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3 Reasons It’s a Good Time to Be Investing in Multifamily Properties

Although investing in multifamily properties can be expensive when compared to purchasing a single-family rental property or home, many investors are finding success with multifamily rentals. This article is for anyone who has ever wondered, “Are rental properties a good investment?” Read on to explore three reasons savvy real estate property owners choose to purchase commercial real estate and agree multifamily rental properties are a good investment.

Reason #1: Rising Construction Costs Make Purchasing Commercial Real Estate More Profitable Than Single-Family Properties

In the past few years, the costs associated with new construction have increased across single-family and multifamily markets. Industry-wide construction cost increases are often due to a number of different factors, including normal inflation and international trade considerations like high tariffs.

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A 2018 article published by the Associated General Contractors of America reported rising costs of materials such as fuel, iron, steel, softwood lumber and asphalt. The average cost increase for construction materials was estimated to be 7.4% compared to 2017. Despite relatively stable costs in 2019, some industry experts estimate more cost increases in 2020.

Rising land costs are another factor making it more expensive to build single-family homes. Lot prices typically increase along with a typical rate of inflation, but the past years have seen more rapid lot price increases.

A final issue contributing to rising construction costs is a labor shortage in the construction industry. This shortage is likely due to a combination of factors such as historically low unemployment rates and a large segment of the workforce reaching retirement age.

Mitigating Rising Costs With Multifamily Housing

The rising costs impact all facets of the housing industry. Investing in multifamily properties will not completely prevent investors from being exposed to these rising costs. However, purchasing commercial real estate with multiple units often leads to greater ROI overall and increased monthly cash flow. As a multifamily property owner you’ll be, in a sense, getting more “bang for your buck.”

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Photo credit: Urban Institute

The upfront expense of a multifamily property may seem intimidating, but the overall value and earning potential makes it a lucrative real estate investment option.

Reason #2: The Housing Supply Crisis Makes Rental Properties a Good Investment

Due to rising construction costs, fewer houses are being built. With overall low supply, demand is driving up prices and houses are selling quickly once they’re listed for sale. The low housing supply and competitive market cause potential buyers to spend more time renting because they simply can’t find the right house or they can’t afford inflated housing prices.

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Although housing supply is currently low, demand is very high. The two largest generation groups, baby boomers and millennials, are both in the market. In some cases, these two groups may even be competing with one another for similar houses because millennials are looking for smaller, more affordable starter homes, and baby boomers are looking to downsize.

High demand and low supply in the housing market is ideal for property owners with multifamily rental properties. As potential homebuyers are forced to wait longer and pay more for the perfect house, they’ll spend more time renting. As a result, the demand for apartments, townhomes, condos and other multifamily buildings will rise.

Reason #3: Lifestyle Changes Among Younger Generations Encourages Individuals to Rent Longer

In addition to the competitive housing market forcing people to forgo home buying in favor of renting, there is a growing population of people who simply prefer renting. Millennials, especially, prefer renting an apartment or townhome instead of owning a house.

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Purchasing commercial real estate now while Millennial and Gen Z buyers are still on the rise makes rental properties good investments that will quickly pay off. Many sources speculate about the reasons millennials prefer renting:

  • They don’t want to deal with the responsibility and hidden costs of homeownership.
  • They have more student loan debt and struggle to save for a down payment.
  • They marry and start their families later than previous generations.
  • They value mobility and travel and don’t want to be tied down to one location.
  • They want to live in popular urban areas without the high cost and risk of investing in real estate.

There are many more reasons for people of all ages to stick to renting over diving into homeownership. As renting continues to be popular among younger generations, multifamily property owners can benefit from the higher demand for rental properties.

Are Rental Properties a Good Investment For You?

No matter your goals or life stage, purchasing multifamily property to rent out can be one of the best investment decisions you ever make. If you want to learn more about investing in multifamily properties, reach out to our team. We are happy to answer any questions you have about the multifamily real estate industry.

Take a look at our current listings to find potential properties for your next investment! Whether it’s your first investment or your 50th, we’ll be right by your side when you make the decision to purchase commercial real estate.

interview with abel gutierrez.

Expert Advice on Borrowing From Mortgage Brokers vs. Banks

Commercial real estate investors might want to keep an open mind when looking for financing options for their property investments. Traditionally, investors would go from bank to bank to “shop around” for the best rates and loan financing opportunities for their latest investment. Now, mortgage brokers do the work of finding your best options based on the property and your financial options. Find out how this works from an expert in both industries.

Abel Gutierrez, owner of Splice Funding Solutions, worked as a Agriculture/Commercial lender in the corporate banking industry before becoming a mortgage broker. Splice Funding is a full-service lending operation, specializing in arranging, placing, funding and brokering commercial loans nationwide. They also offer consulting services to investors looking for financing options for a wide range of commercial projects. Splice Funding is proud to be able to put at least one proposal in front of every potential borrower, even when the situation, location or the property might look unfavorable to others.

Learn More About How Mortgage Brokers Help Commercial Investors

How is a Mortgage Broker Different Than a Traditional Banker or Lender?

Banks have one credit policy and one underwriting criteria, so if that doesn’t fit the project, the investor needs to go to the next one and the next one. Sometimes banks are able to provide a relationship-type proposal that goes outside of the loan itself to convince the borrower to do business with them. This includes additional services, like deposits, cash management and merchant services. Our firm doesn’t offer those services unless one of our lenders works with a traditional bank with those capabilities.

As a mortgage banker we have access to multiple lenders, which is a significant advantage to the potential borrower because we can come up with multiple proposals for them to pick from. When the mortgage broker helps a buyer order an appraisal, it’s owned by the borrower, and we can use that same appraisal for multiple scenarios. However, a bank will keep that information so you can’t necessarily shop around with it.

