Multifamily Investing: How Can You Do it in 2024 – Part 1

What is Multifamily Real Estate?

Multifamily refers to residential properties that are shared by multiple households or families. As an asset class, it encompasses a wide range of housing types — essentially, any building with at least two separate living units that are either vertically or horizontally adjacent. Multifamily is also characterized by shared physical systems such as walls, roofs, heating and cooling, utilities, and amenities. Subtypes can include townhomes, condominiums, apartment complexes, build-to-rent (“BTR”) or build-for-rent (“BFR”) communities, and manufactured houses. In essence, multifamily is a broad umbrella that includes residential properties designed for occupation by more than one family or household.

Multifamily investing is the largest of the “core four” commercial real estate asset classes, and is arguably the most straightforward of all CRE asset classes. Individual passive investors are increasingly tapping into multifamily investing to build more diversified portfolios. Investing in multifamily properties can help you earn passive rental income, scale your portfolio, and in some cases qualify you for unique tax deductions.

Simply put, if you are looking for your next asset class to diversify a 60/40 portfolio, multifamily investing could be a great fit. Multifamily investing is more accessible than ever before for individual investors. Like any asset class, it comes with its own set of risk factors and considerations, which we’ll discuss in detail.

Multifamily Investing Definition

A real estate investing strategy that focuses on properties suitable for multiple tenants, like an apartment complex or condominium. Multifamily investing typically refers to investing in properties with a large number of units so that economies of scale and greater total return can be achieved. This article is fairly comprehensive.
Let’s start with – why should you, as an individual investor, care about multifamily investing? First, here a few top reasons why the multifamily asset class may be worth a look as a next step beyond a traditional portfolio of stocks and bonds:
  1. It potentially offers both cash flow and appreciation/upside.
  2. Unlike single-family investing — or “flipping” — it brings the benefit of a diversified tenant base.
  3. Even versus other commercial real estate asset classes, multifamily is essential, irreplaceable, and in short supply.

As we will cover in more detail, we believe multifamily investing is a critical step to take for any self-directed investor looking to diversify into alternatives. Multifamily investing is the largest sector within commercial real estate. For many investors, it is also the simplest to understand. The demand drivers and fundamental uses of multifamily property are well understood. Relatedly, the multifamily asset class tends to be one of the most stable performers among all types of investments (more on that in a bit). In this article, we’ll review the essential things to know about multifamily investing, and look at the major advantages of multifamily real estate investing. We’ll also share some tips for investing in the asset class from the perspective of an individual passive investor.

Multifamily Investing Explained

Multifamily investing entails buying properties with two or more units that can be rented out to multiple tenants — like apartment buildings and condo complexes. Further, “multifamily investing” tends to mean investment into properties with many units in a highly structured manner, factoring in lease-up, value-add improvements, and other elements of a more nuanced business plan. As such, multifamily investments are considered one of the “core four” types of commercial real estate investment, alongside office, retail, and industrial. 

Real estate investors who acquire multifamily properties are typically looking to increase net operating income (NOI) by increasing occupancy rate, increasing average rents at the property, or both. Success in multifamily investing also hinges on exiting at a more favorable sale price, either through positive changes in the market, value-add improvements at the property, or both. As such, CRE investors typically pay attention to several key metrics when evaluating a potential multifamily investment:

  • Occupancy rate
  • Capitalization rate (or “cap rate“)
  • Sales and rental comparisons (“comps”) in the area
  • Population growth, job growth, and other demand drivers in the market

Like other investable assets, the performance of multifamily investments is subject to market forces: supply and demand. Supply constraints can drive up rents that operators can command at the property, the fair market value of the property as a multiple of rents, and the sale price at exit. Local factors — such as zoning and permitting — can influence supply in a given multifamily market. Macroeconomic factors also play a part. Generally speaking, the supply of rentable units in the United States is far below demand, which creates a constant positive factor for multifamily investingAs of 2024, the supply pipeline (the number of multifamily properties being developed) is strong for the moment but thins out considerably into 2025 and beyond, as rising interest rates put many new projects on hold.

Multifamily Real Estate Investing vs. Single-Family

Often “real estate investing” is used as short-hand for buying and renting single-family homes or “flipping.” Commercial multifamily investing behaves differently in several key ways. Investors should be prepared to expect a few differences when investing in multifamily units compared to single-family homes. For instance, tenant turnover and vacancies in single-family homes can drastically impact or completely erase rental income. In other words, multifamily investing often benefits from a diversified tenant base; with more units, more tenants, and leases expiring at various moments, the asset is more insulated from vacancy risk.

