Multifamily investing can be a very profitable business venture, but to maximize your property’s value, it’s important to understand the full landscape. A key variable to consider when evaluating your investment options is whether or not the location has rent control, explained Chris Cobb, a sales associate at Beck Partners.
While cities like New York, San Francisco, San Diego, Washington D.C. and Houston are often top of mind for multifamily investors, a great opportunity exists in the Gulf Coast because the area has no rent control.
“Those other markets are very saturated,” Chris said. “So, if you’re an institutional investor with capital to spare, the Gulf Coast has a lot of great markets such as Pensacola, Mobile and Tallahassee to break into. There’s not as much competition, and you’re still going to be able to make some pretty good returns.”
No Rent Control
All rent control laws vary, but for the most part they set a cap on how much a landlord can increase the cost of rent for a property. From a multifamily investor standpoint, these laws can make it more difficult to maximize profits.
The best way to increase the value of your multifamily property is by raising the rents per unit, Chris said. There are other ways to increase the margins, including decreasing the expenses on the property, but those tend to be more complicated.
“Obviously decreasing expenses is important, but for the most part, decreasing the expenses is a lot more of a surgical approach,” Chris said. “You really have to get deep into the weeds, and, in a lot of cases, most of the operating expenses are set and you can’t reduce them. You can’t reduce the property taxes, for example.”
The Math Behind It
If a multifamily investor were to purchase an apartment complex with 100 units in the Gulf Coast, it’s reasonable to think you could raise the rent by $25 per unit over the next 12 months. If the investor took that approach, they would accumulate in an additional $2,500 in gross income.
“If you want to apply a basic 10% cap rate to that, that’s $25,000 in value you’ve just created for the building,” Chris said.
Conversely, if an investor is operating under a strict rent control environment and must increase profits by reducing expenses, they would likely need to do so by reducing the property insurance cost. This won’t yield the same return generated by raising rent.
“You’re probably only going to be able to decrease that by $100 per month, and that’s only about $1,200 for the year. So, if you apply the same 10% cap rate, you’re only increasing the value by $12,000,” Chris said. “It’s a lot harder to create value when you’re reducing expenses versus increasing the rents.”
Beck Can Assist
Beck Partners has experts like Chris who have the market knowledge that is necessary when it comes to multifamily investments. Team Beck has fostered relationships in the Gulf Coast, which allows us to give our clients a unique advantage in the investment market.
“We know a lot of the product that’s not on the market, but we have sellers who are willing to take offers,” Chris said. “That’s where we can bring the most value, because we know the people who don’t really want to list their property yet, but are thinking about it, and it’s much better for a buyer to work one-on-one with an owner rather than having to compete to buy the same property, which will really thin out the margins.”
So, no matter where you reside, if you’re interested in the investment opportunity that awaits in the Gulf Coast, Beck has the insights and resources necessary to assist you.