Something that surprises customers the most about a lending entity like Splice Funding is that you end up with the same fees as you would if you had worked with a bank. The breakdown of pricing changes when you work with a lender, but it is very much in line with what the bank would charge. This shouldn’t deter people from working with either type of lender.

What Do You Wish More People Knew About Commercial Lending?

I wish more people knew that banks are not the only place to go for financing. If borrowers are told no by a bank or given a crazy 20-item list to accomplish before they can purchase real estate, they should know there are other alternative financing sources.

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Many people are well-informed on the subject because there’s a lot of information on the internet. They just need to be walked through the process when they’re ready to jump in, and that’s what we do very effectively at Splice Funding Solutions. Banks don’t always take the time to explain the lingo, but since I was in corporate banking for 19 years before establishing a mortgage broker business, I have the knowledge customers are looking for and am happy to explain everything.

Why Should Investors Use a Mortgage Broker Like Splice Funding?

It’s our goal to get your transaction approved and make it happen. Banks need to be loyal to their institution, so they’re not always looking out for your goal in the same way. When we take on a client, we look out for their best interest, similar to a realtor. We fight for the right transaction and want to get as much information about the expectations of the project up front so we can work together to meet the investor’s goals.

When You First Meet With a Client, What Do You Look For in Terms of Putting a Proposal Together For Them?

When we get started with a client, it is essential that they have a commercial property in mind before starting the financing process. This is a common misconception that seems backwards to many first-time commercial property investors. They come to us wanting to know more about what they should be looking for in the market and what their limitations are. However, the commercial real estate financing process is the exact opposite of consumer real estate.

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Usually when you’re buying a home, it’s best to go to a bank and get pre-approved for financing, but in commercial financing, it is difficult to do a pre-qualification without knowing what the project is. Borrowers need to get approval for that specific project since there are more variables to consider in the underwriting process. It’s best if they come to the mortgage broker with a deal or project in mind.

The underwriting process is much different for commercial property investments because they may be looking at the building’s quality as a repayment source instead of the individual (like they would for a consumer loan). The performance of the property and whether or not it has signs or a history of solid cash flow can impact the interest rate and whether or not a loan can be approved.

Once clients have a commercial property in mind, we ask the following questions to obtain a brief summary of the transaction and the customer’s expectations:

  • How much are you expecting to purchase the property for?
  • What type of property is it?
  • Do you have financials on the property?
  • Can we get a credit report on the individual or borrower?
  • What is the downpayment expectation – how much do they want to finance out of this purchase?

Types of Commercial Properties

There are many ways to categorize properties, but the 6 main types of commercial real estate include:

  • Multifamily
  • Office
  • Industrial
  • Retail
  • Hotel/Hospitality
  • Special Purpose

The commercial real estate that is looked at most favorably for a mortgage broker is residential, multifamily, office or industrial. These usually have the most competition, so the mortgage broker can have a good chance of offering a better deal.

Location is another factor to consider when choosing a financing partner. Location can impact the price of a deal and whether or not a lender will be interested in working with the borrower. We’ve built relationships in many rural areas across the state of Iowa and beyond to combat the issue of a location outside the metro, and we’re still likely to do deals across the state, even in smaller towns.

Trends in Commercial Property Financing

Lending criteria is starting to loosen up with less strict requirements to make funding more accessible to investors. This is because deployment of capital is greater now than it was 2 or 3 years ago. This shows the economy is doing well and borrower confidence is high.

Learn More Commercial Real Estate Advice From The Katalyst Team

Our experts want to educate commercial real estate investors on all their options within the industry so they can make better informed decisions that will enhance their investment. Learn more commercial property pointers in our blogs, or check out our listings to see what properties you could get started with.

commercial real estate trends 2020

2019 Commercial Market Review: Real Estate Trends in Iowa and Beyond

In 2019, many different commercial real estate trends in Des Moines influenced the market for commercial real estate buyers and sellers. Paying attention to trends is essential for every savvy multifamily real estate investor. Find out what trends we saw each quarter in our 2019 commercial market review.

Commercial Real Estate Trends in 2019: Q1

In the first quarter of 2019, we saw the year’s lowest average price per unit across all transactions. Later on, we’ll discuss why the average price per unit is climbing across Des Moines and other Midwest metro areas. Other important takeaways from our 2019 Q1 report include:

Inverted Yield Curve

In March 2019, we saw the first inverted yield curve since 2007.  An inverted yield curve occurs when investors begin requiring a higher return on their investment within a shorter time frame. Historically, inverted yield curves indicate the potential for an economic recession within 18 months. For the past 45 years, every major recession was preceded by an inverted yield curve.

Photo credit: The Washington Post

Class B and Class C Units Outperforming Luxury Class A Rentals

Even though developers have built more and more Luxury Class A multifamily apartment buildings in the area, demand for Class B and C units has increased. In spite of the increased earning potential of a newer, nicer apartment building, Class B and C units are still more profitable. The renter-by-necessity demographic is large, and they’re more focused on finding affordable leases, not renting fancy apartments with luxury amenities.

Comparing Commercial Real Estate Trends: Q1 2019 vs. Q1 2018

When we compared 2019’s Q1 stats to 2018’s Q1 stats, we saw a decrease in overall sales volume but an increase in average price per unit from $44,444 to $52,625. Average CAP rate remained comparable in the year-over-year comparison.

