The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
The process of investing in multi-family is very similar to investing in other real estate types when you consider factoring in the rate of return and your net operating income, but there are some key differences. With an industrial investment, for instance, you could have one tenant occupying a large space for many years. With retail you can have much longer leases and different operating expenses. When you’re investing in multi-family properties, you’re often dealing with shorter leases, but a much higher number of tenants where it’s easier to fill those vacancies quickly.
Richard Wilson: How is multi-family investing different from other commercial real estate types?
Brian Burke: The actual process is very much the same. You’re valuing property very similarly where you’re taking the net operating income and factoring in what your rate of return is going to be. The biggest differences come in the various nuances of the characteristics of each of these different asset types. So if you think about retail property, for example, retail has much different lease structures than a multi-family, where you’re cycling out month to month residents, or maybe one year lease residents. Here you might have multi-year leases that might have profit sharing or income sharing components to them. You also have to factor in another commercial property types you might have tenant improvements where if you’re going to lease out a space you might have to put in new flooring or other types of things to get it prepared for the next tenant, you might have extended vacancies because it can take a long time to lease out a retail property. Same with office, industrial is very unique because you might only have one tenant in a large industrial space, so that’s a little bit different.
What multi-family offers that’s different than most other commercial real estate types is just that diversification of tenant base. You might have 200 tenants, or 300 tenants, or 500 tenants instead of 1, 2, 3, 4, or 10. And so you get a lot more turnover, but you can lease them up a lot faster.