Multifamily investments have insane scalability and raising net operating income through value-add activities can create immense value for investors. For illustration, I want to provide a hypothetical example.
You become a passive investor in an apartment syndication for a 144-unit in a growing neighborhood in Jacksonville, Florida. The average rents of $1,050 for the all-two bedroom complex is are currently below the market level rents of $1,200. Over the next three years, your sponsor plans to turn the units and rent closer to market level. What increase in value could that create?
Not taking into account capital improvements needed to raise those rents, and conservatively stating that half of those 144 units are not rented at $1,200, the team has created an additional $10,800 in income per month and $129,600 per year. Using a capitalization rate – which is the current rate at which the market is willing to pay for net operating income – of 6.5%, that $133k increase in net income translates to nearly $2 million dollars in additional valuation of your investment! Not too shabby.
Remember, this is only raising the rents of half of the apartment’s units by $150 per month over a few years. This does not include fully raising rents on all remaining units, adding other sources of income such as storage and optional assigned parking or reductions to operating expenses. The point here is that in growing markets where the demand of housing is increasing, immense value creation can be achieved when active and passive investors alike recognize the unique opportunities to increase net operating income.
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Rodney Robinson II