Commercial Real Estate Trends in 2019: Q2

Although Q2 saw the same number of transactions as Q1, Q2 brought an increase in sales volume along with more units sold — 349 units exchanged in Q2 versus just 224 in Q1 — and an increased price per unit. Investors were purchasing bigger buildings with more units, spending more in order to see a higher return on their investment. We noted some other interesting commercial real estate trends in our 2019 Q2 report:

Iowa Thrives in Spite of Economic Concerns

The Iowa economy was on a slight downward trend, with a number of key economic indicators, such as residential building permits and average weekly manufacturing hours, performing poorly. Rent growth slowed to a national average rate of 2.5%, the lowest rent growth rate in the first six months of the year since 2011.

In spite of these economic indicators and slow rent growth, central Iowa continued to draw interest from investors across the nation, and Iowans continued to enjoy one of the lowest unemployment rates in the country, averaging out at 2.4%.

Class C Multifamily Units Experiencing Growth As Homeownership Drops

In Q2, we saw a 0.6% drop in homeownership rates and an increase in demand for Class C multifamily units. Class C units are generally older apartments with few amenities and renovations, and they’re typically located in lower-income areas.

Comparing Commercial Real Estate Trends: Q2 2019 vs. Q2 2018

We see a few differences when we compare Q2 2019 with Q2 2018. Not only did we see a steep increase in total sales volume, but we also saw an increase in average price per unit, similar to our Q1 year-over-year comparison.

Commercial Real Estate Trends in 2019: Q3

At a glance, Q3 statistics look similar to those in Q2. Our transaction count increased by one, and overall sales volume and price per unit experienced a slight increase. However, a few interesting details stood out when we collected our 2019 Q3 report:

Iowa Economy is Neutral

Although determining factors in the Iowa economy continued to trend slightly downward, certain other elements balanced out those negative effects. As autumn and winter approached, fewer building permits were issued. Agricultural markets also experienced a downturn, but the low interest rate environment helped make up the difference. The overall outcome was a neutral economic outlook.

Price Per Unit Driven Up By New Investors

As you may have noticed throughout this report, one of the major commercial real estate trends in Des Moines in 2019 was an increased average price per unit across all transactions. We saw this increase in each quarter, with the exception of Q4 — we’ll discuss Q4 below.

More than half of the buyers in Q3 were located outside of the Des Moines area marketplace. Investors who may typically buy real estate on either coast are taking advantage of low real estate prices in the Midwest. Unfortunately for local investors, newcomers investing in the area often cause inflated property prices because they are typically willing to spend more on commercial real estate.

Comparing Commercial Real Estate Trends: Q3 2019 vs. Q3 2018

2019’s Q3 saw another leap in total sales volume when compared to Q3 2018. The average price per unit also increased when compared to the previous year’s data.

Commercial Real Estate Trends in 2019: Q4

We ended the year strong with our highest overall sales volume and number of transactions. Take a look at other insights from our 2019 Q4 report:

Price Per Unit Down This Quarter

After seeing the average price per unit increase over multiple quarters, this metric dropped lower in Q4. This was due to a majority of sales in the Des Moines metro area and fewer properties purchased in more expensive suburban communities (about a 3:1 ratio in Q4). According to our data, Des Moines area suburbs are selling around $60,000/unit while the Metro is trading closer to $55,000/unit, on average.

2020 Projection: Fewer Development Completions

With the conclusion of Q4, we begin to look to the new year. Commercial real estate trends predicted for 2020 include a decrease in development completions compared to the previous 5 years.

CAP Trended Down Throughout 2019

Throughout 2019, CAP rates trended down. This real estate trend is likely due to cautious investors seeking safer investments. A property’s CAP rate represents the risk an investor takes on when purchasing a property. A higher CAP rate indicates more risk. Learn more about how to buy a property with a good CAP rate.

Comparing Commercial Real Estate Trends: Q4 2019 vs. Q4 2018

When we took a look at our Q4 2019 data and compared it to our Q4 2018 commercial market review, we saw a 118% increase in sales volume — the largest year-over-year increase of any statistic we recorded! Q4 2019 also saw an increase in average price per unit when compared to the same quarter in 2018.

Contact Us to Learn More About Des Moines Commercial Real Estate Trends

If you’d like to learn more about commercial real estate trends in Des Moines, or if you’re wondering how to use these 2019 commercial market review insights to optimize your investment strategy, reach out to our experts! We’re here to be your real estate investing resource. Browse our current listings or get in touch.

commercial real estate fracking

Real Estate Fracking: How To Get More Profit Out of Rental Properties

The concept of fracking has moved beyond the oil and gas industry and into the real estate industry. The word fracking evolved from the phrase “hydraulic fracturing,” a process where energy companies use high pressure to fracture underground shale rock in order to extract oil and gas. Learn how savvy property owners are leveraging the concept of fracking in order to take advantage of unique benefits and market opportunities.

What is Real Estate Fracking?

In the context of commercial real estate investing, fracking involves breaking up properties into smaller pieces in order to shift the business model and increase revenue. Experts leading the discussion around real estate fracking are encouraging intrepid entrepreneurs to explore its many possibilities.

“Real estate use is getting broken up into smaller bits and reconfigured in higher valuations,” explains Steve Weikal, Head of Industry Relations at the MIT Center for Real Estate. “Companies are taking underutilized or unutilized real estate and monetizing it — in ways we never thought were possible.” He cites co-working companies as one example.

Airbnb and other short-term rental concepts also exemplify the potential benefits of real estate fracking done right. One property owner in Atlanta transformed a traditional rental property into a short-term vacation rental and was able to earn an extra $500 monthly net income when compared to collecting monthly rent from a long-term tenant. And that was just a one-bedroom apartment. Imagine the potential in a large multi-family property.

