In this post we will learn the basics of multifamily real estate investments. Multifamily real estate investment has many benefits including cash flow, passive income, valuation potential and lowered risks. In the previous post I have discussed the benefits of multifamily investment.
For most investors, real estate is a lifetime investment – so it needs in-depth research and through analysis.
The ticket-size of the real estate investment is not small – for most of the investors. Hence it is imperative that real estate investing be an investment that brings in value and has the potential of growth and expansion.
A multifamily real estate investment is high value, dynamic investment which is, in the long run, projected to grow and bring in high returns.
Also Read: Multifamily vs. Single Family Investment?
Multifamily Real Estate Investment – A Brief Insight
Multifamily real estate investment is a housing structure that comprises of multi dwelling units. These multifamily real estate dwelling units may comprise of clusters of dwelling units that are diverse in their design and carpet area, but in the same housing complex.
A multifamily real estate property is a modern-day real estate trend. It is extremely popular amongst the white collar and blue chip working profile as it offers easy, no hassle dwelling arrangement and passive income structure.
For a generation on the move and globally mobile, big independent, single family housing units can become burdensome like a white elephant, demanding high maintenance costs and low returns, and difficult to liquidate.
In contrast multifamily real estate dwellings offer amazing options regarding both, staying and commercial ventures. And disposing it off is easy and lucrative, as its value appreciates over time. Hence, multifamily real estate investment is an investment that is bound to appreciate and bring in great returns.
Key Factors That Make Multifamily real estate investment An Attractive, High Value Investment.
A multifamily real estate offers amazing options and a wide range of choices in whatever way the investor wants to move. Some key factors that make multifamily real estate investment a prime and coveted investment option are:
- Attractive Rental Options – Multifamily real estate offers the lucrative option of owning a rental property that helps to create passive income and diversify the investment portfolio. It creates a steady stream of income that makes multifamily real estate investment a risk free, alternative income option and hence a high value investment.
- The Millennial Demand - The Millennials and the Baby Boomer generations are the biggest segment of money spenders today. And both these segments, in the peak of their career growth, are on the move. Hence there is an emphasis on multifamily real estate that offer good rental options and easy residential options. This is primarily so because multifamily residential properties offer good financing options for the millennials and baby boomers, and these properties are easy to dispose off, if the need arises. And the cost effective maintenance makes it a very practical purchase. This naturally makes multifamily real estate investment an attractive investment option for the investor.
- Quick Growth and Exponential Value Appreciation - A multifamily real estate investment is a high growth investment. It has the potential to multiply the income with an input of just a basic cost added. A shorter term of lease agreements allows for a quicker appreciation of rental value. Also the appreciation of multifamily real estate property is guaranteed, and offers greater profit margin. Hence, turning multifamily real estate into high value investment.
- Attractive Financing Options – Most Financiers, Banks etc, prefer financing multifamily real estate property because of its low risk, high return value. The attractive rentals, constant revenue generation even when a property is not fully occupied, and easy resale options makes multifamily real estate a most profitable venture for financiers. Hence it is extremely easy to raise money for multifamily real estate. It may be expensive, but it is much easier to finance it. A multifamily real estate investment is a preferential investment in the real estate financial world.
- Increase in Housing Demand for Workforce Segment – With large scale migrations towards cities taking place, and international work related and short term migrations, demand for workforce housing has seen a considerable increase. Rentals in multifamily real estate dwellings is the most attractive residential option for the workforce as it offers a safe, well maintained, budget friendly, socially supported residential profile. This makes multifamily real estate investment a safe investment guaranteed to earn good returns.
- Recession and Pandemic Resilient – Most investments tend to crumble or take a bad hit when challenging and turbulent situations unfold, like a recession or a pandemic. However, multifamily real estate is one investment that survives the ravages of societal or economic downslides. A multifamily real estate property generates a constant revenue, even when the occupancy is low, and external influences are extremely challenging. This is so because people always need a place to stay. The multifamily real estate housing offers multiple residential and rental options that are budget friendly, and it also offers the security of a co-supportive community during difficult times. All this points to the fact that multifamily real estate ensures a constant and regular income generation. This makes the multifamily real estate investment resilient to pandemic and recession hits.
- Investment Portfolio - Multifamily real estate investment helps to build a good Investment Portfolio for new investors without breaking too much sweat. Investing in a multi-unit apartment building is much easier, and time and energy effective, as compared to investing in multiple single-family housing units. Multiple single-family units means dealing with multiple loan profiles, multiple sellers, multiple locations, multiple designs and structures and multiple inspections. This can be harrowing, exhausting, money draining, and too much work. In contrast, a multifamily real estate requires the investor to deal with only one loan profile, one seller profile, single insurance, and inspection, one location, but acquisition of multiple housing units. Thus, multifamily real estate investment makes it easy to build a good investment portfolio.
