Why Multifamily ?
We invest in multifamily properties for the following reasons:
While the acquisition and operation of a multifamily property is more complex than that for a single family unit, the scale of multifamily properties allows for professional property management and returns that would not be possible for a single family property. Synchronous Capital focuses its investments on multifamily properties with greater than 100 units ("doors" in industry parlance) so that there is sufficient scale to benefit from professional property management and other economies of scale
Each apartment building is a business with its own set of operating expenses and revenue sources. By optimizing the components of the business, it is possible to increase the Net Operating Income (NOI) of a property. Like other commercial real estate, the valuation of a multifamily property is directly proportional to its NOI: the value of a multifamily property can be increased by increasing its NOI.
The relationship between the property NOI, cap rate, and value is given by the following relationship:
Property Value = NOI ÷ market cap rate
In a typical 6% cap rate market, each incremental dollar of NOI raises the value of a property by almost $17. As a specific example, consider a 150 unit property that is in a market with a cap rate of 6%. Once the property is acquired, the sponsors invest in upgrades to units in the property which allows for increase of rents by $50/month per unit. In addition water conservation measures are instituted that allow for utility savings of $10/month per unit. This has the impact of increasing the NOI per unit of $60/month. Over the course of a year and across the 150 units, this results in ($60 x 12 x 150) = $108,000 in increased NOI for the property. As a result the property increases in value by $108,000/6% = $1.8 mm. This is just an example; there are numerous ways in which revenues can be increased and expenses can be reduced at a multifamily property.
Strong Demand for Affordable Housing
There is a shortage of quality, workforce housing in the US. A 2018 report by the NLIHC estimated a shortage of 7.2 million affordable housing units which will continue to drive demand for quality, affordable housing into the future.
The IRS provides numerous tax incentives for investments in real estate. For multifamily investments in particular, cost segregation (compartmentalizing the various components of multifamily units in to different depreciation schedules) and bonus depreciation can allow for deferment of taxes by netting out this depreciation against gains from other passive investments.
The source of returns from multifamily properties are fundamentally different than from a standard stock and bond portfolio and can act as an effective portfolio diversifier. In times of recession, demand for workforce housing is expected to remain strong especially in areas that have a critical mass of employers.
Our focus is on Class C or Class B workforce housing: improvements that sponsors make to underperforming properties make for a better and more secure community for the residents. There is a significant shortage of quality workforce housing which is being addressed by these investments.