How Real Estate Fracking Creates Value for Property Owners

Real estate fracking creates value by breaking a property up into smaller pieces. This can mean smaller units — fewer square feet per unit can allow for more units in a building, more tenants and more income. In comparison, the “We Living” trend is leveraging this idea with a co-living concept.

Another option for breaking properties into smaller pieces is shifting from a traditional long-term lease to a short-term rental model. For example, a building with five units may have $5,000 gross monthly earning potential if each unit earns $1,000 monthly. If a property owner transforms the same units into short-term rentals and charges $50 per night, that monthly earning potential increases to $7,500.

Of course, there are risks and expenses associated with operating a short-term rental property, but the benefits often outweigh the negatives.

Real Estate Fracking Case Study: WhyHotel

WhyHotel is a startup company that operates short-term vacation rentals in new luxury residential apartment buildings. WhyHotel partners with property owners to take advantage of the building’s “lease-up” phase. These buildings transform into pop-up hotels, generating income with short-term guests before long-term residents move into the building.

WhyHotel is able to generate income from units that would otherwise sit vacant. And by avoiding risks typically associated with buying a vacation rental property, this concept leverages the real estate fracking potential in a profitable, sustainable way.

Is Buying Vacation Rental Property a Good Investment?

Buying a destination rental property is not a requirement to experience the benefits of real estate fracking. Many creative commercial real estate concepts, such as “we living,” allow for property owners to break properties up into smaller, higher-value pieces with short-term leases. However, buying a vacation rental property can be an excellent investment. Depending on factors such as location, property size and local laws, listing a property for rent on a site like Airbnb or VRBO can earn more income than traditional long-term rental properties.

Is Buying Destination Rental Property a Good Investment for YOU?

Whether you choose to invest in long-term or short-term rental properties (or both!), you will have the opportunity to find success and generate income. If you have questions about buying a vacation rental property or any other topics related to investing in commercial real estate, reach out to our team of experts at (515) 639-0145. Learn more about how to buy a rental property, and browse our listings to find commercial properties you can buy to rent out.

commercial real estate advice

A Property Owner Shares His Real Estate Investment Tips For Beginners

We recently sat down with Joe Ekis, a local Des Moines property owner with an impressive breadth of experience within the real estate industry. From managing day-to-day operations to investing in properties and helping operate a property management company, he’s had his hand in all aspects of this type of business. In an exclusive interview with our team, Ekis shared about his experiences in the commercial real estate world, including helpful tips and advice for anyone interested in diving into multifamily rental property investing. Check out some valuable real estate investment tips he has for beginners.

Commercial Property Management Tips: Owning, Operating, Managing and More

What Role Do You Play as an Apartment Owner, and How Do You Handle Day-to-Day Operations?

Early on, I was working for somebody else and learning the property management system and career. When I stepped out on my own and bought my first commercial property, I started out self-managing. I was very hands-on — changing toilets and collecting rents and mowing grass. I progressed in my investment career, and now I own part of a property management company. We have weekly meetings where we talk about property managing, and I’ll wear both hats — owner and property manager.

What Did You Learn From Your Self-Managing Experiences?

I think starting out self-managing was a good thing because it gave me perspectives from both sides. When you can be the person in the trenches, doing the day-to-day stuff, you can talk more intelligently with the property management companies you hire later on. You can be a more informed owner/investor when you’ve done it yourself.

Was it Challenging to Give Up Your Role as a Property Manager When You Started Hiring a Property Management Company to Take Care of Day-to-Day Operations?

It’s challenging to transfer that responsibility over to somebody else. You just feel like you know it all, and you’re used to staying involved with the day-to-day decision-making. It was challenging at first, but now I can concentrate on big-picture opportunities in the real estate investment world. And I’m also older now and less inclined to want to be involved with cleaning every apartment and strapping on a tool belt to do maintenance tasks. It was a natural transition for me and my career path, but it wasn’t always the easiest transition.

Can You Talk About Some Commercial Property Management Tips From Your Early Years as a Property Manager?

I had an old boss and mentor who told me, “Spend my money like it’s your own.” I was managing a large apartment complex for this man, and he also owned the property management company. He wanted me to pretend like I owned the place. If I did, how would I make investment decisions?

Usually when you hear someone say “Spend my money like it’s your own,” it seems like you’re supposed to avoid spending money. But that’s not necessarily the case. Sometimes spending more money might be worth it in the long run because you’ll just get more value from what you spend it on. Here’s an example: Do you spend $200 to fix a 12-year-old refrigerator? The answer is no — you spend $450 to buy a new one because that’s a more cost-effective decision for the property in the end. Don’t scrimp on preventative maintenance, prolonging the life of your current appliances will pay off down the road.

What Is the Hardest Part of Being a Hands-on Property Operator?

It’s a 24/7 job, 365 days a year. If the phone rings on Christmas day at 10am and there’s a fire or a flood or a lockout, you’ve got to respond. Fortunately, when I was first in that stage, I was single and didn’t have a family. As I got older and got married and had kids, they understood that was part of my job.

On the flip side, the advantage of working for yourself is having the flexibility to do activities, hobbies and errands when most people are working their 9-to-5 jobs.

Commercial Property Investment Advice: How to Own Rental Properties

Is it Challenging to Get Started Buying Rental Properties?

When you’re first starting out, it’s tough to find deals. You need to have a good real estate agent. And making your first investment can be tough because you need to have a sizeable amount of cash upfront. My first deal was a $160,000 8-plex in 1993, and I need to provide a 10% down payment. I later sold it for double what I paid. Having a good network of people to help you find deals is one of the best things you can do.

