The number of renters is on the rise and is not expected to slow down soon. In order to meet that demand, many companies in our industry are turning towards new construction. One of our proven strategies is to invest in existing, vintage multifamily properties. These properties provide a cost-effective and environmentally-friendly way to meet rental demand, provide renters with affordable yet comfortable housing, and provide excellent returns for our investors.
Here are a few key reasons why we know this particular strategy gives everyone at GSH—our tenants, our team, and our investors—an advantage.
Refurbishing older properties is affordable for everyone
There’s a cost advantage to buying and upgrading versus building. That cost advantage impacts the affordability of rents for our tenants.
Between the cost of land and the cost of construction, it’s next-to-impossible to offer affordable rental rates. You can’t build a new property in a decent location and charge $900 – $1000 rent for a two-bedroom apartment. Rent would likely need to be double that amount to make a new build cost-effective and get a suitable return on investment. Ultimately, many renters —especially essential workers—are priced out. By investing in existing properties, we can keep our costs much lower than new construction, allowing us to offer more affordable rent rates while still earning a solid return.
Vintage properties can offer better proximity to jobs and schools
The amount of land available for new builds is limited, especially in more mature areas with closer proximity to employment centers and schools. When new construction does occur in more densely-populated suburban or urban centers, it’s typically luxury development with rents ranging from $1500 to $3000 a month.
It’s increasingly difficult to find a new suburban location where you could build a new property on a cost-effective basis. That’s why most of the new construction for affordable housing is happening via government subsidies. However, these government-sponsored deals are typically on land that’s significantly further away from employment centers. By buying and refurbishing existing properties in a suburban setting, we can offer affordable workforce housing in areas that are actually convenient for essential workers and their families.
Older properties provide opportunities to add value
Most of the properties we purchase have not had any improvements over the years. While they are well-built structures, they lack modern amenities. In certain markets, this is often because multifamily apartments were built and owned by local and regional family and construction company developers and didn’t trade hands a lot. Many of these owners have seen their original business plan through and haven’t made capital improvements for quite a while.
When we purchase these Class B and C buildings, we view it as an opportunity to breathe new life into the property. We invest in cosmetic and community updates, including upgrading paint colors, cabinets and fixtures in units, and adding or improving fitness facilities, gathering places, pools, and play structures for children. By reinvesting in these improvements, we not only enhance the quality of life in these communities, but we increase rent to market-rate level and increase occupancy rates.
Older properties allow for an operational overhaul
Often, these vintage properties have either run their course with the previous owner or simply have not been managed very well. With every deal, our team will identify incongruencies between revenue and expenses on the management side to determine where we can improve operationally. By implementing new, efficient management practices, we’re able to make these properties very profitable before we even do anything structurally.
In a nutshell, we look for well-located properties that have great linkages to schools, places of employment, and recreation. We also look for opportunities for revenue enhancement, or operating efficiency, to optimize the incremental value that we can create for investors through a tactical value-add approach.
While renters continue to seek out amenities and a high-quality place to live, the increasing cost of new construction means many renters are priced out of newer properties, and many investors are left with minimal returns. We’ve discovered that one effective strategy for us is to invest in and refurbish older multifamily properties. Then, we can provide affordable housing without sacrificing return on investment, and vice versa. To learn more about our strategy, please visit: https://gshrealestate.com/strategy/
Gideon Pfeffer, GSH Managing Partner, recently had the honor to sit on the FLAIA‘s panel “The Case for Why Multifamily Will Continue to Outperform” as an industry expert to provide insights into why multifamily will continue to outperform other sectors of CRE. To watch the recording click here.
