There are many attractive benefits to diving into multifamily investing: shorter lease terms (which allows for adjusting rental rates to match appreciation in the market), more consistent revenue, a higher demand relative to single-family properties, and a cheaper unit price on a per-family basis.
Understanding where and how to invest in multi-family properties can be challenging given a constantly changing market. If you want to acquire a multifamily asset worth the investment, you’ll want to take the following keys into consideration:
Do your research!
This speaks for itself, but knowing what to look for will give you a chance to make a profitable investment worth your time and money. Understanding the difference between Class A, B, and C complexes, the markets with highest potential growth, and local governmental ordinances and tax policies (among many other factors) is integral to making an informed decision.
Certain trade shows, like the February Cref15 in San Diego, can help you network with other real estate owners and feel the pulse of the market.
Market and Location
The national multifamily housing market is growing at an annual rate of 10.4 percent and it remains a powerful investment option.
According to National Real Estate Investor 2015 projections, there’s still a shortage of of housing units in major markets while there are affordability issues in the top markets (i.e. New York, San Francisco). Multifamily housing will see an increase in demand spearheaded by millennials and their push toward urbanization. Keeping tabs on the millennial push, especially as the job market continues to improve, will be a continued discussion in the multifamily real estate conversation for years to come.
Recently, some have suggested multifamily apartment supply is starting to become oversaturated in growing markets. Such are the perils of having a sudden rush of investors moving from hotspot to hotspot with fierce competition in locations such as North Dallas, North San Jose and South-of-Market (SOMA) in San Francisco.
Make sure to look at inventory projections before you decide to start investing in any given location. Even if multifamily units might not exist currently, the recent increase in new construction could mean a substantial increase in multifamily real estate traffic.
Property Performance Level
Knowing how well a property is performing before you buy it is essential. Sifting for undervalued properties is an art perfected over time, but an essential skill in an increasingly competitive market.
As CashFlowDiary’s J. Massey points out in his brilliant multi-family investing tutorial, you should specifically be aware of metrics such as rent-to-price ratio (rent/building price) and debt service coverage ratio (net operating income/total debt service). You should know if you are buying an undervalued property (so you can bolster the building’s performance) and can afford to take out any loans for an investment.