Should Investors Explore Different Types of Properties or Stick With One Type?

In the investment world, it’s easy to want to get involved in a bunch of different things. But if you find something that works, stick to what you know. I invest in what I know. I don’t overpay. I can drive by my properties and keep an eye on them. It’s easy for me to feel comfortable about my investment decisions.

What Real Estate Investment Tips Would You Give to Beginners Looking to Get Involved?

  • Pick a market and run with it! Whether it’s apartments, industrial, mini warehouses, mobile home parks or something else.
  • The first deal is the hardest. The second deal is much easier when you’ve had a little experience.
  • Invest in the property.
  • Drive net operating income.
  • Eliminate bad expenses and make wise decisions when it comes to expenses.
  • Repeat.

Investing in a property might involve rehabbing units, tearing out 30-year-old kitchens, moving walls, updating light fixtures, changing hardware and ripping out carpet. Know your market and give people what they want. You’ll wake up one day and realize it’s not as hard as you thought it would be.

How Can Property Owners Increase Income and Decrease Expenses?

It’s easier to control the income side. You don’t have a lot of control over expenses, especially when you need to replace something like a water heater. Even though it seems kind of counterintuitive, raising rents and creating vacancies can be a great way to increase income. If a unit may cost $700 to rent, but there may be renters willing to pay $800, and that’s not something you can find out if you never have any vacancies.Another example of increasing income would be doing a $6,000 kitchen rehab on a unit. If that renovation allows you to increase rent from $700 to $800, it will only take five years to start seeing your return on investment. And you will also see the additional benefit of adding value to the property overall when it comes time to sell and decreasing yearly maintenance costs for units with new plumbing or appliances.

2020 Commercial Real Estate Trends

What Trends Are You Seeing in the Multifamily Apartment Market?

One trend we’re seeing is RUBS – Residential Utility Billing System. These systems allow landlords to bill tenants for utilities that may have traditionally been rolled into rent cost and offered as part of a “utilities included” unit. Residents seem willing to pay more when charged separately for rent and utilities than when utilities are included in the rent price.

Another commercial real estate trend is the growing quantity of investors, including institutional investors coming into Des Moines and other secondary and tertiary markets and inflating property costs.

Technology is driving trends. Marketing and advertising have changed drastically along with technological advancements. In 1993, you would have to look in the Sunday newspaper to see a list of available apartments. Convenience stores and grocery stores would have apartment catalogs on a rack. Technology and the internet have made print advertising for apartments archaic.

Do You Have Any Final Pieces of Commercial Property Investment Advice?

First of all, just dig in and grind it out and do it. Don’t sit around reading books about it. Educating yourself is important, but at some point, you just need to do it.

If you’re using traditional financing options, consider what a banker would look for in terms of risk and reward for any given deal. Know your stuff, know your numbers and be involved.

Learn More About How to Own Rental Properties

From real estate investment tips to commercial property management tips, we want to provide you with everything you need to be a successful commercial property owner. Reach out to our team if you have any questions about how to own rental properties or how to manage your multifamily rental properties. Browse our listings if you’re ready to dive into the commercial real estate investment world.

How To Own An Apartment Building: Owning vs. Owning And Operating

If you’re interested in buying commercial property to rent out, you’ll need to decide how involved you want to be with your properties. Your level of involvement with your property is truly a personal decision that will depend on your skills, experience, time availability and interest. If you’d rather hire someone  to handle the operating and managing of your property, you’ll have more time to focus on other matters. But if you’d rather be more hands-on, operating your multifamily rental property yourself does come with advantages.

Are Rental Properties a Good Investment For Property Owners Who Hire Managers?

If you’re not able to operate your rental property yourself, or if you’re simply not interested in handling the details of daily operation and maintenance, you can hire a property manager or operator. You can choose an independent property manager or property management company. Hiring someone to help you operate your property is a good idea in several scenarios.

You’re Too Busy

Dealing with operating your property can be more time consuming than it seems. If you have someone else handling operational tasks, you’ll have more time to spend doing other important things, like assessing real estate data and identifying other investment opportunities.

You Don’t Live Near Your Property

Managing and operating a multifamily rental property is difficult if you don’t live nearby. If operating your rental property remotely proves to be too complicated and cumbersome, hiring a property manager would be beneficial.

You Don’t Want to Handle Tenant Relations

A property manager is skilled and experienced with day to day management such as collecting rent payments, communicating with tenants and resolving any landlord-tenant conflicts. A hired property operator may also be able to help fill vacant units using marketing efforts, and they will have experience soliciting and screening rental applications to ensure the best tenants sign a lease.

Advantages of Buying Commercial Property to Rent Out and Operate Yourself

With a little bit of research and time, you can own and operate your multifamily rental property. Here are some benefits to managing your property yourself:

Owner/Operators Can Save Money

If you hire a property manager, you’ll have to pay a percentage of the property’s monthly income, usually between 4-10%, to the property manager. If you plan to manage the day-to-day operations yourself, you’ll save that money! Managing the operations yourself is often more affordable, especially for smaller properties.

Owner/Operators Have More Control

Handing the reins of your property over to another entity takes control away from you as the owner. Managing day-to-day operations yourself gives you control and peace of mind. Spending time at the property will help you be more aware of any maintenance needs in your units, and you’ll be able to directly oversee repairs to ensure they’re done properly.

