At the most recent Apartment Investor Academy Meeting (Maximizing Your Building’s Potential in May 2010), we explored ways to enhance the value of an apartment building once you own it. I am frequently asked how best to assess the relative value of one building versus another when buying a multi-family property. Should you base an investment decision solely upon cash-on-cash return or try to buy distressed assets at steep discounts off the asking prices? There are many factors to consider.
I am a firm believer that you make money in real estate by buying right. While managing your property efficiently and retaining quality tenants are important aspects of enhancing the value of a multi-family property you own, the first step is making prudent decisions regarding a property you choose to buy. That does not mean simply finding the lowest price per unit, the highest cap rate or routinely submitting “low-ball” offers.
The first step is to clearly define your investment parameters, goals and priorities and to understand the relationship between risk and reward. There is no standardized investment strategy that everyone should adhere to since buyers have different resources, expertise and comfort zones. It is important to consider the following factors: your age or investment horizon, the degree of risk you can tolerate, the level of involvement you want to have in managing properties and your expectations for cash flow and appreciation. Properties that generate the highest cap rates usually involve greater risk to your cash-flow stream and require a more pro-active role in maintaining and managing them. You can expect higher tenant turnover and collection problems and generally lower rent and value appreciation over time for “C”- quality assets in marginal markets. Those who are seeking greater income stability and upside potential should focus on well-positioned properties located in areas with strong market economics and demographics and limited competition.
The best investments do not linger on the market for long and are generally not being offered at “fire sale” prices. While it is vital to fully assess the current rents and operating expenses in relationship to market trends, offers should be based on market realities, not simply targeting a perceived “discount” off the asking price.
