as opposed to appreciation, you’ll want to look for deals with higher cap rates. As a result, you’ll likely want to look into class C properties which provide the best risk-adjusted cash-on-cash returns based on what our team has seen and studied. If you’re looking for a stable asset that will appreciate fast, you’ll likely want to purchase a class A or class B property. Keep in mind that chasing appreciation is a risky game to play and I highlighted why that is so in this post. All this is to say that location, cap rates, and returns are closely tied to one another. The cap rate range which you define for yourself will heavily influence your overall criteria and is the most telling criterion.

Class

Throughout this post I’ve touched on multifamily classifications and if you’ve forgotten the various characteristics of each class, you can find them on our glossary page in detail. At this point in the post I’ve talked enough about multifamily classes that you likely already understand how asset classes fit into the grand scheme of things. Nevertheless, the class of multifamily that you’re looking into investing in will guide a few factors including cap rate, location, and purchase price. Class A assets are in the most desirable locations, have the lowest cap rates, and the highest purchase price. As you go down the scale (i.e. look into class B, C, and D assets) you will notice a gradual decline in the desirability of the location, higher cap rates, and lower purchase prices. I’ll mention that you need to be extremely cautious with class D assets as getting wrapped into those kind of properties will entail you dealing with people/tenants associated with crime. Be that as it may, clearly defining the class or classes of property which you want to purchase will help brokers and investors understand the business plan you seek to implement in addition to the returns you’re seeking.

Business Plan

Something that not all investors understand is that when you purchase a multifamily property, you’re buying a business. Just like a business, a property generates income, has expenses, needs to be filed with the IRS, and can be improved. So the question to ask yourself on the one hand is do you want to purchase a property that is stabilized and needs little to no work done? On the other hand, ask yourself if you instrad want to renovate a property so as to boost the income and make it more valuable? Both business plan’s have risks associated with them, although buying a stabilized asset is safer but will yield lower returns.

I can tell you that value-add properties are becoming harder and harder to come by and that is of course due to their desirability. A growing number of syndicators, including our company, continue to publish posts on the benefits of multifamily and the beauty of implementing a value-add business plan successfully. This marketing trend has caused the overall demand of value-add properties to grow. However, not everything is all sunshine and rainbows when it comes to renovating a property. While implementing a successful renovation business plan can put serious cash into you and your investors pockets, if things go wrong you may find yourself with a hole in your pocket. Failing to implement renovations on budget or over-renovating a property can lead to disastrous consequences. In any event, as investors we need to know what we want and communicating to brokers, investors, or both how we want to go about the properties we seek to purchase helps strengthen deal flow and increases the chances of success.

Unit Count

The unit count of the property that you seek to purchase is influenced primarily by price and the level of experience you have. As I had stated earlier, if you are a beginner I suggest starting off small and not biting off more than you can chew. While more often than not it makes more sense to purchase larger properties (50+ units) due to the synergies associated with their size, you may not be in a place to afford those assets. It doesn’t hurt to start with for example a three or four flat, the point is that you start somewhere. Ideally, you’ll want to gradually scale upwards and hire a third party property management company to run your portfolio. Regardless of what position your in, the size of the asset you’re looking to purchase will be intuitively understood.

Conclusion

Having read this post, you now know how to establish an investment criteria that will keep you focused when looking for multifamily investments. As previously stated, all of these criterion are interrelated in some way and it’s difficult to create a strong idea of what it is you’re looking for if one of the criterion is missing. For those of you that are looking for your first property, I trust this blog post will be pivotal to closing on that first deal. As for the more experienced reader, what I’ve written here is likely a refresher to what you already knew.

If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!