Tips For Getting Started As A Multifamily Property Owner/Operator

  • Start small. The more units at a property, the more complex (and time-consuming) it is to manage. Duplexes and fourplexes are great options for a first-time owner/operator.
  • Start local. It’s hard to manage a property in an area you aren’t familiar with, especially if you don’t live there. Buying a commercial rental property near your own home will be more convenient to handle.
  • Evaluate Your DIY Skills. If you’re confident with household projects and maintenance tasks, doing things yourself will save money. But if you know something is beyond your capabilities, hiring help will often save time and money.
  • Keep Your Tenants Happy. Vacancy can be a big struggle when you don’t have a manager helping you fill your empty units. If you’re responsive to tenants’ requests and you’re committed to making the building a nice place to live, tenants will be more likely to renew their leases.

Contact Us to Learn More About How to Invest in Rental Property

Overall, are rental properties a good investment? Buying commercial property to rent out can be profitable for both real estate owners who hire managers, and owner/operators who have a more hands-on approach. If you want help figuring out how to own an apartment building or how to be an owner/operator, reach out to us today. Check out our commercial property listings if you’re ready to make your next smart real estate investment.

Learn More About Buying Commercial Properties to Rent Out in Our “Multifamily Basics” Series:

ROI of your investment property

Are Rental Properties A Good Investment? Calculating ROI On Property Investments

If you’re thinking about buying commercial property to rent out, it’s important to understand the cost of your investment compared to the income it will generate. In order to figure out how much money you can make with a multifamily real estate investment, you’ll need to calculate your ROI, or return on investment.

Why ROI Matters When Buying Commercial Property to Rent Out

The ROI tells you how much money or profit is made on an investment as a percentage of the cost of that investment. Essentially, the ROI percentage tells you what percentage of your investment you earn back each year. An annual ROI of 10% means it will take 10 years to earn back 100% of your investment. Use the following steps as a guide for calculating your ROI for current or prospective commercial property investments.

Keep in mind, rates may shift based on many different factors including loan interest rates, market value changes, property tax increases and more.

calculating-roi.

Step 1: Calculate Your Annual Rental Income

To calculate your annual rental income, add up the total you predict to earn from rent payments over 12 months. Things to take into consideration:

  • Will you be charging the same price for each unit, or do some units have additional features that could be worth a premium?
  • Can you perform any minor repairs to quickly increase the value of the property that will allow you to charge more for each unit?
  • Think about accounting for a couple vacant months for a unit or two in case you’re not 100% full 100% of the time.

Step 2: Calculate Your Annual Rental Expenses

Rental expenses include utilities, renovation costs, property taxes and insurance. Calculate how much you plan to invest over the next 12 months. Things to take into consideration:

  • Will utilities be included or will residents pay the utilities? If your tenants will be covering their own utility costs, this shouldn’t be factored into the equation.
  • Again, if there’s any repairs done to enhance your property, the expenses of those renovations would factor in here and should be considered to see if it adds more value.
  • If you have a mortgage loan on the property, you’ll need to consider mortgage payments and interest rates in this calculation as well.

Step 3: Subtract Your Annual Expenses From Your Annual Income

This part is pretty straight-forward. If you subtract your expenses from your income, you are left with your cash flow, or the amount of money the property is expected to earn that year.

Step 4: Calculate Your Net Income

Add your cash flow amount from step 3 to your calculated equity from step 4 to find your net income.

Step 5: Find Your ROI

Divide your net income by your total investment to get your rental property return on investment.

Learn More About How to Invest in Rental Property

Calculating your ROI seems complicated, but it’s not as hard as it looks. We’re here to guide you on your journey to becoming a successful multifamily rental property investor. Reach out to us if you have any questions about buying commercial property to rent out, and take a look at the commercial property listings available now.

If you’re looking for more resources for calculating the ROI on your multifamily real estate investment, check out this guide for how to calculate your rate of return on a rental property, or read these step-by-step instructions for figuring out ROI on multifamily rental properties.

Learn More About Buying Commercial Properties to Rent Out in Our “Multifamily Basics” Series:

Single family vs multifamily

Become A Rental Property Owner 101: Multifamily Properties vs. Single-family Properties

Are rental properties a good investment? If you’re looking for a smart investment with potential for a sizable ROI, buying commercial property to rent out may be the right opportunity for you. In this series, we’ll be covering the basics of owning rental properties, and we’ll explain why learning how to invest in commercial rental properties could be the best business decision you ever make.

What is the difference between a single-family property and a multifamily property?

Real estate investors can see a return on investment regardless of what types of investment properties they purchase. Whether you own a multifamily or single-family property is a personal choice, and there are pros and cons for both. We’ll share some insights and comparison information to help you determine what the right real estate investment is for you.

Single-Family Rental Properties: Pros and Cons

A single-family rental property is a residence for one family, person or household. Single-family homes have residential zoning, so they may not be the right fit for you if you’re specifically interested in buying commercial property for rent. Here are some things to consider if you’d like to invest in single-family property:

  • Single-family properties generate less income compared to multifamily properties, simply because there is only one to three units.
  • Vacancy periods will be more costly because you’ll generate little to no monthly income depending on the number of units your property has.
  • Because there are fewer tenants, property management and ongoing maintenance are less time-consuming with single-family properties.
  • The upfront cost of a single-family property can be lower, depending on square footage and location.
  • Real estate investors purchasing residential property to rent out will need a residential real estate loan, which is less complicated and often less expensive than a commercial real estate loan needed for multifamily properties.