- Real Estate Crowd Funding - In multifamily real estate investment, the option of Real Estate Crowd Funding is fast becoming a major attraction for the investor. In crowdfunding, the developer invests a major percentage and opens the balance funding to individual investors, to raise the balance amount. However, it is important to keep in mind that even though it is an attractive option, and returns are high, crowdfunding is high risk investment. It works well for value-adding strategies like renovation, repair etc. But the risks in crowdfunding due to multiple investors, cannot be ruled out.
- Property Management – All property needs to be managed. And managing a property can be a task. Multifamily real estate property offers the added advantage of making it financially viable to hire a Property Manager. In a Single-Family Unit, all the organisational and managerial obligations are on the developer’s shoulders, because financially it is very impractical and expensive to hire a property manager. However, the regular and consistent rental earnings and revenue generation, allows it to be financially viable to employ a Property Manager in multifamily property, leading to multifamily real estate investment being an attractive investment, not only in terms of economic viability but also in terms of structural and administrative ease.
- Real Estate Investment Trusts (REIT) – Real Estate Investment Trusts or REITs are one of the most cost-effective investing strategies for multifamily real estate investment. REIT is a special company, specifically structured to help investors make their real estate investing work for them. These REITS are often traded just like stocks. In REIT 90% of the taxable income is shared with the shareholders as dividends. This naturally creates a great source of passive income generation. Retirement accounts like IRAs specially benefit from REITs. REITs are generally aligned to single real estate units like office buildings, shopping malls, multi-family dwellings etc. The availability of REIT for multifamily real estate property is a definite advantage in the real estate investment arena for multifamily real estate investment.
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Popular Investment and Financing Modes for Multifamily Real Estate Investment
There are three most popular investment and financing modes for multifamily real estate investment. These are:
- Financiers and Bank Loans – This is the most traditional form of real estate investment. Banks and Financiers prefer multifamily real estate investment for its various advantages. However, this mode puts the strain solely on the developer’s shoulders.
- Crowdfunding – This is an attractive, but high risk and high return mode of Multifamily real estate investment, primarily because of the involvement of multiple investors.
- Real Estate Investment Trusts (REITs) - REIT is the most cost effective and risk tolerant multifamily real estate investment. Adding to its benefit is the fact that it behaves like stocks and generates a passive income, and also offers quick and easy liquidity option.
Factors Influencing Investment Strategies in Multifamily Real Estate Investment
Having understood the advantageous position of multifamily real estate investment in real estate investment arena, and the popular investment modes, it is particularly important to go for the correct and the best suited investment strategy.
Every multifamily real estate profile has a different requirement and structure. One investment strategy does not fit all profiles.
In deciding the best suited investment strategy, some key requirements need to be carefully considered, with regard to finances. These are mainly –
Capital Needed– Capital required and capital available with the developer or the investor is a most important consideration. It is a good idea to put 20% of the purchase price away, and accurately calculate the closing costs and the reserve amount.
Liquidity Structure – Liquidity of finances when needed is an important consideration. Selling a multifamily real estate generates the liquidity needed. Here the valuation of the multifamily real estate property must be updated. But this process is tedious and can take months, specially so in crowdfunding. In REITs however, liquidity can be achieved immediately because REITs can be sold like stocks.
Rentals – Rentals in multifamily real estate investment are a guaranteed way of generating passive and consistent revenue. This can create a safe pocket for the investor, but needs a great deal of personal involvement.
Financial Risks – Whatever the strategy, it is extremely advisable to consider the risks in each investment strategy, and juxtapose it with the returns. This helps the investor and the developer to know how much risk can be taken, and helps to fortify against the risks. It is all about taking a calculated risk, if at all.
Income Profile – It is important to have a knowledge of the income needed to be generated. The risks taken and the investment strategy opted for, depends on the income required to generate from the multifamily real estate investment strategy.
With one of the highest average total returns of 9.75% and a deviation of a low 7.75%, multifamily real estate investment is one of the most lucrative investing options in the real estate market. The rich and the powerful elite segment of the society have long been minting money through multifamily real estate investment. However, with REITs, Crowdfunding, Loans, new investors are braving the real estate moguls and entering the real estate market. These new investors bring in new blood, making multifamily real estate investment the investing trend in real estate.
Hope you enjoyed this post on the basics of multifamily real estate investment, let me know what you think in the comment section below.
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What are the major pros and cons of multifamily real estate investment?
When it comes to real estate investments, multifamily properties have a lot to offer. - Cash flow: One of the best things about investing in multifamily real estate is that rental income guarantees a steady monthly cash flow. - There are a lot of good things about investing in multifamily properties, but not everyone can do it. — More expensive to start: No matter how profitable a multifamily rental property might be in the long run, there's no getting around the fact that it costs a lot up front.
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