Multifamily Investing Comparison

[Erik K.]

I am and always will be a multifamily investor.  As a syndicator finding accredited investors has been relatively easy compared to finding deals in my target markets.  Recently I've seen others in this space sitting on the sidelines waiting for the bottom to drop I am still looking for deals but wanted to put something out there to my fellow multifamily investors on how to get cashflow by means other than buying apartments.

To illustrate my point I'll show you two deals, hint: only one of them is real.  Can you tell which one?

Let's assume both of these investments are a good deal with no major CapEx required and the deal meets our underwriting criteria.

Example A

A 96 unit apartment complex in Columbus
Asking Price: $5.2M
NOI: $520K
Cap Rate: 10%

Example B

A commercial construction company in Chicago
Asking Price: $5.2M
NOI: $2.5M
If we used cap rate it would come out to 48%

In purchasing the business my strategy would be the same as an apartment.  Hire a good manager to oversee the operations and I would work with this person to ensure they are executing on the business plan.  The amount of work involved would be similar in either investment but the profit would be drastically different.

The best part of buying a business of this size is that most sellers are accustomed to carrying a portion of the purchase price. If the business has assets, asset-based financing is an option as well as a standard business loan. I wouldn't need to raise money from investors although a JV or syndication could be helpful in a deal like this but more likely in a larger deal.

I'm interested in hearing what the BP community has to say on this topic.  Even as apartment investors we have to diversify,

[Chase McArthur]

@Erik K.

In the simple words of one of my mentors, stay in your lane. You know what you know and its best to keep it simple. The family office I once worked for diversified through the means of differentiated investments in CRE debt. As @Mike Acri stated, there are alot of variables that come into play when delving into owning a business, let alone a business that is as sensitive to the market as construction.

Depending on the amount of capital you and your investors have to work with, investing in debt is a great way to diversify. There are a number of opportunities in creative finance that will allow you to take advantage of what you already know, that is MF investing.

With debt investing, you go from the bottom of the food chain, being last to eat and first to starve, to being at the top, the head of the table, at the very least, second in line. Depending on your risk aversion, mezzanine debt is a great high yield, short term investment strategy. If you have the capital you could go all the way to the top with asset-backed debt.

Food for thought.