Entrepreneur Insight

How to Invest in Multifamily Properties

As the value of apartment buildings continues to rise across the US, it’s no wonder that individuals looking for new investments might want to get in on the action.

Under most definitions, multifamily real estate includes apartment buildings with at least five units. For the 12-month period ending August 2021, multifamily properties grew in value by 12%, according to real estate data provider CoStar Group. That was the highest growth rate of any real estate category except undeveloped land. Further, the growth in multifamily value took place in all regions of the U.S.

The rent that landlords charge apartment dwellers has been “dramatic,” according to online rental agency Zumper. The average national rent for a one-bedroom apartment increased 7% in July, compared to the same period the year earlier. For two-bedroom units, rent grew by 8.7%.

The sector may be red-hot, but many investment experts believe there’s still room for growth. Individuals who are considering taking the plunge, however, should first carefully follow several steps, according to East West Bank’s Jennifer Ho, vice president in the multifamily residence lending group, and Flora Ling, senior vice president of commercial real estate.

The down payment

Before kicking the tires on potential investment properties, individuals should closely review their own finances, Ho said.

When applying for a loan, individuals should know that the down payment for multifamily properties will be higher than that for a mortgage on a single-family residence. An apartment building loan is classified as a commercial loan, which requires more equity from the borrower, Ho said.

“We require a 40% down payment,” she said.

Borrowers should also consider if they have the financial wherewithal to afford a large purchase by reviewing their bank statements and tax returns, Ho said. It’s a good idea to hire an accountant to review those records and provide a second opinion.

It’s also smart to keep in mind that a multifamily property typically amounts to a major investment for an individual, Ho said. Even the smallest multifamily properties have at least five units. That may be too large for some individuals who only want to diversify their investment portfolios.

Recent sales of multifamily properties

Apartment buildings for sale can be found at virtually any price point. The biggest developments typically carry the highest price tags.

In August, the private investment firm Civitas Capital Group acquired a 288-unit apartment complex in Houston for $40 million, according to Multi-Housing News. The property has strong fundamentals, as about 98% of its units are leased and all include washers and dryers.

Smaller developments can be found for less than $10 million. The Bridgepoint, a 48-unit apartment complex in Jacksonville, Florida, sold in July for $4.3 million, according to the Jacksonville Daily Record.

For novice multifamily investors, a better bet is the smallest apartment buildings, usually with about 10 units. One example: a 10-unit apartment complex in San Antonio, Texas, was offered for sale by the owner in August for $950,000, according to LoopNet.

The rise of multifamily property value since 2014

Due diligence

If a new investor has run through all of the recommended due diligence, they should then take a close look at the building and its location. That can help lower the chance that a purchased property quickly turns into a money pit.

It’s important for novices to hire a real estate agent who has direct experience with purchasing multifamily properties. “They know things about multifamily that residential real estate agents are not going to know,” Ling said.

Through the agent, ask the seller for a detailed set of records to make certain that the property has not gone years without basic maintenance, Ling suggested. The last thing a novice investor wants is to purchase an apartment building only to discover it needs new roofing or HVAC equipment.

Deferred maintenance can also lead to other problems for a building owner, Ling said. “If you’re not doing maintenance on your property and something happens in the common area or someone slips, there’s a chance you can get sued,” she explained.

In addition, obtain detailed records from the seller on the list of tenants, Ho said. That can help with making an accurate assessment of how many tenants are potential problems with making late payments.

“Ask the seller if they pay on time,” she said.

Finally, conduct a thorough analysis of the neighborhood, said Ryan Swehla, principal and co-founder at investment fund Graceada Partners in Modesto, California, which specializes in multifamily properties. Doing so can provide critical insight on a community’s long-term prospects.

“You should look for a property in an area with positive population growth because that’s the top thing [driving] demand,” he said.

The most desirable neighborhoods will have apartment buildings that command the highest prices for purchase. But they also allow the owner to charge the highest rents, Ling said.

“Is the location more desirable, where demand is always very stable?” she said. “That will make it easier to sell the property later.”

Property management

Once all those steps are taken, investors should take a closer look at their own threshold for dealing with trouble.

Owning an apartment building requires a great deal of personal attention to things like maintaining the common areas, asking loud tenants to be more respectful of neighbors, assessing the potential for crime in a neighborhood, and collecting rent payments.

A building owner is not required to handle all those tasks himself or herself. Professional property management companies specialize in running apartment buildings on behalf of owners. Many times, it’s a good idea for a first-time investor to hire such a company, Ho said.

“I would hire a property manager,” she said.

Those companies cost money, however, and for some investors the cost will lower their potential return on investment to unacceptable levels. If the investor has time in their schedule to be the manager, it’s a way to really take advantage of the potential growth.

How to invest

In some cases, it might make more sense for an investor who’s just getting into the multifamily sector to first try investing through a fund. That can help reduce risk and lower the size of required payment, Swehla said.

“Sometimes it does make sense to invest with a group that does this regularly and specializes in this sector,” he said.

Whether investing through a fund or as an individual buyer, investors should proceed carefully when looking at multifamily properties and get their own house in order first. But the potential reward is significant, as multifamily real estate checks many boxes when it comes to attractive investments, Swehla said.

“There’s a lot of pent-up demand for housing in general right now, and multifamily is a way to get exposure to that,” he said.

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