A multifamily asset is a residential structure that contains more than one residence in a single building.
Adding real estate assets to your investment portfolio may be a wise move for at least two reasons. First, it isn’t a good idea to put all your eggs in one basket; the low correlation between real estate and traditional investments ensures that when the stock market takes a downturn some of your investments may remain unaffected. Second, historically, real estate has been less volatile than stocks – meaning that on average real estate returns are more constant than stocks, with fewer big swings in either direction.
How does an investment in real estate generate wealth? First, the sale of the property can deliver a profit if the property appreciates during the holding period due to improvements (renovation), development, or favorable changes in the property’s surroundings (for instance, new schools or shopping centers in the area). Second, the property can provide regular payments in the form of rent.
There is a wide variety of real estate assets: office buildings, storage facilities, hotels, retail, industrial, and, of course, residential. The residential real estate falls into two categories: single-family – a residential structure that contains a single residence – and multifamily – a residential structure that contains more than one residence in the same building. Multifamily properties may be high-rise/mid-rise apartment buildings, garden-style, suburban complexes, or mixed-use projects with retail space on the ground level and residential units above. They range from duplexes and triplexes to large complexes with hundreds of apartments. Larger multifamily housing usually includes amenities such as a parking garage, a swimming pool, a fitness center, a lounge, and an outdoor grill. Most multifamily assets in the US are renter-occupied and professionally managed.
There is a range of multifamily investment strategies, each involving different levels of risk and return. At one extreme, there is an investment in a stabilized, new, or newly renovated rental asset in a top location, a strategy that tends to be low-risk and low-return. At the other extreme, there is a complete redevelopment of a distressed property, a strategy that involves more risk and higher potential return. In the middle, there is renovation/repositioning of an older, partially, or fully occupied property to profit from rental increase and appreciation.
There are several reasons to invest in multifamily as opposed to single-family assets.
First, though multifamily properties are more expensive, they are easier to finance. Banks are more likely to approve a loan for a multifamily asset because multifamily assets generate more money every month and are less affected by vacancies and rent payment delinquencies. For example, If a tenant moves out of a single-family asset, then that asset’s occupancy rate immediately drops to 0% vacant and generates no income. By contrast, a multifamily asset with 100 units would still maintain a healthy 90% occupancy rate if 10 tenants moved out simultaneously, continuing to generate income and allowing the property owners to pay their monthly debt service.
Second, if your goal is to reach a portfolio with a relatively large number of rental units, then the most efficient route is to purchase multifamily assets, rather than incurring the purchasing costs of buying a large number of single-family assets.
Finally, multifamily investors can benefit from economies of scale since the cost per unit of construction/renovation and property management may decrease as the number of units increases.