In our last article, we told you about the hottest markets for new multifamily construction across the country. In fact, BAM founder and CEO, Ivan Barratt, gets asked all the time why BAM isn’t in on the ground floor of multifamily development. We share why BAM tends to steer clear of multifamily new construction and what you can gain by looking a little further afield than the newest, shiniest property, in today’s edition of the BAM blog…
Why Construction May Not be The Best Deal
With strong rental demand in many different areas, and while it can be appealing to invest in a brand new multifamily property, there is a real and definite down side to putting your investment money into new inventory. According to Ivan, time itself can be against you; as he puts it, you’re looking at a considerable time lag from when you start development to when you can rent out those units. Should the market take a turn during that time, you may lose equity faster than you can say “new development is inherently risky.” Furthermore, as we’ve noted time and again, most of the new inventory being delivered is Class A: luxury properties with high-end finishes and high rent. That doesn’t leave you much room to increase rent, and Class A often takes a hit with any economic downturn. Class A doesn’t sustain the same consistent demand and rental occupancy that other asset classes do, like workforce housing (Class B/C assets).
Instead of New Construction, Consider This…
BAM is very transparent about what we look for in a good investment opportunity. We’ve found that of the various asset classes, workforce housing carries the best risk-adjusted returns. That said, nothing worth having is easy, as the saying goes; Ivan estimates that to find that one good deal, he and his team examine close to 200 possibilities! Some of the benefits of finding the right property include consistent demand, the ability to make upgrades without getting into a heavy value-add situation, rental growth, and more. Unlike Class A properties, workforce housing has been shown to weather economic downturns better than their counterparts. Workforce housing consists of necessity-renters such as service workers, teachers, government employees, military members living off-base, and more.
Finding a Multifamily Investment Diamond in the Rough
If new construction isn’t going to be the best bet, how do you find one of these diamonds in the rough? You look through plenty of possibilities and do due diligence. One of the most important factors is that Ivan and his team find multifamily investment properties that are already being run like a solid business: it has steady cash-flow, but there are opportunities to improve efficiency and increase profits. Location also matters, regardless of what market you’re in. Look for good schools, good transportation, access to jobs, and away from high-crime areas. You’re looking for a property that your renters want to live in and where they feel safe sending their kids to school. It’s also important that the area shows growth potential.
The BAM Bottom Line: Although new multifamily development can seem like a tempting investment, it’s inherently more risky than other multifamily assets. BAM prefers workforce housing that will see consistent demand and occupancy and be able to weather any economic storms.