Enjoy a quick breakdown of arguably the 5 most alluring reasons you should invest in multi-family real estate over the coming years.
According to the world’s largest commercial real estate investment firm United States Commercial Real Estate Services, CBRE, over the 26-year period of 1992-2018,
Multifamily real estate provided the highest average annual total returns (9.75%) of any commercial real estate sector with the second lowest level of volatility (7.75%).
Not too shabby! On the surface it sounds great doesn’t it, but what’s driving this trend? To start putting the pieces of a bigger picture together and answer that question, let’s go through these reasons one by one in brief.
#1: Spiking Millennial Demand
Technically we’re in a period where classical home ownership isn’t as attractive as it has been in the past for a variety of socioeconomic reasons. Some are more fundamental, like for example the financial gyrations of the 2008-2018 decade. While others are cultural or generational, like the modern need for high-degrees of lifestyle flexibility and general mobility. How about the sharing economy and all the implications for rental markets? Multi-family real estate is where the shift is moving, so demand for rentals should remain strong for a good clip.
#2: Downsizing & Minimalism Trends
In connection to our last point, on the other side of the age spectrum boomers are also downsizing, seeking simpler lives and finances. According to prominent real estate analysis, Forbes for example, the biggest move to rentals came from those aged 55 and older between 2009 and 2015. More recently in 2017, they accounted for 30%.
What seems to be driving this trend is the demand for certain types of multi-family rentals that offer less hassles, tons of the right kinds of amenities, and a living standard this generation finds rather appealing. Couple with this a general trend towards minimalism where smaller multi-family units are becoming more attractive than larger single-family homes, and the numbers speak for themselves.
#3: Shorter-Term Lease Agreements
If we’re using in generalities here, then most people’s long-term outlooks on the U.S. economy are anything but stable and certain. So compared to longer five-year leases customary with various other kinds of commercial real estate, 1-year multi-family leases feel safer to renters. While this doesn’t protect you from longer stints of economic downturns, it does allow you to raise rents when boom times abound – making recovery a bit smoother and quicker.
#4: Greater Need for Workforce Housing
What’s ‘Workforce Housing’ you ask? Multi-family properties that cater to families bringing in anywhere from 60-120% of their area’s median income – typically Class B & C buildings without the cutting-edge, high-brow perks of more expensive properties. That being said, according to the State of the Nation’s Housing study by Harvard Research, in 2017 Class A construction continued its upward trend, while B & C are facing shortages.
For a wider perspective, as Financial Samurai put it,
“In the decade between 2005-2015, the supply of rental housing stock increased by nearly 100% for high-end units, but during that same period the stock of affordable units fell by 2%.”
This means it’s a more predictable investment on the medium-to-short term level – more demand than current supply, with plenty of margin for improvements and reducing management costs.
#5: Returning to Financials
If we’re comparing apples to oranges, multi-family investments provide a more preferential mortgage market vs. office space, industrial properties, hotels, strip mall spaces, etc. Here’s a couple numbers for 2017:
- Typical Commercial Mortgage Rate = 4.50%
- Multi-Family = 4.25%
- Broader Commercial Investors Loan-to-Value Ratio = 59%
- Multi-Family Investors = 67%
- General Commercial Investor Debt-Service-Coverage Ratio = 1.74%
- Multi-Family Investors = 1.25%
Need more be said?
Closing Thoughts: Entrypoints
Great, you’re sold and wondering where to sign up. In the past the biggest stumbling block after this point was hundreds of thousands to 7-figures (if not 8+) to purchase medium-to-large buildings like these; say with 100+ units. You have the kind of leverage and cash it takes to get involved with these properties laying around? Probably not, which is why different forms of real estate crowdfunding began taking shape and continue increasing in popularity.
Basically, a central platform allows a large number of people to make micro investments and collectively purchase a multi-family property. While percentages are going to be much smaller, and you’ll likely have no involvement with it, returns can be reliable.
A More Exclusive Route?
Another option is to partner with a professional and specialized multi-family investment firm like Virtus Property Group. The main difference is you’re part of a much smaller pool of investors where returns can be better, but you need to contribute a bit more to deals than many crowdfunding platforms which can ask for as little as $1000.
- Only a small number of higher-quality investment opportunities each year.
- Virtus focuses on established, well-positioned multi-family properties with great opportunities to add value and increase cash flow.
- Our niche is 15+ unit apartment buildings – undermanaged, and purchased below replacement costs at wholesale prices after extensive due diligence.