Are you eager to venture into the world of multifamily real estate investment but find yourself puzzled about what constitutes a sound investment? In this insightful blog post, Cody Charnell, a seasoned investor and multifamily real estate broker, takes us on a detailed journey through the process of analyzing an 11-unit apartment building. By the end of this analysis, you’ll gain valuable insights into the key factors to consider when evaluating a potential multifamily investment.
Understanding the Property
Cody’s analysis begins by introducing us to an 11-unit apartment building recently acquired in Long Beach. The property was listed at $4.25 million but ultimately closed at $3.9 million, showcasing the potential for negotiation in the real estate market. It boasts a generous 6,646 square feet of living space on a 7,275 square foot lot, an impressive size for the area. Located on the peninsula, the property spans three separate parcels, adding an intriguing dimension to its uniqueness.
Unit Mix and Rents
Cody delves into the unit mix and rents, shedding light on the property’s current state. All 11 units are one-bedroom, one-bath apartments, with an average size of approximately 604 square feet per unit. Notably, the current rental rates range from a low of $1,100 to a high of $1,950, significantly lower than the market potential for this upscale neighborhood. The listing agent suggests a market rent of $2,500 per unit, a figure that could be surpassed with a deluxe remodel. Cody emphasizes that investors often seek properties with low rents as they present opportunities for substantial rent increases and, consequently, enhanced property value.
Property Features
The property features 11 separate electric meters and gas meters, offering individual billing for tenants. Additionally, it boasts seven garages—a precious commodity in the area. These garages can be rented for additional income or converted into accessory dwelling units (ADUs), further expanding the property’s potential.
Analyzing the Deal
To assess the property’s viability, Cody begins with a crucial metric: the gross rent multiplier (GRM). He calculates the GRM based on both current and potential rents, demonstrating the importance of this initial filter. With a purchase price of $3.9 million and current annual rent income of approximately $183,000, the property’s GRM stands at 21 times gross based on current income. However, considering a market rent of $2,500 per unit, the property could potentially generate $330,000 in annual gross rents. This projection yields an impressive GRM of 11.8, a promising indicator for the deal’s potential.
Pro Forma Analysis
Cody proceeds to introduce a pro forma analysis, a comprehensive tool used to evaluate the property’s financial performance under different scenarios. He explains the importance of achieving a debt coverage ratio (DCR) of 1.2 or higher to secure commercial financing for properties with more than five units. In the case of this property, a down payment of approximately 74% is required to reach the desired DCR, a substantial investment that may deter some buyers. Cody also mentions the possibility of utilizing a bridge loan, albeit with a higher interest rate and different DCR criteria.
Summarizing the Deal
In the final stage of analysis, Cody provides a comprehensive deal summary that takes into account various factors, including the purchase price, gross rent multiplier, expenses, cash flow, and exit value. With an initial purchase price of $3.9 million and a projected exit value of $5.1 million achievable through unit renovations to market rents, the property reveals substantial potential. The analysis indicates a remarkable 31% return from appreciation, coupled with significant cash flow and tax benefits, resulting in an impressive total return on investment exceeding 37%. It’s essential to note that this scenario pertains to the first year, assuming the buyer can acquire and renovate the units to realize these new rents. Most investors typically allocate 18-24 months to achieve these desired returns. However, once the asset is stabilized, the bulk of the hard work is behind them.
Conclusion
Cody Charnel’s meticulous analysis of this 11-unit apartment building exemplifies the depth of consideration required when evaluating multifamily real estate investments. While this analysis may appear complex at first glance, it underscores the importance of thoroughly assessing various factors to ensure a successful investment. If you’re intrigued by this process and eager to learn more, Cody welcomes you to explore his channel, where he regularly conducts such analyses and imparts valuable knowledge to aspiring investors.
In the world of multifamily real estate, understanding the intricacies of property analysis is key to unlocking lucrative investment opportunities. Cody Charnel’s expertise and guidance in this blog post provide a valuable foundation for anyone embarking on their journey in multifamily real estate investment.
