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Should You Diversify Into Multifamily, Part 3

The Importance of Value-Add Investing

By: Carl Pankratz

In Part 1 of this series, we outlined the overall benefits of investing in multifamily real estate.  Part 2 included reasons why property management is key to success (and how we emphasize in-house management for the benefit of our investors and residents).  In this, the final installment, we discuss why value-add can be a primary vehicle in achieving investment targets. 

Apartment properties come in many different classifications. Properties are often referred to by property class (A, B, C and D) based primarily on age but also somewhat on condition and location. There are also specialty classes like student housing for properties that rent by the bed near college campuses or low income housing where many units are restricted on how high the rents can be as well as how high the income can be of the residents that live there. There are some outstanding opportunities for value creation when investing in apartments that appeal to middle or working-class families that need renovations or upgrades; these are considered or value-add apartments. As we discuss this value creation, there are three areas we are going to highlight: ways to create value, prohibitive nature of building new product, and the demand for workforce housing.

First, value-add properties offer an investor significant avenues to increase the value of a property while improving the surroundings for the residents and often have a positive influence in the communities surrounding them. These assets, which are generally 10 to 50 years old, often have dated interior finish-outs and the exteriors and amenities may be in some level of disrepair or at least not up to the standards of newer properties in the area.  The changing styles and preferences over time make it possible to bring in modern designs and ideas to refresh the space, making it more appealing. This improved appeal generally leads to higher rents and better investor returns. Ideas to make spaces more attractive to current and prospective residents include: revitalized kitchen cabinets, backsplashes, new flooring, improved lighting fixtures, and new appliances.

All these, and other upgrades, can lead to rent premiums. However, as we discussed in the previous article concerning property management, it’s important to partner with an investment group that understands the highest and best use of rehab funds in a project. In some cases, smart home technology may be a good investment; however, in some markets it is an excess whose cost will never be recaptured. Utilities are also routinely higher at older apartment communities. Thus, bringing in water conservation measures or energy consumption improvements can also be a big benefit to the property’s bottom line. Whether it is improved finishes, energy efficiency, or better management, these properties can offer big investment upside.

A second factor in the benefit of investing in value-add multifamily is that building new affordable housing for residents close to jobs is challenging. Today, many factors weigh against the ability to build properties with rents middle and working-class families can afford. Finding labor is very challenging. In a market with a booming economy, trying to find a quality crew experienced in construction will come with a cost, as the demand for their services has outpaced the supply. Additionally, material costs are increasing, land prices are higher, there is limited multifamily zoning in desirable areas and building codes are more onerous than ever before. All of this has resulted in a cost of bringing new product to market that has increased dramatically throughout this economic expansion. Higher costs when building new properties results in rents at those communities that are significantly higher than many working-class families can afford. This insulates the market for properties that are a bit older, as even after renovation they can often be acquired for substantially less than current replacement cost. Value-add properties also have the advantage of already being occupied in most cases. When new properties are built, a substantial amount of the investment time is spent with negative cash flow as the units are not yet occupied and often large concessions have to be given during the lease up period.

Last, a big driver for value-add multifamily is the huge demand from working families. Workers with jobs essential to schools, police and fire departments as well as the service sector cannot afford housing that is conveniently located to their jobs. Using numbers from the National Multifamily Housing Council, there is a 3.1 million unit shortfall for working class families in the United States. This has been made more difficult, by the lack of supply on the market. Per the Joint Center for Housing Studies of Harvard University, the national vacancy rate for both owner-occupied and rental units fell to 4.4%, the lowest point since 1994. This provides an incredible demand for a limited number of units. Many renters are pushed to areas outside of where they work in order to find apartments that are affordable. These apartments are typically the apartments that are older in age and in need of an upgrade. These residents may not be able to afford the rents of a new building, but they still desire a clean and nice place for themselves and their families to call home. Many times, the apartments that were built prior to 1990 were built in locations close to core urban locations, and by upgrading the units, residents now have a clean and safe place to live, close to their employment. Therefore, nicer appliances, well designed kitchens, and other updates have value, as it still allows a rent that they afford but with the quality they desire. This drives the huge demand for value-add apartments.

Throughout this series, we endeavored to provide information on the multifamily process, while empowering you to make better investment decisions. You have hopefully seen the benefit of multifamily, the important role that good property management plays, and the demand from renters for value-add apartment communities. As you move forward, it’s important that you invest with a partner that has experience in the space and ask the “right” questions. Multifamily investing can help you achieve your financial goals; please reach out and let us know how we can help you in your journey.

Over the last decade, Exponential Property Group has given hundreds of investors the opportunity to grow their net worth using multifamily real estate.  Go to exponentialpropertygroup.com/invest to learn how you can too.

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EXPONENTIAL PROPERTY MGMT. DIRECTOR OF OPERATIONS

Lisa Harris

Lisa Harris is the Director of Operations for Exponential Property Management. In this capacity, she is responsible for driving property performance, monitoring market performance, and providing leadership oversight to a growing team of regional and property managers. 

Lisa has over three decades of experience in multifamily operations and property management. Prior to joining Exponential Property Management, Lisa served as a Regional Director for W3 Luxury Living. In this capacity, she provided directional leadership supporting the businesses property management efforts. She has also held significant regional leadership roles with Monogram Residential Trust, Behringer Harvard, and Lincoln Property Company. 

Lisa studied Advertising and Public Relations at Texas Christian University. She is also a Certified Apartment Manager via the National Apartment Association, as well as a Certified Property Manager via the Institute of Real Estate Management. Lisa is an active member of the Apartment Association of Greater Dallas. 

