Multifamily properties have proven to be a lucrative investment for several real estate investors as well as a point of diversification outside of the stock market for any well-rounded investment portfolio. Firms searching to find great multifamily deals is a trend that doesn’t seem to be stopping any time soon. The opportunity for excellent cash flow in an alternative investment that can have strong upside potential makes multifamily investment a popular place to deploy capital either actively or passively. I can’t tell you the number of conversations I have had with those who started their real estate investing journey purchasing single-family homes, only to later find that multifamily properties were ultimately the better decision for them (either actively or passively) in the long run.
Why Passive Investors like Multifamily Investments
Everyone needs a place to live, and finding an affordable and well-kept apartment building is always in high demand. These investment opportunities have stability as well as the capability to keep up with inflation through rent increases. When you’re investing in apartment complexes that have hundreds of units, the vacancies don’t have much of an impact on the day to day business. Leasing is merely a function of property management. A good sponsor will deploy a strong plan that will mitigate potential risks as well as offset tax burdens. A cost segregation study, if implemented, will provide tremendous tax benefits from accelerated depreciation that will be shared with all partners in a deal. The main reason passive investors like this investment is because they get to be truly passive in a tangible asset. The sponsors manage everything and a passive investor typically receives quarterly disbursements.
Why Active Investors Like Multifamily Investments
Active investors like multifamily deals because there are several opportunities for success. You can have a core deal that is stabilized and cash flowing or an opportunistic deal where you are completely upgrading a community and after repositioning, refinancing to pull out your initial investment or selling with a large equity multiple. We like to work in the middle of the spectrum on the value-add and core-add deals. This is not to say that we leave a great deal on the table as we have done it all, we just prefer this type. These are the deals that need some upgrades to bring them up to standards expected by tenants and give you an edge in the marketplace. Upgrading properties allows us to raise rents and force appreciation while we’re also lowering our expenses to create more NOI. Dependent on the asset, we can typically refinance a majority, if not all of the capital to return to our investors, and enjoy several years of cash flow before selling for a nice gain. Sometimes there isn’t a need to sell at all. As Warren Buffet stated, “Our favorite holding period is forever”.
Multifamily Real Estate Investing is an Excellent Option, But Consider This…
In the commercial real estate space, you can do well with a multifamily investment, but keep in mind the following:
Which real estate market are you investing in? Understanding market dynamics is extremely important with any investment property. We are watching rents freefall in some markets in the USA as Covid-19 unfolds. Secondary and tertiary markets, while they were already looking appealing because of the purchase price opportunities, may see more of an uptick in population growth as people relocate from primary cities throughout the pandemic. That’s not to say that deals won’t be found in prime areas. We will see some operators who will not be able to weather the current situation and sell at a reduced price in all markets. Market consideration will be key as you are performing your due diligence.
Management Who is managing the property? Whether it is being managed by the sponsor or by a third party company, the management in place is going to be handling the day to day and should have a track record of success in this space. Poor management will lead to a distressed asset. At FNRP we have all of our management in house. We are vertically integrated and like being close to everything. It’s what works best for us and our investors. That’s not to say that other operators who are not vertically integrated are not very successful. There are plenty of ways to hit a ball. The bottom line is to make sure you have well-vetted and successful property managers tending to your real estate investment.
Location You can be in a great market, but you also need a great location. What amenities are nearby that cater to your demographic? How accessible is it to major roadways for commuters? A rental property that is walking distance to great amenities and convenient for commuters will likely have a lower vacancy rate than one that is off the beaten path.
Whether you’re a first-time or long time passive investor or active multifamily investor, the multifamily housing asset class is a strong investment vehicle. Rental rates remain consistent in most areas and renters continue to look for great options to reside. There are deals everywhere for those who are consistently looking and analyzing. Best of luck in finding your next investment or acquisition.