Multifamily Investors Control Their Own Destiny
Real estate investors buy their first property for many reasons. For most, it boils down to independence, self-reliance, and control of their future. While most investors start out relatively small with single-family wholesale deals, residential fix and flips, or buy-and-hold rentals that they manage themselves, some opt to go big from the start with commercial real estate, often multifamily developments.
For those investors, the timeline to “freedom” from time constraints or financial limitations can be much shorter than for those who start out smaller, but the risks, like the deals, often feel bigger as well. For example, when Brad Sumrok, founder of Sumrok Multifamily Mentoring, walked away from his engineering job in 2005 thanks to his successful apartment investments, he knew he had something he wanted to share. “I will never forget the way I felt when I was able to quit a job I actually hated and walk away from that corporate life,” he recalled.
“With apartments, virtually anyone can replace their income and walk away from their job within three to eight years,” said Sumrok passionately. His preferred mode of investing involves raising money to do these large deals and using the time-honored methods of “leveraging other people’s time, other people’s money, and other people’s experience” to make big things happen fast.
“I don’t manage the properties myself, for example,” he explained. “I find good deals on good apartment buildings that meet specific criteria and then we raise money to purchase that building and immediately begin making improvements to create a better situation for the tenants that, in turn, creates better profits and cash flow for the building.”
It’s a Small World, After All
Multifamily investors add value to their investments in ways that are distinctly similar to the strategies single-family investors use. They may renovate or rehab a building the same way a flipper might fix up a single-family property. Wholesaling is also an option, although few investors realize this.
“Investors often don’t realize that you can wholesale big properties the same way you wholesale smaller ones, and often not for substantially more money than you would spend getting a single-family residence under contract,” said Think Realty Resident Expert Pamela J. Goodwin, one of the country’s premier commercial real estate experts. She noted, however, that you will seldom hear the process referred to as “wholesaling” in the commercial space. You can read more from Goodwin on this topic on p. 34.
Multifamily investors also leverage the same types of market analysis that single-family investors do when it comes to buying in the path of progress, investing in growing metro areas with solid economies and jobs markets, and evaluating areas in advance to make sure their target tenant population will not only find the area desirable but also affordable.
Sumrok’s primary strategy involves adding value to apartment buildings to increase rents and occupancy. “We are careful not to over-improve the property,” he said. “We do moderate, meaningful upgrades that will improve the tenants’ experience while bumping rents between 10 and 20 percent over the next two years of ownership.” Those types of improvements generally include improving amenities like the pool area, the clubhouse, the fitness center, or the laundry center. “We also focus on interior upgrades such as new flooring and new appliances in some or all of the units as well,” he said.
Many Hands Make Successful Investments
If apartment investing simply seems too big to handle on your own, Sumrok has a solution. He believes apartment investing should nearly always be handled with partners. In 2016, Sumrok and one of his investment partners reported raising $22 million from private investors to buy $90 million worth of apartment buildings. Then they started building a team.
“We hired third-party professional management companies with a proven track record in those properties’ specific markets and worked with proven brokers, lenders, attorneys, and contractors that specialize in those types of assets,” he explained. However, Sumrok didn’t start with deals anywhere near $90 million in value; his first deal back in 2002 was a 32-unit property that cost just under $1 million.
Stick with the Formula That Works for You
One thing that stands out about multifamily investing compared to single-family is that it has, by its very nature, a lot more moving parts. Sumrok explained he deals with these potential complications by focusing on certain multifamily assets that fit his model for investing rather than focusing on finding new and different opportunities across different asset classes.
“If you came to me today and said, ‘Hey, Brad, I’ve got a great deal on a mobile home park and you’ll get 40 percent return,’ I’d say, ‘You know what? I don’t really understand or know mobile home parks. Underwriting a mobile home park is quite different than underwriting an apartment complex, so I’m not going to buy in,’” he explained.
Sumrok has stuck to this philosophy for more than a decade. “Since 2002, I’ve been buying the same types of assets, just in different markets. We cater to tenants making $30,000 to $60,000 a year and that is an area of the market where there is always room to add value because there is virtually no new construction in that sector but that population – and the potential – is always growing.”
A building with more than one rentable space. Also known as an apartment complex.
Investors use property classifications to communicate about the quality and rating of a property using a common definition.
A: Class A properties tend to be the highest quality and charge the highest rents in the market. They are usually less than 15 years old, have modern amenities, tenants with relatively high incomes, and low vacancy rates.
B: Class B properties tend to be slightly older than class A properties and charge lower rents than A properties do. Buildings are usually well-maintained, but may have minor deferred maintenance issues.
C: Class C properties are usually more than 20 years old, located in relatively undesirable locations, and need renovations and updates to be competitive in the market. They tend to charge the lowest rents as well.
Stabilized Properties: These properties meet the following characteristics: fully leased, market-rate rents, minimal and staggered tenant turnover, minimal improvements necessary to maintain current standard of operation. Stabilized properties tend to be easier to finance.
Brad Sumrok is the founder of Sumrok Multifamily Mentoring. He has been buying and improving apartments since 2002 and may be reached at email@example.com.