How Do Multifamily Property Investors Raise Money?
Raising capital is an important skill that is rooted in research, good judgment and, most importantly, building solid relationships. The exact strategy for raising funds varies and includes a wide range of options, everything from taking a personal friend and family approach to running a sophisticated CRM investor relations platform. This stage of a project is typically driven by the investment strategy of the developer’s overarching goals — both short term and long term. So before you have any conversations with investors, it is important to do your research and have all the vital information on hand.
For starters, in my experience, investing in multifamily housing is a great strategy that can provide both short- and long-term value for you and your investors. The short-term value in many cases offers a fantastic return within the first 24 to 36 months of the initial investment. The long-term benefits are the monthly and/or annual cash flow that the properties will continue to generate for investors as long as they retain ownership of the property.
Most developers will fund their projects by using a combination of three sources. First, the developer will use their own money. I have found that typically a developer will invest about 3% of the total cost of the project. Then, the developer will go to his group of investors to hopefully raise a combined total of 30% of the total cost. Finally, it is time to bring in a bank for the remaining 70% of the project. This approach is similar to the way in which the multifamily developer looks at a capital raise.
Both the bank and the investors will want to know the valuation of the property. Multifamily properties are valued very similarly to how one would value a single-family home. Examine these characteristics:
• Market: The city, state and neighborhood where the development will be located
• Property: Characteristics of the multifamily complex, including all of the amenities, any stand-out features and the land it sits on
• Comparable properties: You will want to provide information on sales, listings, vacancies, cost, depreciation and other factors for similar properties in similar markets
This information is combined to create a final opinion of value for the home and delivered in an official report to potential investors and the bank. A detailed report encapsulating all of this information will be crucial if you hope to secure funding. The report is typically a market study. A market study is a comprehensive assessment of the market that includes who the large employers are in the market, income ranges, population by age, family sizes, growth trends, vacancy rate, comparable rental rates, absorption rates, etc. using data from properties that are similar in size and features that are already in the market. My best advice is to do as much research as possible to fully understand your market of interest. Think about what you would like to know if you were the investor because you are.
The valuation of a multifamily property is an important part of determining if it is a solid investment or not. This is typically determined by the age of the property, the occupancy ratios, the property’s cash flow and how well it is being managed and operated. If it is a new property, then understand the market that it is in and the history of the management team and/or sponsors behind it. If your data outlining the property, the area, the development team and the management team all clearly show a need for a well built and professionally run property, you should be set up for success and finally ready to get to work developing your property and creating jobs and homes for a growing community of people and families.
Accessibility