The apartments sector has risen from an alternative category within real estate investment to a legitimate asset class of its own.
The coming-of-age of the millennial and Gen Z cohorts, aging baby boomers, the Great Recession, and shifts in lifestyle preferences have all contributed to this rise.
The sector’s growth is set to continue because, frankly, everyone needs a place to rest their head, and people are increasingly delaying or forgoing homebuying due to financial and lifestyle factors.
As in any type of investment, those who invest in apartments must approach it with a realistic strategy. This starts with an understanding of the below:
What does ‘multifamily’ mean and what are the different types of multifamily developments?
Multifamily means apartments.
In the commercial real estate world, the two terms are interchangeable.
There are different forms of multifamily developments in which investors can invest. A few of them are:
- affordable housing—affordable to those with a median household income or below as rated by the national government or a local government by a recognized housing affordability index
- transit-oriented development—a type of urban development within walking distance of public transportation
- garden-style apartments—an apartment building having direct access to a backyard or garden, or a low-level apartment building or building complex surrounded by lawns and trees, shrubbery, or gardens.
- micro-apartments—one-room apartments that are typically less than 300 square feet but are self-contained, designed to accommodate a sitting space, sleeping space, bathroom, and kitchenette
- mixed-use—a combination of uses in one building or complex; when multifamily is involved, it usually sits above ground-floor retail, office, or other uses
Each form of multifamily holds pros and cons for investors.
The best choice for each investor is the form they know and understand best, after considerable research and due diligence.
How does multifamily investment work?
Whichever form of multifamily property investors choose to invest in, they are effectively collecting rent as income from that property.
The rent goes toward debt accrued in acquiring, constructing, or upgrading the asset; operating expenses; and profits to be distributed to investors.
Multifamily operating expenses can include management of the property, repairs, taxes, utilities, renovations, tenant services, and a host of other options.
These expenses vary by size of property, number of units, neighborhood in which the asset is located, and the amount of money the owner wishes to invest in the property to attract and retain tenants.
Keeping operating expenses low by investing little in a property can end up costing owners more in lease turnover and vacant units caused by lack of appeal to renters.
It’s important to note that every time a tenant doesn’t renew their lease, the owner must invest money in making that apartment presentable to a new tenant, which could include new paint, carpeting, appliances, etc.
The more often this is done, the higher the expense—without the tenant in place to offset the expense with rental income.
What are some different strategies for multifamily investment?
Just as no two investors—or their portfolios—are alike, there is also a variety of strategies for multifamily investment. A few of them are:
- By market—At Trion, we believe in investing in markets that do well when times are bad, not markets that do well when times are good. Using that strategy, successful multifamily investments are less tied to economic cycles and generally can weather downturns.
- By property type—Some investors prefer affordable housing because there is always a demand for it, while others swear by transit-oriented multifamily because cities are so well populated that vacancies are usually quick to fill. They get to know the market for these properties and become attuned to both the plusses and the red flags for which to watch.
- By risk level—Different investors have different levels of risk tolerance. Those who are low on the risk-tolerance spectrum are more likely to choose to invest in well-maintained, well-managed multifamily assets in primary markets than properties that need considerable renovations before they can turn a profit.
- By price—Most investors know how much they are willing to spend on a multifamily asset and only consider properties within that range. This strategy narrows their scope and can save them a significant amount of time weeding out properties that are outside that range.
Whichever investment strategy investors use, it’s wise to vet each property completely before closing a transaction.
That means evaluating the location, the economy, the demand drivers, the pool of potential tenants, and the full gamut of expenses they may face during ownership.
Only after doing so can they determine which multifamily properties make the best investments for their portfolio.