Passive apartment investing has proven to be a great way to generate passive income and grow your wealth. There are a few different types of multi-family investing strategies, so it is important to understand what they are and some of their pros and cons. Let’s look at the three main categories of passive apartment investors: turnkey, distressed, and value-add.
A turnkey apartment is a stabilized property where little to no work is required after acquisition. This type of property has high occupancy (typically over 95%), and doesn’t require any renovations. The basic strategy here is to buy a stable, cash flowing property, take over management and to focus on maintaining the current level of property performance.
Some people like turnkey investing because it has the lowest amount of work required for the new owner, and is the lowest risk strategy. There is no chance of over-budget renovations. The cash flow is very predictable since the rent income has been optimized. The downside of investing in turnkey apartments is that they typically have the lowest returns out of the three strategies. Since there are no renovations to complete, there is very little opportunity to increase the rent on the property. This means the cash flow will stay relatively stable, and there won’t be the opportunity to add much value to the property.
A distressed apartment is typically an older property that has numerous problems. They have problems such as poor operations due to mismanagement, out-dated interiors or exteriors, have poor quality tenants, and have low occupancy rates. The strategy is the acquire a distressed apartment and fix the issues or conduct major renovations in order to increase occupancy, rents, and overall performance.
The benefit of acquiring a distressed apartment is that there is the potential for the highest return, because there is so much revenue and value that can be added. The downside is that in order to obtain these high returns, there is a high level of risk taken since there are many things that could go wrong trying to repair a distressed property. Also, there can be little to no cash flow at the beginning of a distressed apartment acquisition.
A value-add apartment is a hybrid of turnkey and distressed investing, allowing investors to get the best of both worlds. These properties are stabilized and performing well, but there are still opportunities to improve performance by increasing income or decreasing expenses. This can be accomplished by conducting moderate renovations enabling a higher rent to be charged to tenants.
A value-add apartment is the best of both worlds, since the investor gets consistent cash flow upon acquisition, and then the opportunity to substantial profits from value-add strategies such as renovations. For this reason, the risk is much lower than a distressed apartment.
CPI Capital has assessed all the strategies and determined that value-add apartments present the greatest opportunity for the best risk-adjusted returns. We place a high focus on finding apartments with a very strong cash-flow on day one, but with substantial upside due to various factors such as out-dated units or below market rents. If you want to get access to our exclusive investment opportunities, sign up for our Exclusive Investors Club.
– Ava Benesocky
CEO, Co-Founder Canadian Passive Investing
– August Biniaz
Chief Strategy Officer, Co-Founder Canadian Passive Investing