In a recent series of articles we have looked at crowdfunding for real estate investors. In this article we would like to explore some tips and tricks for investing in real estate. Specifically, we will look at self-storage and multi-family properties.
Self-storage real estate is a sub-sector of the commercial real estate market. Common services in the industry include renting storage units to renters on a month-to-month basis. The following are factors that individuals should consider before investing in this market.
Self-storage is driven by cash flow and cash flow should drive the investment decision. Potential investors should review the trailing three years of cash flow and compare that with the current rent roll. It’s important to look for a pattern: Is cash flow rising or declining? If income has been declining, why? The answer to that question may signal that a buyer should be more cautious. If cash flow has been rising rapidly, this may indicate that you need to be more aggressive in your pricing.
Unlike other property types, self-storage facilities make a distinction between physical occupancy and economic occupancy. The physical occupancy of a facility might be 85%, but if the owner is giving deep discounts on rents, the economic occupancy might only be 60% of potential gross income. That’s an important distinction that can affect loan underwriting.
Borrowers who need to obtain financing for an acquisition must be prepared for stringent underwriting from the lender. For example, some buyers might be willing to be more aggressive on price, because they plan to put some “sweat equity” into a deal to make repairs or operations. However, if they go to a lender for financing, that lender still may require the buyer to maintain a certain level of cash reserves for maintenance costs or maintenance fees — even if the buyer plans to self-manage the property.
There is a huge supply of self-storage units in almost every major city in the U.S. and most midsize markets as well. It is extremely important that you select a market that allows virtually no further construction of self-storage facilities. Otherwise, you may find that the occupancy can never rise above a certain level since there is always more supply being brought on the market. These barriers to entry can include no correctly zoned property, or a high price per square foot for suitably zoned land, that makes building a new facility uneconomical.
We are entering into a period of unequalled dislocation in lending markets. Many commercial real estate properties, maybe most, will run into trouble in the coming years. As their existing notes are unable to be renewed, since they paid too much for the property, there will be a tremendous number of REO properties on the market. This also brings a high level of desperate sellers. This may present an opportunity to buy a quality self-storage facility for pennies on the dollar.
A seasoned self-storage broker or consultant can help you navigate the market and choose the winners over the losers. There’s nothing like solid, proven experience in the brokerage world to guide a buyer along the right path.
Multi-family real estate is normally comprised of five or more units and fits into various classifications, such as A, B, or C. If you are considering investing in a multi-family property, either via crowdfunding or directly, the following are points to consider.
It’s been said many times before, but location is of the utmost importance for real estate investors, and even more so when investing in multi-family properties. With more tenants, each and every unit will need to appeal to renters. For many renters, location is generally the most desired criteria. When investing in multi-family properties, investors should pay attention to high-growth, high-yield areas where properties are in high demand and well-maintained neighborhoods.
The best way to scan through potential deals is to crunch the numbers and determine (approximately) how much a specific multi-family property can make you as an owner. You do this by calculating the difference between expected income (rent payments, storage fees, parking fees) and expenses (repairs, maintenance, etc.). When you do not have access to some information, such as a clear neighborhood comp, you can use the 50% rule. Simply take the expected income and HALVE it, this then becomes your estimated expense number. The difference between your estimated monthly income and estimated monthly expense is your net operating income (NOI).
The estimated mortgage payments are brought into the equation in this next step, by calculating your estimated monthly cash flow. To find out how much money you’ll actually be putting into your wallet on an ongoing basis, you want to subtract the monthly mortgage payment from the NOI of your prospective multi-family property. This calculation will provide you with your cash flow estimate, helping you determine whether or not the investment will be worthwhile.
The next step is to evaluate the property as a whole. Investors should take into consideration the number of units on the property, including the number of rooms in each unit. Beginner investors should begin their real estate search focused on three types of multi-family properties: the duplex (two units), triplex (three units), and four-plex (four units). These types of properties not only offer the most upside with the least amount of risk for beginner investors, but they are generally more affordable.
Every situation will differ when financing real estate, especially multi-family properties. For example, an investor may choose to live in one of the units while renting out the others. This would allow the investor to qualify for owner-occupied financing. This means the income from the second unit will be factored into the lender’s qualifying ratio. Investors need to also consider their credit score when contemplating financing options, as this important number will greatly influence the qualifying process. In general, lenders will look at three components: credit, debt-to-income ratio, and down payment.
There is one more question when evaluating potential multi-family properties: who is selling the place? Because the purchase price can vary greatly depending on the seller and their motivation, it’s imperative for investors to gain an understanding of who they’re dealing with. A bank-owned property is dealt with much differently than a for-sale-by-owner property, which means there’s potential for cost savings.
Akshat Bhargava contributed to this report.
 Alexander Harris & Beth Mattson-Teig, 12 Tips For First-Time Investors in Self-Storage Real Estate The Sparefoot Storage Beat(2015), https://www.sparefoot.com/self-storage/news/44-advice-for-self-storage-investors/ (last visited Oct 19, 2018).
 How To Buy A Self Storage Facility Properly, How to Buy A Self Storage Facility Properly – Self Storage University, https://www.selfstoragesuniversity.com/articles/how-to-buy-a-self-storage-facility-properly.php (last visited Oct 19, 2018).
 JD Esajian, Investing In Multi-Family Properties: The Complete Guide Fortune Builders(2018), https://www.fortunebuilders.com/multifamily-investment-property/ (last visited Oct 19, 2018).