QUESTIONS FROM OUR FIRST-TIME INVESTORS
As real estate prices continuously rise, many wonder if it will affect the ROI of their multifamily investments. When investing in multifamily real estate, it is important to predict future cash flows to ensure profitability through all market cycles. Below you’ll find some FAQs about multifamily returns and ROI.
1) WHAT IS AN AVERAGE RETURN OR ROI?
ROI is a very straightforward interpretation of how an investment is performing. This is derived by taking annual rental income minus expenses, and dividing it by the asset’s purchase price. Multiply that figure by 100 to get the figure in terms of a percentage. Returns from 6-8% are considered average; seasoned investors look for returns of 10-12% and greater.
2) WHAT IS A GOOD ROI FOR MULTIFAMILY?
According to a report released in 2017 by CBRE, the world’s largest commercial real estate investment firm, the multifamily asset class achieved an average annual return of 9.75 percent between 1992 and 2017, which is the highest of any class of commercial real estate. Once again, this figure leaves out an eventual exit when the property is sold and appreciation is realized.
Keep in mind appreciation and tax savings are left out of this equation. When exiting a strategy years down the road, appreciation and tax savings will be a key factor in an investment’s success, but are not reflected in an equation like ROI. Two other equations may be more relevant to investors thinking about total capital employed and the amount of time prior to exit. These equations are Cash on Cash (CoC) return and Internal Rate of Return (IRR), and you can read more about them here.
3) ARE MULTIFAMILY PROPERTIES A GOOD INVESTMENT?
When compared to other real estate asset types, multifamily property is considered a comparatively “safe” investment. This is because when times get tough, people still need a place to live. In fact, many people are compelled to sell their homes and relocate into rental accommodation during a recession. Relating this to recent times, when COVID-19 hit, many businesses allowed their employees to work from their homes. As a result, demand for office space has decreased. Meanwhile, the residential market has been soaring.
4) WHAT ARE THE DIFFERENT ASSET CLASSES WITHIN COMMERCIAL/MULTIFAMILY REAL ESTATE?
- Single Tenant
- Power Center
- Regional Shopping Center
- Neighborhood Retail Center
- Strip Centers
- Single and multi-tenant
- Warehouse / distribution
- Flagged / Unflagged
5) HOW DO I DETERMINE WHETHER A DEAL IS RIGHT FOR ME?
Desire to invest passively – First, an investor must decide if they want to be passive or not. Hands-on investing can be a full time job. Without time, knowledge, and experience it can be difficult to produce returns like some passive investors realize when selecting a firm to invest with. When passively investing, Sponsors oversee the entire property including: taxes, financing, and accounting, while investors just receive fixed profit shares. Due to the passive nature of the investment, liability is limited to the amount invested.
Do you have faith in the Syndicator? Investing in a syndication as a limited partner (LP) leaves the investor powerless. This is because the syndicator (sponsor) makes all the management decisions. Therefore, investing in a firm that you not only trust, but has a successful track record remains vital.
Tolerance for risk – Various real estate investments include a wide range of risk/reward. Low-risk investments are usually stable assets with conservative leases in a building that is close to fully occupied. Value can be injected into properties like this by lowering operating expenses, increasing rent, and potentially doing renovations. Other investments, such as ground-up construction, take longer to complete the exit strategy. Due to the increased complexity of a deal the risk is increased. However, the return for ground-up construction can be much more lucrative than value-add.
Not all investors have the same interests or risk appetite. As a result, not all investors want the same investment strategy. Reach out to one of MarketSpace Capital’s representatives, and we will be happy to answer any questions you have on the Real Estate Investment Strategy right for you.
MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
Disclaimer: *For sold properties, actual sales price is reported. For active investments, the Estimated Current Value is based on the Managing Member’s estimate of current value. Recent acquisitions are generally valued at the acquisition price. Values may be internally prepared. This web-page/website is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of any offering of MarketSpace Capital.