Posted in  Multifamily Investing, Real Estate  |  February 25, 2024  |  Steven Peterson

Multifamily property is a great investment opportunity with steady and regular returns. As an investor, you get a range of benefits when you invest in Multifamily Real Estate. Consider making it an integral part of your investment portfolio and enjoy its various benefits.

Find everything you need to know about investing in and selecting from various multifamily properties.

What to Expect?

  • Multifamily Real Estate Investing Overview
  • Understanding Multifamily Real Estate
  • Common Types of Multifamily Properties
  • Choosing the Right Property: Essential Factors
  • Exploring Investment Strategies
  • Understanding Financing Options
  • Risk Mitigation and Legal Considerations

What is Multifamily Real Estate?

A multifamily property or multifamily real estate are residential properties that have multiple individual housing units within a single building or complex. These are usually separated by a common wall. Single-family homes house only one family. While multifamily properties are designed to house several households, each in separate living spaces. When the owner lives on-site, the property is considered ‘owner-occupied.’

These properties are a key component of the real estate market and are categorized into different classes based on factors such as amenities, age, and overall quality.

According to a National Multifamily Housing Council (NMHC) report, multifamily property accounts for about 20% of the U.S. housing stock. This shows its significant role in the real estate market and highlights that it should be part of your investment strategy.

Source: Number of U.S. multifamily homes 2015-2023 | Statista

Common Types of Multifamily Real Estate

Here’s a breakdown of the various types of multifamily property that you can select from.

Apartments

Apartments are the most common form of multifamily investing. According to the U.S. Census Bureau, as of the latest available data, there were approximately 21 million occupied apartments in the United States. If you are a beginner or a risk-averse investor, you will find apartments as the safest form of Multifamily Real Estate Investment.

Condominiums

Condos provide a unique twist to multifamily investments. They combine elements of both ownership and community living. These represent one of the most popular rentable properties in the U.S.

Duplex

The duplex is again a classic choice among the Multifamily Real Estate investors. It consists of two separate units in a single building. The duplexes have gained popularity in recent years, with a steady increase in demand.

According to the National Association of Realtors (NAR), sales of duplex properties rose by 15% nationwide in the past year alone. As an investor, you can get a steady income, high demand, lower vacancy periods, and good asset appreciation.

Townhouse

Townhouses offer a balance between single-family homes and apartments. These are often two distinct dwelling units separated by a wall with individual parking and access. According to the National Association of Home Builders (NAHB), townhouse construction represented approximately 12% of all single-family homes in recent years.

Class A High-End, Luxury Units

These are high-end, luxury apartments with top-notch amenities. They can generate the highest rental income and are always in demand. According to various services and financial and real estate experts, Class A properties continue to attract both investors and tenants. This is the reason for their sustained popularity and appreciation.

Garden Apartments

These are again a popular variety of rental properties. As the name suggests these are apartments with well-maintained lawns and greenery – a charming place to be. The garden-style apartments are more commonly found in suburban areas and offer a peaceful living environment.

Triplex

A triplex multifamily property comprises three separate living units. Triplexes have seen increased demand in certain urban markets due to their versatility for both investors and owner-occupants. You may consult with your financial advisor regarding the demand, availability, and returns on a triplex property in different cities or states before investing.

Multistory Apartment Buildings

These are the towering structures that house multiple units on each floor. These provide ample space for residents. There is sustained demand for multistory apartment buildings in urban centers across the U.S. as is shown by the various development projects. It may be one of the most attractive options for you as an investor in multifamily property.

Top Markets for Multifamily Development

City

Under Construction Properties

Construction Completed YTD

Construction Starts/Units Q1 2023

Austin

61,873

2,547

6,013

Dallas

60,532

2,016

5,864

Miami

44,533

2,732

3,612

Atlanta

41,204

2,679

4,120

Phoenix

39,875

3,811

1,985

New York City

38,859

137

3,304

Denver

35,893

1,696

1,580

Houston

34,709

1,686

1,660

Los Angeles

32,306

1,926

814

Charlotte

32,188

1,538

1,459

Source: Yardi Matrix

Multifamily Real Estate and Property Classifications

We have already looked at the various types of multifamily properties that you can choose to invest in. You can also evaluate the pros and cons of various types of properties according to their classifications.

This holds good, whether you are investing your funds or planning to take a mortgage for the same. The properties are generally classified as “A”, “B”, “C” and “D.” Do note that the classification may vary between different markets, regions, or states.

