5 Tips to Growing Your Multifamily Portfolio

Multifamily real estate has been historically proven as one of the most stable investment vehicles for investors establishing multi-generational wealth. Over the years – as both Oakland landlords and local property managers – we found this to be true, particularly for those who acquired properties in the 80s, 90s and early 2000s in submarkets like Grand Lake, Rockridge, Lakeshore, Adams Point, Cleveland Heights and more. 

With decades-long patience paying off in spades, coupled with unprecedented demand for East Bay real estate and historically low interest rates, Oakland’s established landlords are well-positioned to multiply their accumulated wealth by growing their portfolios. 

This month, we offer five key insights to help multifamily investors sharpen their competitive edge as they prepare to level-up their portfolios in Oakland’s ever-evolving market.

TIP #1: LEVERAGE TO YOUR ADVANTAGE

The primary purpose of any investment – real estate or otherwise – is to maximize returns.  However, economic law states that – at a certain point – if you hold an asset too long, your investment is in danger of reaching the point of diminished returns.  In the context of real estate, the goal is to leverage within the ideal range of time where making moves results in massive payouts.  If you sell too early, you leave equity on the table; too late, and the asset may be beyond the plateau. 

Today, many landlords in the highly desirable submarkets of Oakland are well-within the “goldilocks zone,” having held multifamily properties for ten years or longer.  During your holding period, cash flows have risen thanks to the influx of renters leaving San Francisco for the East Bay.  Perhaps you implemented value-add strategies, like remodeling units during vacancies, or minimized expenses to help your bottom line.  If you feel your building has reached a pivotal inflection point, it may be time to plan your next move.

There are two main strategies to effectively leverage: first, refinance your property and use the proceeds to purchase an additional asset; and second, trade or “upleg” your current asset for one with additional units and higher cash flows using the 1031 tax-deferred exchange program.  Either of these options are effective depending on your financial positioning and short term and long term goals.  With the Federal Reserve’s recent reduction in interest rates last week (one quarter of a percentage point), it might be the optimal time to maximize your borrowing power and leverage up in the market.

TIP #2:  GO BEYOND MARKET PULSE

Whether you defer management duties to a local property manager or handle the day to day responsibilities yourself, it is highly likely you have heard the industry catch phrase: “market pulse.”  Real estate agents love to pitch “pulse” in the form of emails, phone calls and postcards by sharing recent sales prices, cap rates and GRMs.  While these ever-accessible metrics inform you of market activity and help gauge current valuation, the convenience of technology and it’s plethora of high-level data will only get you so far. 

The ability to understand the market from various angles and depths is a critical competitive component for every real estate investor.  Are you aware of the capital improvement projects taking place in your submarket?  Or the latest turnover trends and lease administration concessions?  Are you plugged in to tenants’ “wants” and business growth in the area?  Though these are merely a few examples, it becomes obvious why one-dimensional sales comps are unreliably shortsighted. 

An all-encompassing overview of the market – based on your personal investment of time or working with a capable team – will not only help place your property in true context, but help to define a winning strategy as you decide to proceed in the market.

TIP #3: POSITION YOUR PROPERTY

To maximize value, pinpoint the specific strengths and weaknesses of your property, and identify areas of opportunity to increase value.  In the business world, many companies perform internal and external analysis, commonly referred to as SWOT Analysis (Strengths-Weaknesses-Opportunities-Threats).  This exercise is incredibly useful because it gives you a strong indication of where your property currently measures up and where to shift advantage in your favor. 

Your unit mix, stack, amenities, tenant profile, annualized rents, location, quality/condition, proximity to transit lines and more might fall into the “strengths” or “weaknesses” categories.  Revitalization and increased business development in your neighborhood might be driving up demand, and in turn the “opportunities” available to you. 

Conversely, other landlords might be using concessions to incentivize tenancies which might be a direct threat to your lease up process.  By applying this SWOT framework to the context of your real estate, the invaluable insights you collect will help prioritize where your time, resources and budgets should be deployed.

