Updated: May 17, 2022
Aside from cash flow (which is extremely important), investing in multifamily assets offers investors the opportunity to make multiples on their capital. While many people seek modest returns and follow the slow path to wealth, investing in "the right multifamily assets" provides the ability for extreme growth. Of course, this comes with a caveat; in order to multiply capital, one must find great deals! But while great deals are hard to come by, it doesn't take a whole lot to produce life changing results.
In multifamily commercial real estate (5 units and more), the concept of forced appreciation gives way to this unique opportunity. Forced appreciation, simply means commercial real estate investors have the ability to force assets to appreciate in value.
Because every annual dollar of net income has a direct effect on value, as investors increase net income, they also increase the value of the specific asset. This is a powerful concept and allows investors to literally write their own futures.
Say you find a 50 unit MHP at $1.8M, with rents below market by $75. After acquiring the property, you execute on adding value to the community by installing a dog park, a playground, BBQ pit, etc. Alongside these changes, you also streamline management, as well as enforce rules to improve the overall experience of living in the community. As a function of these valuable changes and to make it a win win, you also increase rents by $75 to move the property closer to market rate rents.
Assuming everyone pays, this financial change immediately sends $3,750 per month and $45,000 over the year to the bottom line/net income. And because commercial properties are valued as a multiple of their net income, this change increases the value of the asset in a big way.
In fact, if the local cap rate was at 7%, this change would increase the property value by over $642,000. Assuming you put 25% down or $450,000 to acquire the asset, this rent increase would multiply your initial capital by over 100%.
It's in this way, which multifamily/commercial investors can literally multiply their capital!