Is Investing in Multifamily Housing Right for You?

There is no place like home, and for many Americans, said home is in a multifamily dwelling.  If you have been considering real estate investment opportunities, you have likely heard that multifamily properties should account for a sizable portion of your portfolio.  But why?  What makes multifamily housing a stable, high-potential investment opportunity?

First, multifamily housing is an attractive investment option because it creates economies of scale.  The cost of operating multifamily housing is likely more affordable than single-family housing when considered on a per-unit basis.

But ultimately, it comes down to flexibility, versatility, and demand.  Multifamily apartment housing stands out because it is utilized by every generation, at every life stage, and by all income levels.

1. Everyone must live somewhere.

Some investment sectors may see ups and downs in times of economic uncertainty.  When it comes to multifamily housing, there may be slight changes in the market when the economy shifts, but rollercoaster-like movements are unlikely.  Why?  Because everyone needs a place to live.

Younger generations are flocking to urban, including suburban, areas at increasing rates, where costs are higher and home-buying options are more limited.  And even with COVID slowing down housing demand throughout the urban core, the suburbs are booming.  Many cities, at the time of writing, have recovered to pre-pandemic levels of supply and demand. The trend of urbanization is likely to continue.  Approximately 83 percent of the US population lives in urban areas as of 2020 reports, up from 64 percent in 1950.  By 2050, that number is projected to reach 89 percent

Traditional housing costs have skyrocketed across the board, up 9% in 2020, with the median price of an existing home hitting a historic high of $329,100 in March of that year.  And 2021 has seen even higher price increases as demand has outpaced supply.  As more young people move to urban areas seeking economic advancement, high prices and down payment requirements may prevent them from tapping into the traditional housing market.

Even high earners turn to multifamily housing as a way to live more affordably.  Many complexes offer world-class amenities and luxuries that would be non-existent in a starter home—not to mention renters do not have to deal with house-maintenance headaches.

Young people are seeking multifamily options, and older generations are doing the same. (And they also are living longer.)  Many choose to forego the responsibilities of homeownership once they retire or have an empty nest, deciding instead to downsize to well-appointed apartments.

2. Renting is already popular…and likely to remain so.

At 30 percent of households, renters make up a significant portion of the population. That’s 11 MILLION households, a huge portion of the investable real estate market.  And the rental market is not slowing down as Millennials continue to signal their preference for apartment life.  A recent study from the National Apartment Associated indicated that America needs 4.6 million new apartments by 2030 to keep up with housing demand.  

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3. Apartment leases are flexible and trending longer-term.

Thanks to rising real estate costs and increased competition for housing, many residents have shifted toward staying in multifamily housing longer, rather than using it as a short-term transitional space.

While people are living in their apartments longer, multifamily housing leases are still usually renewed at 1- or 2-year intervals, which gives investors/owners the flexibility to move rates with market conditions.  They can adjust rents quickly to ensure they maintain investment efficiency, capturing rent increases during upswings and during downswings.

4. There are many multifamily options to fit any investor’s needs.

Apartment complexes are generally divided into A, B, C, and D classifications based on:

–   Level of luxury

–   Construction quality

–   On-site amenities

–   Location

What asset classes you choose to invest in will be determined by your risk appetite and investment strategy (e.g., core, value-add, opportunistic).  Investing in multifamily housing through syndication can allow you to buy into multiple apartment complexes at different classification levels, spreading your risk and broadening your reach to different market segments.  Diversification at its finest. 

5. Additional financial backing can reduce risk and improve profitability potential.

Because multifamily apartments are housing units, investors may be able to take advantage of debt financing backed by quasi-governmental entities promoting housing affordability.  This support makes the cost of financing a multifamily apartment more affordable than other types of commercial real estate, which in turn drives potential returns higher.

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