Multi-family assets cover a wide spectrum of niches, such as apartments and mobile home parks, and investment strategies, such as new development, acquiring stabilized assets, seeking value-add opportunities, or repositioning of highly distressed assets. Each niche has its own unique characteristics and each strategy has its own risk factors.
Balance of Risk and Reward
One particular strategy has my favor because it has both the upside characteristics of a new development or distressed turnaround, but the short-term solid fundamentals of a stabilized asset. That strategy is acquiring value add properties. In the 2020 article, 3 Business Models of Multi-family Investing, we highlight the characteristics and benefits of acquiring distress, value-add and stabilized assets. We concluded that we prefer value-add because it is a sweet spot of receiving rewards but managing risk. I will explain.
Cash flow is King
Especially, in these uncertain times, it is important to have cash flow. Some say cash is king; we believe cash-flow is an even higher authority. While cash gives you buying power to acquire resources, cash flow allows investors to ride out any storm. Even with the most lucrative investment in which an investor could potentially have a great pay day on the sale, without cash flow to ride out difficult seasons that impact income or cause heavy expenses, an investor will have to exit the investment or suffer bankruptcy.
This happened in 2009 when many speculators who brought houses with the intent to sell them at higher prices ended up suffering because the market eventually slowed down and they could not realize their return or cover their debt service. This hurt especially those whose whole business model was built on making money from the sale and not collecting cash flow. Value-add strategies first and foremost provide cash flow on day one, allowing the investor to collect rental income and build reserves for rainy days.
Upside Potential
When investors find value-add opportunities, they can mix the benefits of cash flow on day one with the potential to grow net operating income (NOI) by a combination of increasing income or reducing expenses. This can be done in the form of physical value add (renovations, improvements to property, etc.) or operational value add (raising rents to market levels, reducing property management expenses, etc.). These are great opportunities to force equity in any multi-family investment. In fact, immense untapped value can be achieved from very simple improvements, such as improving management and raising rents modestly to closer align to the market levels. Significant upside exists for value-add opportunities.
In summary…
Any investment that benefits others, pays you during its holding period and presents opportunities to create value to later sell for a good profit is a win. The value-add approach of acquiring a performing asset that produces sufficient income to cover debt service and produce positive cash flow is a win when investors can identify those added opportunities to grow the assets value.
In real estate, those great opportunities are found in acquiring cash-flowing multi-family apartments with decent occupancy and value-add potential. This is the approach that Robinson Capital takes in our investments with the priority to first protect investors’ money and then to create wealth for all stakeholders.
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