Depending on factors mentioned above, you might opt for an aggressive approach by tackling deferred maintenance projects and addressing the high-ticket items like roof replacement, plumbing and seismic.  If your resources are limited or the market is dictating a more conservative, cost-friendly approach, it may make most sense to confine your scope to exterior paint and minor landscaping projects. 

Regardless of the strategy you employ, go one step further by repurposing unused or wasted space to enhance the old-world charm and character unique to your property.  By being creative and hyper-efficient, you effectively position your property for premium value.

TIP #4: GO OFF-MARKET

Once you square-up finances, go beyond pulse and prime your property for top dollar, it is time to create your own opportunities.  We are big proponents of this mantra.  

In Oakland’s hot real estate market, when a broker lists a multifamily property in hot submarkets like Adams Point or Cleveland Heights, the sale typically goes to the same private equity groups monopolizing the market.  They have the means and resources to act quickly, while the smaller, family-owned portfolios are at a massive disadvantage time after time, deal after deal.  For this reason alone, working off-market is primary way to grow your portfolio at a more comfortable pace.  With various benefits for the seller, these types of transactions are often a win-win for both parties.

If you are looking to purchase in the same submarket or neighborhood, you may be personally acquainted with several of the owners on your block – a warm introduction goes a long way.  If your preference is to explore a transitioning submarket, be sure to do your due diligence (remember: go beyond market pulse!) Familiarize yourself with the tenant demographic beyond the basic statistics of a typical offering memorandum.  Walk the neighborhood, do your research, and have commanding knowledge from all angles.  Identify which properties interest you, line up the financing and aggressively write off-market offers.  You might just land your dream property!

TIP #5: FIND YOUR ALLY

Tying in this last point, find a broker who acts as your personal ally – both you and your broker should approach the agency relationship in this way.  The wrong broker will emphasize the “fast close” promise which may or many not inadvertently push you into a decision that feels rushed and uncomfortable, leaving you with unanswered questions and an overall lack of confidence in the deal. 

If you plan to manage the property yourself (versus hiring a professional management company), these decisions may have massive implications if not meaningfully thought-through, which is precisely why your “internal champion” should be someone who fully understands both the local submarket and market at large; someone capable of going “micro” on the pros and cons of the particular systems of a building in detail; the vendors capable of servicing such systems; the typical lease up phase, rental metrics and more. 

By hiring an empathetic broker who aligns your long-term goals with a specific asset in a specific submarket, you increase the odds of success all around.

FINAL THOUGHTS

With Bay Area technology companies like Uber, WeWork, Pinterest and Airbnb recently filing IPOs and/or successfully going public, it’s common to hear residential agents project this new, cash-heavy demographic will infuse wealth in local real estate by driving up rents and single family home prices.  Less discussed is this segment’s growing interest in investing in cash flow properties. 

While these tech-savvy buyers use their smartphones to access online platforms like Robinhood for stocks and Coinbase for cryptocurrencies like Bitcoin and alt-coins, they are also discovering platforms like Roofstock and Fundrise which provide seamless access to shares of portfolio investments. As more of these new real estate tech companies gain in use and popularity, so too will the overall interest in investing in real estate. 

Personally, we project multifamily assets will gain interest among these young, career-focused high-income earners.  The Millennial and Generation Z demographics crave being at the epicenter of urban and cultural experiences, and value freedom and flexibility to relocate to new cities for job opportunities and life’s next great adventure. 

Unlike their predecessors, they are settling down later in life, but they also exude a heightened knowledge about financial responsibility after witnessing their parents survive the Great Recession. 

While a certain amount of skepticism exists around homeownership, multifamily investing provides the benefits of property ownership with two very attractive features: first, these investments align with their lifestyle choices and preferences; and second, and most importantly, multifamily provides supplemental income via an alternative revenue stream.  So while these new investors look for a segue into the market, Oakland’s established multifamily owners have tremendous opportunity to grow and upleg into a higher-quality investment.  

If you are in the position to purchase or sell, we welcome the opportunity to work with you!