Multi-Family Investing: The Impact of Inherent Bias

Posted by Nick Gonzalez
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For the past seven years, I have lived, breathed, and gotten to know multi-family investing as both a broker and as an investor myself. I have found several trends in investor’s mindsets that influence the way these deals are approached, and ultimately affect their outcomes. I believe that analyzing these tendencies can be beneficial for both inexperienced and seasoned multi-family investors alike.

Unless you are dealing with a trophy property in an irreplaceable market, multi-family deals are all about yield. Yield means something different to everyone, but I always look at it as what I can capture out of my invested dollars.

Everyone wants a bargain, but the thing to keep in mind is to always be prudent. I discourage my clients from setting hyper-specific criteria when it comes to unit size, unit mix, property condition, etc., because sometimes the most unassuming deal is the best one and sometimes the deal with “significant upside” can be the worst.

 


"Everyone wants a bargain, but the thing to keep in mind is to
always be prudent."

 

In order to assess potential yield when approaching an investment, it is essential to remove all bias and sentiment surrounding specific properties. It is easy for people to assume the “dump” can be turned into a diamond or that the diamond is deceptively priced, but oftentimes with diligent analysis you may find that neither of these assumptions are correct.

Think about what piqued your interest in multi-family investing. Usually, the reason most of us choose multi-family investments is because of the stability they offer; most multi-family assets have a healthy percentage of renewal rates which allows us to benefit from relatively predictable revenue streams versus other asset and investment types that can create a certain amount of unpredictability.

Your risk and unit turnover will be the two biggest levers surrounding your overall return: the lower your tenant/unit turnaround is, the higher profits you will typically reap, which marries the yields advertised on A/B/C quality properties to their risk and overall value.

The cost of your average unit turnover (e.g. carpet, paint, repairs) will likely be fixed within a predictable range. However, the timeframe of how frequently you turn those units can vary wildly from property to property. This may all seem obvious, but apply this to your criteria moving forward to determine whether the pricing on the lower-end apartment complex with mostly month-to-month leases and higher turnover at a 10-12% return matches the same risk/reward of the class B complex at an 8% return with lower turnover. This level of analysis will hopefully help you eliminate your inherent bias as you invest in multi-family properties.

Lastly, don’t be afraid to walk away from deals. I usually prescribe to a three-strike rule when analyzing a property for either myself or for a client. By the time I hit strike three, I know we need to move on. Right now the multi-family marketplace is very “hot” in North Carolina as well as on the national level. Because of this, there are not as many investment opportunities available, often making it hard to walk away from deals. But ultimately, if you find yourself having to solve puzzles to make the numbers work, it’s time to move on.

Hopefully this gives you some insight into how to approach multi-family investments. In the next part of this blog series, I will be diving into specific examples of how to analyze different multi-family investments from a financial standpoint as well as common mistakes I see on both broker and investor pro forma statements and assumptions. In the meantime, Download our  to learn more about some key aspects to CRE investing!

Nick Gonzalez

Written by Nick Gonzalez

Nick’s core focus is on investment property sales, working with investor and institutional clients in both acquisition and disposition of real property and businesses. Nick assists in all aspects of bank-owned and distressed sales, including initial asset evaluation, creating action plans and strategy for management, stabilization, and disposition.

In commercial real estate, multi-family housing, investment in multi-family housing