If you are thinking about investing in commercial real estate you might want to include multifamily properties in your investment portfolio. This article from “Realtor Mag,” the official magazine of the National Association of Realtors, will hopefully provide you with some new insight into this potential opportunity area.
Investors looking for single-family rentals are running into supply issues, but that doesn’t mean they’re out of luck; they just need to think outside the box.
MAY 2014 | BY BRENTON HAYDEN
Over the past few years, institutional investors have gobbled up the available stock of desirable single-family rentals in many markets. Rather than compete with these large investment companies, why not try multifamily investment?
Too many investors immediately rule multifamily homes as unaffordable and high maintenance, which is a costly mistake. In many cases, multifamily property can be a better investment than single-family homes. If you know your audience and are willing to be creative, a multifamily investment property could be the best purchase you ever make. Here are three reasons:
1. More reliable income. A vacant single-family home means zero income. However, barring a major disaster, your multifamily home will rarely sit completely unoccupied, even during high turnover seasons. This fact gives you the leeway you need to repair or renovate vacant units, and the time you’ll need to find quality tenants rather than accepting the first person who submits a rental application.
2. Tried and true. There is still a large base of tenants looking for multifamily homes, believe it or not. A recent study by the National Multifamily Housing Council shows only one-third of rental properties are single-family homes while 63 percent are multifamily. If you don’t believe it, take a look at the skyline. Hopefully all of those high-rise apartment buildings don’t block the view.
3. Cheaper by the pound. Let’s face it: That big initial price tag of a building can be terrifying. The key is to think of this purchase as the investment that it is. After all, your price per unit will be much lower than it would be if you dealt exclusively in single-family properties.
Despite all this encouragement, multifamily investing is still daunting. It is fairly different than investing in a single-family home, and there are some extra items to consider.
Amenities Are King
One of the biggest factors to look at when purchasing a multifamily home is location (some things never change). Are there amenities within walking distance? Is public transportation available?
Tenants interested in a unit in a multifamily home are likely more dependent on local amenities and public transportation than tenants interested in a single-family home. That beautifully renovated duplex on the city limits may not be a great investment if there is no bus route nearby.
Knowing the area will also give you a good idea of the kind of income you can expect. Just because the listing says you can expect a certain income per unit doesn’t necessarily make it true. Do your research to find comparable properties nearby.
Just as you need to do your due diligence in researching the neighborhood, it’s important to be aware of all the local laws governing the financing of multifamily purchases.
In some states, the financing for a multifamily home is based on the property’s ability to generate income, instead of being based upon the buyer’s credit, as is the case in the purchase of a single-family home. In other states, multifamily property investments are actively encouraged through favorable financing regulations.
When it comes time to find tenants, your multifamily building will have more obvious competition. Just as it was easier for you to find comparables when you were researching the multifamily market, it’ll be just as simple for renters to do the same and shop around for the best deal. You’ll need to be more aggressive with advertising, pricing, and differentiation in the multifamily marketing world.
As the market starts to cool off in some regions, and heat up in others, it’s important to do your research when purchasing a home. Make sure you have realistically assessed the need for multifamily space in your area and the market potential of your investment.
In the overcrowded single-family rental market, multifamily properties are a blessing in disguise. Before you discount that downtown high-rise or the contemporary duplex, consider the facts. You can’t judge an investment by its dual occupancy status. Jumping to conclusions about multifamily properties might just mean missing the investment of a lifetime.
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Joe Pleva, Director
202 Manufacturers Road
Chattanooga, TN 37405