Multifamily real estate owners have the ability to increase cash flow and, ultimately, the NOI by increasing income or decreasing costs. There are many approaches an owner can take that will form each property’s unique business plan.
Multifamily real estate owners have the ability to increase cash flow and, ultimately, the NOI by increasing income or decreasing costs. There are many approaches an owner can take that will form each property’s unique business plan. To achieve the returns investors seek, many real estate owners acquire value-add deals because they offer the potential of both long-term asset appreciation and the opportunity to provide ongoing cash flow to investors.
Regardless of the type of asset that is acquired, a solid business plan needs to be established upfront to evaluate the strategies that have the potential to increase income and decrease costs on the asset so that the owner can maximize investment returns. This article outlines five components every multifamily real estate business plan should comprise.
1 | Conduct market research
Before investing in a multifamily property, it’s essential to research the market thoroughly. This includes analyzing the local rental market, vacancy rates, rental rates, demographics, and economic trends in the area. Collecting market data will help the owner determine the potential demand for the property, identify any areas of oversupply, and understand the competitive landscape. Additionally, visits to the market are essential during this research stage. Meeting with other market participants, touring adjacent properties, visiting the Chamber of Commerce, and exploring the local scene is critical to ensuring that investing in the market is the right decision for the owner’s investment goals.
2 | Analyze the current marketing strategy
A comprehensive review of the property’s past marketing efforts may be helpful in uncovering the property’s potential. For example, one reason the property’s vacancy rate is excessively high could be attributed to sub-par marketing. Checking whether the property has a website that is easily navigable and gives potential renters a positive view of what it would be like to live there is an essential step to understanding the current property owner’s marketing efforts. Also, reviewing where the property is advertised is critical to understanding whether the current owner showcased the apartments on the best sites for that market. Marketing is also an essential aspect of retaining tenants. Community events and social media can assist in keeping lease renewal rates high and result in less unit turnover. Determining whether activities or other efforts were organized for current tenants can also shed light on whether there is an opportunity to renew current tenant leases.
3 | Identify value-add opportunities
Once the market research has been completed, the next step is to identify potential value-add opportunities. These could include renovating units, improving common areas, adding amenities, or repositioning the property to target a different demographic. By identifying these opportunities, the owner can create a plan to increase the property’s value and maximize its potential return on investment.
4 | Develop a financial plan
With the value-add opportunities identified, creating a financial plan that outlines the costs associated with implementing the strategy is the next logical step. The plan should include a budget for renovations, improvements, or marketing efforts. Investigating ongoing expenses, such as property management fees, utilities, and maintenance costs, is also essential. It’s also important to keep in mind value-add opportunities could result in increased rent for tenants and additional fees.
5 | Determine your investment strategy
Based on the market research and financial plan, the owner will need to decide on an investment strategy. The strategy should include the target return on investment, how long the owner plans to hold the property, and the exit strategy. For example, the owner may plan to hold the property for five years and then sell it for a profit or perhaps keep it in the investment portfolio indefinitely to generate ongoing rental income.
Multifamily real estate owners realize that the best way to improve an asset’s appreciation is to increase income and decrease expenses. Creating a detailed business plan encompassing the above components will help an owner evaluate how well an asset may perform after the capital improvements and marketing strategy are implemented. The business plan will also help communicate the investment strategy to potential investors and lenders, ensuring everyone is on the same page.