Multifamily housing, specifically apartments, is an incredible investment for many reasons.
Typically, the value of the property appreciates as the market appreciates. As the market grows, it becomes harder for builders to keep up with demand as developments take years to plan, get permits, and build the apartment complex.
Let’s take a deeper look at why multifamily is a great investment.
Each month, residents pay rent and any additional fees. After all the expenses are paid, and the
loan is serviced, there should be cash flow at the end of the month. The cash flow is similar to a single family rental property, except there are not 1 unit, there are many. If there are 50 units in the property, the cash flow is compounded by 100.
As we just looked at the cash flow of the property, a phenomenal benefit of multifamily is the passive income for some investors. Limited Partners, also called LPs, should receive distributions on their investments, either month, quarterly, or some other time frame. The LPs provide initial capital but are not required to work on the property. In fact, LPs are asked not to do any work on the property as the General Partners, or GPs, have designed a business plan and are actively working on the property.
If we are looking at investments, take a minute to think about what could happen in a ‘worst-case’ scenario. Let’s look at the COVID pandemic, for example. Retail stores were hit very hard, in fact, many retail and travel/leisure companies had to file for bankruptcy. However, people have to live somewhere. The demand for apartments only increased during COVID. If we look at the housing crisis in the late 2000s, home prices lost 50% of their value in some areas, foreclosures were over 225% from 2006 numbers, and many people had to rent. Apartment complexes solve a basic human need: shelter. Apartments are resilient to downturns in the market.
Due to the strength in numbers, there is a smaller chance of the asset not performing. For example, in a single family property, there is typically 1 lease. If someone loses a job, there is a greater chance of them not being able to pay rent, however, the expenses and mortgage payment is still due. This increases the likelihood of the owner not being able to pay their bills. In an apartment complex, the likelihood of everyone losing their job at the same time is extremely unlikely. While there is a greater chance of someone in the apartment complex losing their job, the entire apartment community helps offset the small number of people losing their job.
Multifamily properties typically have 1 loan, regardless of the number of units in the property. This reduces the closing costs to get into a property, simplifies the process to obtain and pay the loan, and makes it easier to track how a property is doing. There are reasons to have multiple loans but it is rare.
Similar to loans in the previous section, most apartment complexes have 1 insurance policy. Whether the property has 10 units or 500 units, it is 1 insurance policy. The risk is also spread across the entire property. With single family homes, you would need an insurance policy for each property and the risk is not spread across many homes. While there are typically multiple buildings in a property, there are several units under one building. This is one reason why insurance premiums are reduced. The cost and simplicity of insurance are a huge benefit to investing in multifamily assets.
A huge benefit to multifamily is economies of scale. Having 50 units or 150 units does not necessarily mean 3x the work. The leasing and maintenance staff, as well as contractors, have certain tasks they do regardless of the number of units in a property: pick up trash, clean the pool, landscaping, pest control, etc. The software that the property management company can handle the number of units ranging from 1-1000+. While the overall amount of work may be higher, it is offset by the higher amount of income and cash flow and makes multifamily properties a great investment.
Tax benefits are a huge benefit of investing in apartments. The government allows depreciation on real estate, however, not on the physical land. Depreciation is a paper loss and helps reduce (or eliminate) the tax burden. There are also 1031 exchanges that are possible. 1031 exchanges are meant to defer capital gains until a later date, enabling investors to buy bigger properties.
Apartments are a real, tangible asset, unlike stocks or, dare I say, crypto. A business can file for bankruptcy overnight and the stock is worthless. Insider trading or some rumblings in the market can cause stock or crypto to crash almost instantly. The value of the stock or crypto can NOT be manipulated or improved by an individual owner. Multifamily property is real estate and will have some type of value due to the land, the buildings, and of course the income potential.
Apartment demand is rising, and there is no relief in sight. The demand is only going to get worse over the next few years, according to Fannie Mae. We also pick markets where there is high population and job growth, creating more demand as builders cannot keep up with the population growth.
While there are many more reasons that multifamily is a phenomenal investment, these are some of the top benefits of investing in multifamily: economies of scale, cash flow, resiliency, and tax benefits.
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This is the opinion of the author and not legal or financial advice. Please consult a CPA, attorney, or financial advisor for legal or tax advice.