DIRECTOR OF CONSTRUCTION

Stan DeMille

Stan DeMille is the Director of Construction and Development for Exponential Property Group. In this capacity, he provides strategic leadership and direct oversight to the construction aspects of the firm’s ground-up development and value-add renovation projects.

Stan has nearly three decades of architectural and construction management experience. Prior to joining Exponential Property Group, Stan was a Senior Project Manager for Jones Lange LaSalle where he was directly responsible for managing the ground-up development and redevelopment of Chick-fil-A’s throughout the Southwest. In this capacity, he handled all aspects of development from managing relationships with municipalities, architects, civil engineers, and vendors to ensure timely project completion. He also held various construction and development leadership roles with Bar Louie Restaurants, Lact Call Operating, and Consolidated Development Services. 

Stan holds his Bachelors of Science in Architecture from the University of Texas at Arlington. Stan spends most of his free time with his wife and twin boys. He is actively involved in his sons’ extracurricular activities including theater, rock climbing, and baseball.

VICE PRESIDENT FINANCE AND ACQUISITIONS

Sterling Worth

Sterling Worth is the Vice President of Finance and Acquisitions for Exponential Property Group. In this capacity, Sterling leads all investment sourcing and analysis efforts for the firm, as well as debt and equity raising, and asset management. 

Sterling has nearly two decades of institutional commercial real estate investment experience where he has a multi-billion dollar track record of successful capital placement spanning all commercial real estate asset classes. Before joining Exponential, he spent over a decade with Invesco Real Estate, and several years with Clarion Partners.

Sterling holds his Bachelors of Business Administration from Texas A&M University. Most of his free time is spent with his wife Natalie, his daughter Lily, and son Turner. 

EXIST MULTIFAMILY DIRECTOR OF OPERATIONS

Francis Murphy

Francis Murphy is the Director of Operations for Exist Multifamily. In this capacity, he leads a team of operations, sales, and business development professionals for the materials and graphics businesses, respectively. 

Prior to joining Exist Multifamily, Francis owned and operated a Junior Soccer Club in the United Kingdom. His passion for teamwork, development, sports, and giving back to the community fueled his leadership and propelled his success for over a decade in the profession. Prior to this, Francis was an Operations Manager for one of the United Kingdom’s largest pharmaceutical companies where he managed a large team of professionals and maintained direct responsibility for all supply chain operations. 

When Francis isn’t building the materials and graphics businesses at Exist, you can find him spending time making close friends laugh over a competitive game of Texas Hold’em Poker or traveling. 

DIRECTOR OF INVESTOR SERVICES

Amanda Schwarz

Amanda Schwarz is the Director of Investor Services for Exponential Property Group. In this capacity, she oversees all aspects of capital raises, investor communications, and database management for our Investor Services team.

Prior to joining Exponential, Amanda spent over two decades in various client and office management capacities. She brings extensive management and interpersonal skills alongside her multifamily real estate experience, making her uniquely qualified to lead in her current role. 

Amanda holds a Bachelor’s degree from the University of Illinois. When she isn’t spending time making sure Exponential investors have a top-tier client experience, she loves spending time with her family. She also enjoys hiking with her husband and traveling.

CHIEF FINANCIAL OFFICER

Heather Goodell

Heather Goodell is the Chief Financial Officer for Exponential Property Group and it’s affiliated companies. In this capacity, she is responsible for leading and growing a team that oversees all Accounting and Financial statement reporting, Federal and State tax reporting, Treasury Management services and other supporting areas for the firm’s various lines of business.

Prior to joining Exponential, Heather served as CFO for RealManage where she supported all Finance and Accounting activities, including deep involvement with middle-market M&A activity for the firm.

Heather is a licensed CPA and holds her Masters of Accountancy from Auburn University Harbert College of Business as well as her Bachelors of Business Administration from Florida Atlantic University. She loves to spend her free time with her family, friends, and reading a good book.

CHIEF OPERATIONS OFFICER

Natasha Austin

Natasha Austin is the Chief Operating Officer for Exponential Property Group and Exponential Property Management. In this capacity, she acts as the strategic leader over all property management operations and value-add renovation strategy for the company. 

Natasha has deep domain expertise having spent over two decades in multifamily property management and operations. Prior to joining Exponential Property Group as the Director of Operation in 2015, she led property management efforts in various capacities with DD Fire, Pegasus Residential, Guardian Real Estate Services, and United Apartment Group. 

When Natasha is not leading her team of over 100 professionals at Exponential, you can find her with her husband traveling with her kids who are avid baseball players. She also acts as the Executive Director of the Martha’s Ranch Foundation, a 501c3 created to provide a source of fun and support tailored for families with autistic children.

PRINCIPAL CHIEF DEVELOPMENT OFFICER

Matthew Bays

Matthew Bays is the Managing Principal and Chief Development Officer for Exponential Property Group as well as the Chief Executive Officer for Exist Multifamily, Exponentials materials and graphics company. Matt oversees the identification and execution of new property development opportunities for the firm, as well as leading and growing the multi-million dollar materials and graphics company.

Prior to joining Exponential in 2017, Matt oversaw all U.S. operations for Renew Sleep Solutions where he led all aspects of operations, business development, new site development, and design/implementation of workflow technologies. He also held senior level roles with Davita, Varsity Shoppe, Iron Mountain, Pinogy Corp, and Dell Corporation. 

Matt holds his MBA from Southern Methodist University Cox School of Business as well as his Bachelors of Science from the University of Texas at Austin. When he is not creating new business ideas, or developing new technology, his efforts are directed towards his role as Chairman of the Board for the Martha’s Ranch Foundation, a 501c3 he created alongside his wife to provide a source of fun and support tailored for families with autistic children. When not working, you can find Matt spending time with his wife Kim, son, Jett, or twin step-sons James and Nathan. Matt is an avid traveler and scuba diver.