Are multifamily properties a good choice for investors? Over the past decade, we have seen some fundamental shifts in the economy that have made multifamily properties more attractive to investors. In recent years, the housing inventory, particularly affordable housing, has not kept up with demand. This has resulted in intense competition for single-family homes, higher home prices, and increasing rents. Although these factors are unfavorable both for buyers and renters, this dilemma has created new opportunities for the multifamily property investor. Putting these factors aside, there are several pros and cons to multifamily investing that one should be aware of.

PROS

Management Efficiency

Multifamily properties usually have lower management costs since management of multiple units is consolidated in one location. For example, there can be economies of scale and efficiency when working with contractors and maintenance.

Investor Time Savings

It takes less time, effort, and paperwork to invest in one multiunit property than it does to individually purchase an equal number of single-family homes.

Potentially Higher ROI

The more income a multifamily property generates, the higher the value. Investors and owners can make a wide variety of upgrades to the property that will allow them to command higher rents and, in return, boost property value. Investors also have more flexibility in positioning a multifamily property. For example, these buildings can be positioned and repositioned to appeal to different target markets as market needs shift.

Recent Fed Rate Cut

Multifamily asset pricing is tied to debt pricing, so the recent rate cut, a surprise to some, ends up being a positive for multifamily housing.

Shifting Demand

High-density, multifamily housing offers people, particularly millennials and seniors, an opportunity to meet their housing needs and preferences. The growing demographic of multifamily property renters favors a low-maintenance, urban location with luxury amenities and integrated technology over large, suburban single-family homes.

CONS

Timing

Has the market peaked? The new supply of multifamily properties in many markets is starting to catch up to demand. As supply catches up, rent increases have slowed.

Uncertainty/Development Risk

Multifamily properties are especially susceptible to new construction headwinds such as trade tariffs, construction labor shortages, and local government regulations. Construction costs have increased due to federal tariffs on imported materials such as steel, lumber, and electrical components. Also contributing to the increasing costs of new construction is the shortage of construction workers. Projects are taking longer to complete as it is difficult to find the labor needed. Furthermore, they are costing more because workers are commanding higher pay. Local governments also contribute to cost increases through the passage of affordable set-aside mandates and new rent control ordinances.

Potentially Harder to Finance

Depending on your starting point, you may find it more difficult to obtain financing for a multi-family property. If you own a few single-family rental properties, you are probably familiar with conventional government-guaranteed loans (commonly used to finance a personal residence).  If so, getting approved for a multi-family loan might seem more challenging as you will now be dealing with “commercial” lenders. Commercial loans are generally handled by a separate department within lending organizations. As such, you may not have the contacts in place to find these loans.  Also, commercial lenders look for specific things in the loan application financials. If you are not aware of their requirements, it can make the process more difficult and time consuming.

On the other hand, if you have experience with commercial loans on rental properties (single-family or otherwise) you may find that getting a multi-family loan is relatively straightforward and, dare I say it, even easy. The reason for this is that commercial lenders like larger deals. It takes the same amount of underwriting work to close a small loan (i.e. 2 or 3 single family homes) as it does to close a large loan (i.e. on an apartment building) but the larger loans generate more fees for the lenders.  If you have a quality deal to present, you may find that your commercial lender gives you more attention then you were expecting.  As always, your mileage may vary.

Commercial loans tend to differ from conventional loans in a few other ways. Rates will be slightly higher versus conventional loans. It is also very difficult to find a fixed rate loan for a term beyond 10 years, with 5 years being most common. The amount of down payment required may also be larger (25% or so) and amortization periods may be shorter (20 to 25 years is the norm).

Conclusion

The macro outlook for multifamily properties suggests that there are enough economic, demographic, and cultural factors in place to keep multifamily demand healthy for several years. However, the opportunities will vary by market, as some have hit saturation while others still have room to grow.