Source: Multifamily property price index continues to climb | Yield PRO

Class “A” Multifamily Real Estate

These are characterized by:

  • Recent construction or renovation
  • Properties with a physical age exceeding 10 years but with substantial renovations
  • High-rise structures in select Central Business Districts, which may be over 20 years old
  • Commanding rents within the Class “A” range in the submarket
  • Well-merchandised, appealing landscaping, an attractive rental office, and/or club building
  • High-end exterior and interior amenities matching with Class “A” products in the market
  • High-quality construction with the use of the finest materials

Class “B” Multifamily Real Estate

Class B Multifamily properties are defined by:

  • Generally built within the last 20 years or older properties, recently renovated
  • Exterior and interior amenity packages that may be dated and are less extensive than those offered by high-end properties
  • Good quality construction with minimal deferred maintenance
  • Commanding rents within the range of Class “B” rents in the submarket

Class “C” Multifamily Real Estate

Class C Multifamily properties have the following characteristics:

  • Typically built within the last 30 years or older properties recently renovated
  • Limited, dated exterior and interior amenity packages
  • Improvements that show some signs of age and deferred maintenance
  • Commanding rents below Class “B” rents in the submarket
  • The majority of appliances are “original”

Class “D” Multifamily Real Estate

Class D Multifamily properties are identified by:

  • Mostly over 30 years old, representing worn properties often situated in outer or ordinary locations
  • Shorter remaining economic lives for the system components
  • Lack of an amenity package
  • Marginal construction quality and condition
  • The lower side of the market unit rent range
  • Intensive use of the property such as turnover and density of use
  • Lower rental that constraints the budget for routine maintenance operations and repairs

Choosing the Right Multifamily Real Estate Property for Investing

We’ve looked at the various and diverse options available. Let’s now talk about the essential factors you need to consider when choosing the right multifamily property for your investment journey:

Location, Location, Location

The Golden Rule in real estate holds true for multifamily properties. Most experts are unanimous that investing in neighborhoods with strong job markets and amenities is key to long-term success. This gives you high occupancy rates with good rental income.

Take for example the Duplex properties in areas like Capitol Hill or Baker. They offer relatively lower prices compared to downtown Denver but tenants still benefit from proximity to job centers, entertainment venues, and outdoor recreational opportunities.

Property Condition

You must do a thorough inspection of the property or get it done by experts. Proactive inspections can uncover potential issues, allowing for informed decision-making. You will get to know in advance how much you will need to spend on repairs or renovations to make the property attractive to tenants or leaseholders.

Here are some pro tips to do this yourself:

•Check roof, siding, and walls for cracks, rot, or structural issues

•Look for water damage like stains or discoloration on walls

•Test light switches, outlets, and appliances for functionality

•Check plumbing for leaks or water stains around sinks, toilets

•Verify utilities condition: water, electricity, and gas availability

•Evaluate amenities like parking areas, common spaces, outdoor areas

•Request property documentation: maintenance history, permits, inspection reports

•Take detailed notes and photos to document findings

•Thoroughly examine each aspect to avoid overlooking issues

Market Research

No investor in real estate can do without this. Always stay informed about market trends, rental rates, and vacancy rates in your target area. You can check the reports from platforms like RentCafe and Apartment List, which can provide valuable insights into local market dynamics. You can also get a short or detailed summary from your financial advisor or consultant for the same.

Risk Tolerance

Consider your risk tolerance and investment horizon. It is vital to align your investment strategy with your risk tolerance to ensure a sustainable approach.

Property Management

Assess your willingness and capability to manage the property. There is a rising trend in outsourcing property management to professional companies, streamlining operations for many investors. This is a viable option for you if you want to invest your time and energy elsewhere and let professionals complete this task.

Source: U.S. multifamily property sales volume 2020 | Statista

Investment Strategies for Multifamily Real Estate

Now that we’ve established a solid base, it is a good time to explore some investment strategies tailored to Multifamily Real Estate. As an investor, you’ll find them of immense value to take the right decision at the right time.

Value-Add Strategy

This involves purchasing a property that may be underperforming, when it comes to rentals or needs improvements. You can acquire such a property at a bargain and make substantial savings. Use that money for strategic upgrades that can lead to increased property value and higher rental income.

A report by CBRE highlights that properties that undergo strategic renovations and improvements see a significant increase in rental income and property value over time.

Buy and Hold

You can also use the buy-and-hold strategy for Multifamily Real Estate. Simply put, this is about an investor buying a property to hold onto it for an extended period. This approach aligns well with the increasing demand for long-term rental solutions. Check with your financial and real estate advisor on how this strategy can increase your asset value over time.

Take for example Equity Residential, one of the largest publicly traded REITs specializing in multifamily properties. It strategically acquired multifamily properties in prime locations across major U.S. cities, such as New York City, Los Angeles, and Chicago. With buy-and-hold strategy, the company to capitalize on the growing demand for rental housing and benefit from the appreciation of real estate values over time.

