Investing in multifamily properties like apartment complexes can offer a path to passive wealth generation that bypasses the volatility of stock market movements.
“Multifamily has been one of the most attractive and desirable investment property types for investors during the current cycle,” says Russ Moroz, first vice president of investments at Marcus & Millichap.
It’s popularity, Moroz says, can be attributed largely to perceived stability in the housing market and consistent growth in both demand and rental rates for multiunit properties.
Multifamily investing yields several clear-cut benefits, beyond those associated with single-family home rentals.
Raphael Sidelsky, chief investment officer at W5 Group in New York, says those benefits include a solid risk-return profile, cash flow and capital appreciation. Multifamily housing also benefits from declining rates of homeownership, a trend Sidelsky says is likely to persist for the foreseeable future.
For the first-time property investor, the challenge lies in deciding which approach to take within this realm of real estate investing. There are three primary options for investing in multifamily properties:
— Direct ownership.
— Real estate crowdfunding.
— Multifamily REITs.
Robert Rahmanian, principal and co-founder of Real New York, advocates owning multifamily rentals directly over other investing avenues.
“Maybe it’s because I’m an active investor and I like to roll up my sleeves and truly be a part of the investment,” Rahmanian says. “That means making decisions on renovations, seeing the income and expenses and overall, feeling in control.”
That extends to the option to purchase an apartment building or duplex solo or in partnership with other investment seekers. Moroz says this structure offers greater control over whether to hold, reposition or sell a multiunit property as they see fit.
The most daunting aspects of direct ownership include selecting a suitable property, finding reliable tenants and overseeing property maintenance. Purchasing a turnkey property can be one way to minimize some of those challenges. In a turnkey property, tenants and a professional management company are typically already in place, meaning there’s already steady cash flow being generated.
Getting financing for the purchase may present another challenge, although Moroz says it shouldn’t be a deterrent.
“Financing for multifamily investment properties is more favorable than any other product type, largely because of competition from Fannie Mae and Freddie Mac,” he says. “These government-sponsored enterprises often offer rates and terms which are better than investors can achieve from conventional financing sources.”
Real Estate Crowdfunding
Real estate crowdfunding may appeal to someone seeking multifamily investments on several levels.
First, there’s the opportunity to access a diverse range of properties that have been thoroughly vetted by the platform. It’s possible to invest in multiple markets across the country, versus concentrating property ownership in the investor’s local geographic area.
Investment minimums may be much lower than purchasing an apartment building directly, which is an advantage for the beginning investor. Some real estate crowdfunding platforms such as Fundrise, for example, set the minimum investment at $500. Others like RealtyMogul place the bar only slightly higher at $1,000.
All of the tax benefits associated with owning a rental property, less the management demands or costs associated that go along with direct ownership, also apply to crowdfunded investments.
“Crowdfunding is great because it gives you access and visibility of markets outside of your own and you now have the option to invest with a general partner that hopefully has a track record,” Rahmanian says.
The trade-offs are liquidity and control. Crowdfunded real estate investments often have a holding period of several years, tying up investors’ money in the meantime. The person investing also has no direct say in how the property is managed.
“I’m a big believer in seeing, walking and touching the investment you buy on a daily or weekly basis and from there, you can analyze a spreadsheet and execute on the highest level,” Rahmanian says.
Crowdfunding, by nature, doesn’t allow for that.
Real estate investment trusts own a collection of properties, giving investors diversification and dividend income in a single tax-advantaged package. Ones like Equity Residential (ticker: EQR) and Avalonbay Communities ( AVB) focus holdings on apartment communities and multifamily rentals.
“For individual investors, apartment REITs are a good way to invest that provides diversification, high-caliber management, current income, and none of the headaches of actual ownership,” Sidelsky says.
An apartment-focused REIT can also offer greater liquidity compared to real estate crowdfunding since REITs can be bought and sold as needed to fit a portfolio.
Rahmanian says these REITs may attract the passive investor who’s looking to time the real estate market on a grand scale.
“You have REITs that operate across the U.S. and the world and I find the interest there to be investing when you think the real estate market is going up and shorting when you think we’re at the end of a cycle or something will disrupt the market,” he says.
The key thing to keep in mind when investing in multifamily REITs is looking at the underlying properties, rather than focusing just on dividend yield. Assessing the fundamentals of the underlying investments and the housing markets they’re concentrated in can help investors choose apartment REITs that align with their risk profile and performance expectations.
Also, remember that dividends paid from a REIT are taxed as ordinary income.
Moroz says investors should realize the current cycle has been a long one for growth historically and understand what that means from a multifamily investment perspective.
“We’re probably in the latter part and as such, they should be more careful about purchasing properties with underwriting based on the same rent growth assumptions we’ve experienced over the last nine years,” he says.
In most markets, rental growth has been above average historically but in many submarkets, wages haven’t matched the pace of rising rental rates. That could be a challenge to the sustainability of additional rent growth in those markets.
Sidelsky notes that it’s also important to keep the balance of supply and demand in view, steering clear of areas where available multifamily rentals outstrip demand. That could create a situation where rental rates stagnate or vacancy rates remain high.
Finally, run the numbers on any apartment or multifamily rental investment to make sure the deal makes sense.
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