While the 2020 census, which begins in April, will provide a more robust look at rental property trends, 2017 data from the Pew Research Center showed an upward tick in the number of households choosing to rent. From 2006 to 2016 alone, the number of households renting increased from 31.2 percent to 36.6 percent, which researchers noted was the highest rate since 1965.
As you begin exploring multifamily real estate opportunities in 2020, consider the following.
Why Multifamily Housing?
As you begin to explore investment opportunities in multifamily real estate, it’s important to understand what it is and how it differs from investing in several single-family homes. Duplexes, triplexes and apartment complexes all fall under the multifamily housing umbrella. Multifamily properties consist of two or more separate units under a single roof. These properties can range from a high-rise that spans 10 or more stories to a “garden-style” that consists of four stories. Usually, the type varies by location because of price and land availability. While the investment for acquiring a multifamily property may be steeper, it is more efficient than building a portfolio that consists of multiple single-family homes.
Multifamily properties generate more rental income and steady cash flow each month. When a single-family property is vacant, there’s a higher risk of having a negative cash flow, whereas an empty apartment within a 100-unit complex isn’t a huge setback. Investing in a multifamily housing fund with an experienced firm such as Timberland Partners Investments also means you have the benefits of ownership without the day-to-day hassles.
Classifying Real Estate Properties
In real estate, properties are assigned a “grade” or classification that makes it easy for investors, lenders and brokers to communicate about the quality and value of a property. Class A properties are typically newer, luxury apartments with high-end finishes and sought-after amenities. Well-maintained properties generally built in the last 15-25 years are considered class B. While class A and B properties tend to be well-located, Class C complexes are usually more downscaled buildings, often in less desirable neighborhoods. Understanding the differences among these property types is important because it helps investors know the current value of the property and discover the potential it possesses.
Net Operating Income
When comparing investment opportunities with multifamily apartment complexes, reviewing the property’s net operating income (NOI) can help an investor evaluate the price. The NOI is a pre-tax calculation of the property’s income minus the the operating expenses. A property’s income can include rent, laundry facilities, pet fees and reserved parking, among other things. Operating expenses range from legal fees to routine building maintenance. Essentially, the current NOI gives the investor an idea of the cash flow a property generates.
Multifamily property funds, like Timberland Partners Fund VII (TPAF VII), can help an investor diversify his or her portfolio. Putting money toward a fund that includes properties thoroughly vetted based on price, class, location, and the potential to add value through renovation, helps an investor reduce risk. In other words, if one acquisition in the fund doesn’t perform as well as expected, investors still have several other properties to rely upon, including those that are overperforming. Funds allow our partners to invest in properties in a wide variety of markets, rather than the single geographic location in which they live. Choosing to invest in a geographically diverse fund also helps mitigate risk.
Long-term Wealth Building
Investing in multifamily real estate is a strategy for building wealth over the long-term and is best suited for those who seek sustainable results. While it’s important to realize that the market will fluctuate, real estate typically appreciates over time, which positively affects your return on investment. Additionally, multifamily properties act as a hedge against inflation because housing is a basic necessity. During volatile financial times, renters are more likely to cut other costs before moving. When there’s a booming economy, multifamily properties can have elevated rent, ultimately increasing cash flow. While multifamily real estate is great for building long-term wealth, it may not be the right investment for someone who is looking for fast cash.
The Bottom Line
Doing your research, evaluating your risk profile, and having a conversation with our Investor Relations team about your near and long-term goals is important. We’re in the business of helping people invest in real estate. Making sure you have all the materials needed to make an informed decision is of the utmost importance to us.