Fix and Flip

You may have heard of this concerning single-family homes. However, the fix-and-flip strategy can also be applied to multifamily properties. If you are a fix-and-flip investor, you can find some great investment opportunities in the multifamily sector.

Source: Attom

Syndication

Real estate syndication also at times involves pooling funds from multiple investors to acquire a larger property. You can use syndication to foster collaboration and expand your investment opportunities.

Passive Investing

Do you prefer a hands-off approach? You can then consider passive investing through real estate investment trusts (REITs) or crowdfunding platforms. This can provide exposure to multifamily real estate without the day-to-day management responsibilities. According to Nareit and various other sources, multifamily REITs have demonstrated resilience and consistent returns.

Risk Mitigation and Legal Considerations

Understanding and mitigating risks is a crucial aspect for you as a multifamily investor. Let’s look at some key considerations that can cover your risk exposure:

Insurance

Adequate insurance coverage is essential to protect your investment. The National Association of Insurance Commissioners (NAIC) advises that property owners should regularly review and update their insurance policies to ensure comprehensive coverage. Choose an insurance that covers all common risks to the property.

Legal Compliance

Familiarize yourself with local, state, and federal laws governing rental properties. Your compliance with regulations related to tenant rights, fair housing, and property maintenance is crucial to avoid legal issues.

You can check the website of the National Apartment Association (NAA). It provides resources and updates on legal compliance for multifamily property owners.

Market Analysis

Regularly conduct market analysis or consult your financial advisor to stay ahead of potential risks. You can also check with the U.S. Census Bureau and the National Real Estate Investor (NREI). Both are valuable sources of market data and can help you identify trends to make informed decisions.

Property Inspections

Routine inspections can help you to identify maintenance issues before they become significant problems. The American Society of Home Inspectors (ASHI) emphasizes the role of inspections in preventing costly repairs and ensuring tenant satisfaction. You can also seek assistance from professional Multifamily Real Estate property management firms who provide specialized services for this.

Tenant Screening

Thorough tenant screening is also essential for risk mitigation. Ensure comprehensive tenant screening by experts to minimize the risk of late payments or property damage.

Key Takeaways

As we wrap up our exploration of the types of multifamily property, let’s summarize the key takeaways:

Diverse Options

The Multifamily Real Estate offers you a wide array of investment options. These cater to various preferences and risk appetites, based on which you can make your investment. You can also take the help of a qualified financial advisor for the same.

Due Diligence Matters

As an investor, you need to research thoroughly and take due diligence. Spend time to understand the market, property conditions, and financing options. These are critical for a successful investment that can give you steady returns.

Long-Term Vision

Multifamily investing is often a long-term game. Patience and a strategic approach will contribute to the sustained success of your investment over the years and decades.

Adaptability

You need to be adaptable in the ever-changing real estate market. Flexibility in your investment strategy can help you navigate challenges and seize opportunities.

Risk Mitigation

You can mitigate your risks through insurance, legal compliance, and proactive property management. These are essential for safeguarding your investment.

Ready to take the next step or have any questions about Multifamily Real Estate investment? Don’t hesitate to reach out and take the help of an expert. Your financial advisor can provide you with guidance tailored to your unique situation.

Get personalized consultation, including the latest market insights and data. This can make your multifamily investment dreams a reality and provide you with a steady stream of income.

Disclaimer: Please note any information provided in this article is intended solely for educational purposes. It does not constitute financial advice for any investor. You are advised to consult with a qualified financial professional before making your investment decisions.

Find Investing Ideas Before The Market Does

Get Ahead with Early Investment Insights

About the Author

Steven Peterson is our staff writer and he has been interested in alternative investing strategies since 2016. He first started his research on gold, and real estate investment trusts which later expanded into wine, hedge funds, and lithium.

Subscribe to learn more..

Recent Blog

Your Guide to Alternative Investments

Source: Caisgroup1. IntroductionAlternative investments have gained significant popularity in recent years, contributing to a growing market estimated at over $13 trillion globally.Unlike traditional investments,

Your Guide to Alternative Investments

Unlocking Hidden Wealth: The Rise of Alternative Assets

Source: Caisgroup1. Introduction  The alternative investment market has become an attractive option for investors looking to diversify their portfolios and achieve higher returns.In 2023, the

Unlocking Hidden Wealth: The Rise of Alternative Assets

Get The 12 Best Alternative Investing Ideas for 2024

It's time to diversify. Instead of betting against big banks and high frequency traders, be a smart investor and diversify your portfolio.

Get the inside scoop on 12 best investing ideas for 2024 (that do not depend on the stock market)

Request Instant Access

Stay one step ahead of everyone else.  Know before the market does.