Multifamily Rental Properties: Pros and Cons

Multifamily rental properties contain multiple units, each of which is a private residence for a person, family or household. Multifamily properties can be more complex to buy and manage, and if you’re wondering how to invest in rental property, you should understand the pros and cons of owning a multifamily property:

  • More units bring in more income, which is why commercial rental properties are a good investment.
  • Turnover and vacancy are less costly because other tenants will still generate monthly income for you.
  • Property management can be time-consuming and expensive compared to single-family properties since there’s more tenants. Additionally, more units means more plumbing and appliances that can potentially break and require additional maintenance.
  • Buying commercial property to rent out can be more expensive upfront, especially if you’re looking at a large property with many units.
  • Multifamily properties have greater opportunities for appreciation since each time you make a repair to the building or a common area it forces real estate appreciation on each unit in the property. This makes expensive building repairs, such as a roof replacement, more cost-effective in a multifamily rental property.
  • Investing in a multifamily property will often require a commercial real estate loan. In contrast with the relatively fixed terms of most residential loans, commercial real estate loans are more flexible and negotiable. Interest rates and repayment terms can vary greatly, so investors have many options to explore and find the right loan.

Are rental properties a good investment for YOU?

Whether you choose to invest in single-family or multifamily properties (or both!), you will have the opportunity to find success and generate income. If you have questions about the differences between single-family and multifamily investment properties, reach out to our team. Learn more about how to buy a rental property, and browse our listings to find commercial properties you can buy to rent out.

Learn More About Buying Commercial Properties to Rent Out in Our “Multifamily Basics” Series:

amenities vs services

The Difference Between Amenities and Services: Which is Worth More to Renters?

If you’re interested in building or investing in multifamily properties, it’s important to consider more than just units per square foot, rent rates and utilities. Certain amenities and services can be enticing to potential renters, and maintaining high overall service quality is vital, if less tangible. Providing flashy amenities might draw tenants in, but offering high quality and responsive service will keep residents satisfied.

As you consider what amenities and services to offer at your multifamily rental properties, think about what those offerings will cost and if your tenants will find more value if you invest that money elsewhere in the property. Read on for an explanation of the differences between amenities and services, along with our recommendations for how to save money while offering more value to your tenants.

What is The Difference Between Amenities and Services?

“Services” and “amenities” can start to seem like industry jargon, and many people think there are no differences between amenities and services. However, there are a few important distinguishing details that set them apart.

Amenities at Multifamily Properties

Typically, amenities are physically tied to the property and are permanent. Common apartment amenities include:

  • Swimming pool
  • Dog park
  • Rooftop patio
  • Clubhouse or party room
  • Fitness center
  • Theater room
  • Garages
  • Balconies
  • Bike storage
  • Laundry room
  • Fireplaces
  • Playground
  • Coffee shop/free coffee

These amenities cannot be added or removed without serious renovations. Some have steep up-front costs and ongoing maintenance expenses. Anyone interested in investing in multifamily properties should keep those costs in mind. If you have the budget for them, amenities can provide nice perks for residents. They can give your whole property a luxury feel and entice people to sign a lease. But are they worth a long-term investment?

Services at Multifamily Properties

In contrast to amenities, services are not permanent and are typically less expensive to implement. Apartment services include:

  • Intuitive service ticket system and prompt responses to maintenance requests
  • Online and recurring payment options
  • Dog walking, pet sitting and other pet-friendly services
  • Driving services/airport pickup
  • Trash valet
  • Laundry services
  • Fitness classes (not just facilities)
  • Upgraded package delivery services

Why Services May Be A Better Investment

Residents are less concerned about fancy amenities they may not use anyway and more interested in services that increase convenience and ease. People are busy, and they want ways to save time during their daily routine. Investing in the features and services people actually want will give you more satisfied tenants and a better return on investment.

We know there’s a difference between amenities and services, but what does that mean practically when you’re investing in multifamily properties? If providing amenities and services is so expensive, are rental properties a good investment at all? We believe if you focus on high-value, low-cost services and amenities, you’ll find it’s worth it to own multifamily properties.

Ideas for Investing in Your Service Standards

One of the easiest ways to increase your service standards is to optimize your current offerings and focus on efficiency. You could hire more maintenance technicians so service requests are completed faster or simply evaluate current processes to make sure you’re maximizing your resources.

Introducing more services can be gradual, and some ideas may require very little investment. For example, you could partner with service providers like pet-sitters, dog walkers, drivers or housekeepers. You wouldn’t need to hire a whole new crew of staff members — simply facilitating the connection between your tenants and these services is, in itself, a service.

You could also try piloting services by offering them as limited time offers on specific days. A trial is a great way to see if residents are interested in certain services, and they’re a way to test how much time and money is needed to make a service available to tenants.

When you start implementing changes, even small ones, residents will notice and appreciate the attention to detail. Soon, current tenants will start to spread the word about their great experience living at your property, and your vacant units will start to fill up.

Are Rental Properties a Good Investment? Find Out More

If you’re curious about purchasing commercial real estate to rent out, or if you’re looking for ways to make your multifamily rental properties more successful, reach out to us. Our commercial real estate experts are knowledgeable about industry trends and tips, and we would love to answer your questions. Contact us today or reach out to Jared Husmann directly at 515-334-4900.

How to Use Real Estate Data and Trends to Make Smart Rental Property Investments

Buying an investment property to rent out to tenants comes with no guarantee of seeing a return on investment. However, selecting the right property and following industry best practices will help you acquire a real estate investment that generates income. We’ll discuss how to buy a rental property and how to make improvements that add value to your properties.

What You Need to Do When Buying an Investment Property to Rent

It can be very difficult to know if rental properties are a good investment and whether a few fixes around the property will be worth it in the long run. The following scenario is just one example of the research required for commercial property investing. Take a moment to picture this:

You find the basic details of a listing, including the price of the property, rent price point, expenses, a drone video and virtual tour of the property. By just looking at the listing, you have almost all the initial information you need to know this could be a great property to invest in. You schedule a tour of the building, and as you walk up to the building, the broker hands you a report with more details about the property, along with information about comparable properties in the area. The report features a range of practical data points that confirm your initial assessment about the property being a great investment, and there are even recommendations about where you can add value!

