Institutional investors recognize the value in multifamily real estate, the second largest share of these investors’ commercial real estate holdings. To the common commercial real estate (CRE) investor, multifamily investing can be more accessible than the other three primary CRE assets: office, industrial, and hospitality.
Making an informed decision on multifamily investing means understanding what this asset entails is crucial. The asset class, demand drivers, demographics, amenities, and variety are the elements you need to scrutinize. Then, understand how to utilize the information to make the right decision.
Asset Class
Multifamily is one of the most versatile asset classes in commercial real estate. Buildings with two residential units are considered multifamily properties, and so are buildings with 100 units. This definition means condominiums, townhouses, and apartments are prime for multifamily investing. But apartments are generally very popular multifamily asset. Therefore, to understand multifamily investing, expertise in apartments is paramount. This post homes in on apartments.
Classifications
Multifamily properties are graded according to condition, age, location, and rent.
Grade “A” is offered to the most luxurious properties with the best amenities, with grading decreasing in alphabetic order.
1. Class A
Class A is typically afforded to buildings and properties with resort-style amenities, including fitness centers, lavish pools, and community barbecues in suburban locations.
Properties with this grade are the best-in-class option.
2. Class B
Class B multifamily properties are often defined by meeting workforce housing needs. A step down from “Class A,” “Class B” caters to median income earners, with amenities, location, and condition being less well-kept than the aforementioned class.
3. Class C
Class C assets are designed for lower-income earners as the lowest rated asset class. These buildings are typically defined by their barely functional amenities — if any exist. They are cheap to rent, older, and often in disrepair, requiring renovation and maintenance.
Property Types
Within the versatile multifamily investing category, apartments are the most versatile. They can include upmarket high-rises, sprawling resort-style complexes, or densely populated dorm-like buildings.
Each type offers a different risk, cost, and return.
· Low-Rise and Garden: Two to four-story properties are considered low-rise.
· Mid-Rise: Five to nine stories
· High-Rise: Ten or more stories
Demand Drivers
The purpose of multifamily investing is to turn a profit or, at the very least, meet your targets until you do. Demand drivers — underpinned by the population segments — will determine whether a property or a locale can produce or generate ROI estimates.
These demand drivers can change the percentage of property rented compared to the percentage purchased based on population growth, economic conditions, job growth, and cost of ownership.
Population Growth
Population growth has a direct — albeit slow — impact on the number of households in the country. The number of renters has increased alongside the population increase. In 2010, there were 38.02 million renter-occupied households in the U.S. in 2021, that figure had increased by 5 million to 43.98 million households. This increase equates to a 3.4 percent increase in renter households. In that same period, the population increased by 7.4 percent.
The figures reveal that as the population grows, so will renter households.
Economic Conditions
Following the ’08 recession, homeownership rapidly declined from a peak of 69 percent in 2004.
The economy impacts the number of rental households because:
· Former homeowners enter the rental household market
· Prospective homeowners delay buying real estate to mitigate exposure to debt
· Rentals become more appealing to young professionals migrating to city centers for opportunity
Job Growth
Job growth coincides with homeownership as it often means younger buyers (Millennials) moving out of their parent’s homes or communal spaces to buy. But there’s a caveat that can depress homeownership rates even in a booming job market: cost of ownership.
Cost of Ownership
If job growth and income stagnate and ownership costs increase, rentals become more appealing.
You can use figures — like housing prices and mortgage rates — to forecast based on available stats and trends to determine when the rental market will grow.
These figures also apply on a micro-scale and can be employed to determine how renter households will grow or shift in a city using its data and stats.
Demographics
Investing in multifamily real estate is investing in a type of resident. It is likely that you can ascertain who your resident will be: their income, age, occupation, and family status.
The reason? Demographic trends contribute to rental popularity.
Millennials (born between 1985 and 1997) are all adults, many still in their 20s when renting is common. But this generation, typically more indebted than their predecessors, is also delaying marriage, having kids, and purchasing properties, making multifamily investing in a population of millennials more appealing.
Amenities
Whether an asset is lucrative will depend on its access to amenities deemed worthwhile to tenants. Multifamily properties are often only appealing to tenants if they offer:
Walkable/Bikeable Locations
As an urban renaissance is underway, renters are prioritizing proximity to grocery stores, dining options, and even business districts. The rental landscape — defined by millennial households in multifamily properties — prefers a central location: one close to their work, leisure, and lifestyle activities, rather than a rental tucked away in a suburban part of town.
Access to Transit
Along with the desire for proximity, is the desire for reliable public transit, especially where other amenities are located outside a walkable radius.
Modern Amenities
Middle- and upper-middle-income earners are drawn to amenities that include rooftop loungers, high-speed internet, in-unit washer and dryers, and balconies. Soundproofing and package lockers are also more appealing to renters.
Variety
When navigating multifamily investing, choosing between existing and new developments is one of the primary considerations.
Recent estimates place the cost of a new development at $64,500 to $86,000 per unit. But to achieve these figures often requires building a high-rise or building with greater than 100 units. At the current construction cost, buying and renovating may be the better option, especially in markets not overly saturated.
Conclusion
Multifamily investing can only be a high reward if you know what to consider before making a big investment.
You need to take data points that matter into consideration. Investors can compare demographics and demand drivers to asset classes, amenities, and per unit cost of multifamily investing to determine if the investment is worthwhile.
Dunmor is ready to assist you in all your real estate lending needs. Our team of seasoned real estate professionals has deep expertise in all facets of real estate lending and investments, and we provide high-quality real estate lending resources to thousands of professional real estate investors just like you.
Contact us today to find out how we can take your real estate investing to the next level.