Since owners will have access to multiple streams of income, multifamily properties can be less volatile assets compared to single-family rentals during times of an economic downturn or recession. Although multifamily units require a higher initial investment, investing in this type of real estate typically means fewer gaps in rental income and cash flow.

Even with short rental agreements, leasing to multiple tenants provides a built-in hedge against inflation. Since multifamily tenant turnover is relatively high, rental prices can quickly reflect current market values and compensate for inflation. What’s more, it is common for multifamily operators to “capture” inflation in rents – in inflationary periods in the past, multifamily operators have commonly pegged rent increases to the CPI, automatically offsetting the effects of inflation.  

Multifamily Investing — a Recession-Resistant Asset Class?

The resilience of multifamily real estate investments, particularly during recessions and various business cycles, can be attributed to several key factors:

  1. Stability in Demand: During economic downturns, while sectors like retail, office, and hospitality may suffer due to reduced consumer spending and travel, the demand for housing remains consistent. People always need a place to live. This enduring need for housing underpins the resilience of multifamily investments during recessions. For instance, during the COVID-19 pandemic, many people chose to stay in their current living situations due to health and economic uncertainties​​.
  2. Increased Renting During Recessions: Economic downturns often make it challenging for individuals to qualify for mortgages, as lenders become more cautious and restrict loan issuance. This situation leads to an increase in the renter population, thereby boosting demand for rental apartments. Additionally, in times of financial uncertainty, individuals are less likely to make significant purchases like homes, further increasing the pool of renters​​.
  3. Performance During Past Recessions: Historical data from past recessions, such as the Great Recession, show that multifamily properties can rebound quickly after initial volatility. For example, apartment Real Estate Investment Trusts (REITs) recovered and outperformed other commercial real estate asset classes and even the S&P 500 in the years following the Great Recession. Moreover, the U.S. Bureau of Labor Statistics reports that residential rents in the U.S. have generally risen each year, even during recessions, except for a brief period following the Great Recession​​.
  4. Adaptability to Economic Changes: Multifamily investments have shown adaptability across different economic downturns, whether caused by financial crises, tech bubbles, or pandemics. For instance, during the early 1990s recession, multifamily was the only major property type to experience positive rent growth. Similarly, during the economic fallout of the pandemic in 2020, multifamily, along with industrial and retail sectors, experienced positive rent growth due to strong housing needs and government stimulus​​.
  5. Income-Based Valuation: The valuation of multifamily properties is primarily based on the income they generate rather than market conditions. This income-based valuation adds a layer of resilience during market downturns, as multifamily units continue to generate rental income even when market conditions are unfavorable​​.

As of 2024, it seems increasingly likely that the “soft landing” scenario will come to pass — a gradual decline in interest rates and inflation without any significant harm to the economy. This is not a foregone conclusion, however — some form of downturn is common following a period of rapid rate increases like we saw between mid-2022 and late-2023. Multifamily may, hence, be a timely asset class to consider.

The case for multifamily investing as a recession-resistant asset class has quite a bit of historical precedent. During the Great Financial Collapse (perhaps the worst economic downturn in U.S. history) multifamily outperformed other asset classes. After the initial dip, multifamily REITs outpaced all other CRE asset classes and the S&P 500 for the duration of the recovery. Further, delinquency rates on Fannie Mae and Freddie Mac multifamily loans hovered below 0.5% for much of the GFC, never reaching 1%, at a time when unemployment rates in the U.S. exceeded 10%. This low default rate speaks to the potential downside protection of multifamily investments, particularly in workforce and non-Class A assets.

In Part 2 We’ll discuss – Advantages of Investing in Multifamily Properties

Successful real estate investors focus on finding the deal because it’s the biggest problem new investors face, the best protection strategy, the lowest common denominator for any exit strategy, and the trigger point that makes everything else easier. The Bottom Line – Investing in Affordable Housing or a Multi-Family Portfolio, it can be very tricky. Why try to go it alone. Are you interested in having a professional / responsible group handle your investments ? Then don’t venture down this road alone, let SIMM Capital guide you in the right direction. We live it and breath the industry – at SIMM Capital our strategy is to give everyone the chance to build wealth through real estate. We seek the best assets that hold the largest opportunities while delivering in rent growth year over year. We know the business. To see how we can help you with your Real Estate investments talk to an expert and click the link




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