Imagine the report gives you information like this: A property in close proximity recently sold for $15,000 more because it had a brand new boiler system installed. Directly next to this fact is a cost break-down for replacing a boiler system. The report tells you that in your area, it costs around $10,000 for a new boiler system. With this information, you know you will be able to immediately add $5,000 in value by replacing the boiler system at this property.

The report might also tell you that another similar property nearby is earning lower rents per square foot, but perhaps that property has laminated countertops. The property your considering has granite countertops, so it’s able to achieve $10 more in rental income per unit per month.

This is the power of data. And with continuously improving data collection techniques, reports like the one described above will be the standard in a sales transaction within 10-15 years — if not sooner!

Of course, this is just a story, but it gives you an idea of the extensive research and information gathering that goes into a purchase before deciding if you want to invest in a rental property. As a buyer, seller, owner, real estate agent or lender, you must rely on data like this, and it would be smart to start tracking the data you have now.

How can you do this? Simply look for data and record it! Here are some data collection tips for aspiring rental property owners:

  • Every time you see a property for sale, whether it’s a sales brochure or an offering memorandum, keep the information.
  • Save documents in a file, and create a spreadsheet to record data points.
  • Utilize public records — tons of data is readily available online.
  • When a broker sends you an update on what is happening in the market for rents, sales, occupancy, etc. keep the information and add it to your data spreadsheet.

  • Utilize these data points to enhance your knowledge of your own property or properties, and pay attention to the overall market.
  • Soon, you’ll be able to find and recognize patterns in the market.

As you’re collecting and storing data, don’t get lost in the weeds. Data is abundantly available, but not all data points will have an impact on the overall market, a particular sale or your bottom line. Once you get started, it will be easier to see which data points are most crucial to your success.

How to Invest in Rental Property Step 1: Do Your Research

The amount of data available can seem overwhelming when you’re buying an investment property to rent. As you begin browsing real estate listings, start with in-depth research as demonstrated in the story above. Some things to consider while you’re collecting data about a property:

Collecting Real Estate Data From Listings

When you find a multifamily property listing that seems promising, the listing itself will provide large amounts of helpful data, like number of units, square footage and historical information about past sale prices and taxes. However, some information is not easily accessible on online listings. You’ll need to reach out to an agent to arrange a tour in order to see property details like fixtures, finishes and potential subtle signs of damage or neglect

Collecting Real Estate Data From Agents

If you’re interested in a multifamily listing that’s missing things like interior photos or other important information, reach out to the listing agent. No question is off-limits. An agent will be able to answer your questions and/or schedule a tour so you can see the property for yourself.

Collecting Real Estate Data From Property Tours

Seeing a property with your own eyes is often the best way to figure out if it will be the right investment for you. Take notes when you tour a property. Keep an eye out especially for things you could easily upgrade in order to add value, attract more tenants and increase rent prices to earn more income. Here are some examples of easy opportunities to add value to a property:

  • Replace old, outdated appliances
  • Remove or refinish worn-out flooring
  • Install new, efficient heating/cooling systems
  • Replace the water heater
  • Upgrade the countertops
  • Utilize smart technology, like a digital thermostat
  • Upgrade windows
  • Add simple, attractive landscaping

If you’re looking for a few improvement options that are less costly than replacing major property items, start with a quick, fresh coat of paint and a few new light fixtures, and you’ll be on your way to adding value to your property. These types of upgrades can be very easy and inexpensive while making a positive impression on potential tenants. Also consider what home design features are currently trending, like electrical sockets with USB ports or fixtures with matte finishes. Adding a few modern details can be a big selling point without breaking the bank.

How to Invest in Rental Property Step 2: Crunch Some Numbers

If you view a property that needs some upgrades, don’t let that scare you away! A multifamily rental property that needs renovations can be a very wise investment, but just like our example listed above, it’s important to figure out exactly how much value you can add to the property with upgrades, how much those upgrades will cost upfront and how long you’ll have to wait before you see a return on investment.

Some upgrades will be very expensive but will increase property values exponentially, while some renovation projects may not be worth it in the long run. As you consider what to upgrade, consider both tenants and future buyers.

This part of the research process can be tricky, but there is a lot of data available if you’re willing to take the time to look for it. It’s essential to be accurate while making these calculations, so don’t forget to consider the following multifamily rental expenses:

  • Price of materials, fixtures, appliances, etc.
  • Labor costs
  • Taxes and insurance
  • Property management
  • Vacancy
  • Utilities
  • Ongoing maintenance costs

Are Rental Properties a Good Investment?

There is no simple answer to this question. The future of your success in the multifamily housing real estate industry depends on data collection. Savvy real estate investors collect data and analyze market trends to make strategic decisions about real estate purchases. In order to see ROI, you’ll need to study information from third-party sources and historical data. The more you know about past trends, the more you’ll be able to accurately predict future patterns in the commercial real estate industry.

In short, if you collect data, study the market and create a smart strategy, buying an investment property to rent out can be very profitable. If you jump in without doing the right research, you can easily end up wasting money on a poor investment.

Learn More About How to Invest in Rental Property in Des Moines

That’s why we’re here to help steer you in the right direction. Contact us or reach out to Jared Husmann at 515-334-4900 if you have any questions about how to buy a rental property, or view our commercial property listings if you’re ready to get started.