Multifamily is one of the most sought after and active sectors in the real estate investing world. And for good reason. While not every apartment deal is going to be a home run the overall asset class should absolutely be a part of your portfolio. Here’s why.
1. Apartments are stable and hold their value
Multifamily holds up extremely well in down cycles. CBRE did a study and showed from 1992 through 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%). That means you can expect to make above average returns, with great tax benefits, AND still be able to sleep well at night. I am a conservative investor who likes to go to bed and wake up in the morning with little to no change. Multifamily investing gives you that ability.
In addition, apartment delinquencies are incredibly low. At the height of the last recession, the worst housing crisis since the great depression, delinquencies were 90% lower than single family homes. If you buy the right properties this type of investment is extremely stable and will create generational wealth for you and your loved ones.
2. High demand from Millennials and Baby Boomers
It’s no secret that millennials are loaded with student debt. Even if they wanted to, more and more millennials are having a hard time saving to come up with a down payment for a home. Combine that with the fact that a lot of millennials, myself included, favor having the flexibility to move around from city to city and place to place over the benefits of owning a home. I have owned two homes and can tell you that renting is much easier and allows you greater access to new opportunities because you do not feel stuck in one place. Millennials want this freedom.
Baby boomers are also driving significant demand for rentals. Why? Renting after age 55 is becoming increasingly popular not because they can’t afford to buy but because they are choosing a simpler lifestyle. The idea of a hassle-free, amenity rich, luxury experience is very appealing. Once baby boomers make the shift from ownership to renting, they typically will never buy again. This is fantastic news for a multifamily investor.
3. High demand for affordable housing
To prove even more that we are becoming a nation of renters let’s discuss the need for affordable housing in the US. According to data compiled by Deutsche Bank, the median age of a home buyer in the United States is 47. In 1981 the median age was 31. Home prices keep climbing and more and more people are finding home ownership to be out of reach. While homeownership rates are dropping our population is significantly increasing. According to the census Bureau, by 2023 the immigrant share of the US population will hit its highest level in history (14.8%) and continue to rise. For most immigrant’s homeownership will not be possible and the need for high quality affordable housing will only further increase.
Lastly, demand for apartments is not going away. Nearly 39 million people live in apartments and we are quickly exceeding capacity. We need to build an average of 325,000 new apartment homes every year to meet demand. However, we are trailing that number and on average (from 2012-2018) only delivering 316,00 per year. Basic supply and demand principals show when demand is high, and supply is low prices will increase. All good signs for a multifamily investor.
4. Multifamily investing allows you to scale
Growing a multifamily portfolio is safer and easier to do than single family homes. More doors under one roof allows for easier management, economies of scale, and is considered less risky in the bank’s eyes. Instead of getting 20 different loans and having to drive to 20 different addresses to replace a roof you can do it all at once with a 20-unit apartment complex. At some point, usually around 10-20 single family homes, you will realize the increased complexities that come with managing a large portfolio of homes. This is where multifamily thrives. You can trade in those 20 single family homes and buy one 100-unit apartment complex. Not just that, you will likely get better financing and have enough income coming in from those 100 units to pay for a highly competent on-site professional property manager who can take the day to day operations away from you. Which brings me to my final point…
5. Partnering with professionals
Multifamily, in particular large multifamily, investing can be highly sophisticated. Much more so than single family homes and because of this the professionals you will work with will also be sophisticated, professional, and focused on their role in the multifamily investing world. Apartment investing is a team sport. Between the broker, lender, general contractor, property manager, sponsor, asset manager and other investors you are likely dealing with a higher caliber group of individuals than you would in the single family space. And that’s a good thing. Most of these professionals are highly skilled and will know more about the asset class than you could ever dream of. Multifamily investing allows you to leverage their time, money, network, and expertise to your advantage.
As with all investments it’s important to do your due diligence before investing any money. However, given its strong track record and demand it is highly likely that multifamily will continue to be a stable, predictable, and profitable way to grow your wealth for many decades to come.