MULTIFAMILY HOUSING - AN OVERVIEW

Multifamily housing is characterized by multiple units in a single building or connected by shared walls. It can be developed at a range of heights and densities, from low-rise duplexes to high-rise apartment complexes, and can be rental or ownership housing.1 Multifamily housing can be built at complementary scales and characters to the surrounding neighborhood, whether single-family residential or high-rise commercial/mixed-use.

Multifamily housing types may include:

Duplexes, triplexes, fourplexes
Bungalow courts
Townhouses, garden apartments
Multistory apartment buildings
High-rise apartments and condominiums

Multifamily housing is necessary to provide affordable units, particularly in high-cost housing markets. The majority of subsidized affordable housing is provided through multifamily development types, which use the land and building infrastructure more efficiently than single-family detached housing.

Multifamily developments can be entirely affordable, or mixed-income. They tend to have a range of unit sizes, from studios to three bedrooms. Affordable multifamily developments often offer amenities such as childcare centers, playgrounds, and community gathering spaces, and may also offer resident services such as case management, vocational development, financial literacy, etc.

Importance of Multifamily Housing

The multifamily sector is considered one of the most “defensive” areas of real estate. Apartment buildings tend to be less prone to economic cycles, since everyone needs a place to live, even when a drooping economy might cause significant vacancies in other types of commercial space. Crowdfunding allows investors access to larger multifamily complexes that offer even more stability since individual vacancies in those properties have a more limited impact on the overall rent roll than do vacancies in smaller two- to eight-unit multiplexes.

Apartment buildings represent almost 25% of the total U.S. commercial real estate market. They can vary by location (urban or suburban), by the mix of units (e.g., studio, one-bedroom, or two-bedroom), and by the type of structure (high-rise or garden apartments). Garden apartments (usually two-or three-story buildings with more open space) often have a more favorable building-to-land ratio for purposes of the depreciation deduction.

They also sometimes exhibit more price elasticity, meaning that rent reductions or increases are more likely to affect demand; high-rise apartments tend to be more expensive at the outset, and thus pricing is often less of an issue.

Like other areas of commercial real estate, apartment buildings can be classified by quality level. “Class A” structures are generally newer buildings in better market locations. Amenities may include workout facilities, deluxe lobbies, and doormen, and the rents are reflective of these features. Class B structures are usually somewhat older buildings in locations that are less upscale, with a more limited range of amenities. Class C buildings tend to be the older buildings in the market area, usually with lower- and middle-income residents.

Apartment demand comes from a number of sources, including;

Demographic trends,
Homeownership and household formation rates, and
Local employment growth.

Newly married couples and young adults moving out on their own are likely to initially rent an apartment. Demand is also driven by relocations of existing households to new areas. Also, many people who could conceivably buy a home still choose to wait until they are better able to bear the financial burden of a monthly mortgage payment.

It also means that multifamily properties can adjust quickly to market conditions, either to quickly implement rent increases in a “hot” market or, if the demand environment is not so great, to offer short-term rent incentives in order to minimize the vacancy rate. Market rents depend on local median incomes as well as the cost and availability of homes or condominiums to purchase as an alternative to renting an apartment.

As with other commercial properties, apartment complexes require competent property management if cash flow is to be maximized. The tasks of rent collection, tenant relations, maintenance schedules, security, bookkeeping, and showing and renting space are all jobs that need to be done successfully to assure that the expected budget will be achieved.

The management function has only grown in importance in recent years; the shift of more real estate ownership to institutions that require strong reporting, and a significant increase in both litigation and regulation, all call for managers to increase their levels of documentation.

Since apartment buildings share many features with single-family homes, this type of investment is often more familiar to many investors. The cash flows derived from multifamily complexes are usually relatively steady, assuming that the property is correctly managed.

Crowdfunding allows investors access to larger multifamily complexes that offer even greater stability. Assuming the proper due diligence has been done in initially valuing the property, a well-maintained and favorably located apartment complex represents one of the least risky forms of real estate investment.

Multifamily housing serves a vital role in the real estate marketplace as one in four households in the United States live in multifamily homes. Many desirable features of multifamily housing as well as changing demographics have exacerbated the popularity of multifamily housing as a housing choice.

The busy lifestyles of many Americans who desire freedom from the responsibility of maintenance costs and repair time, the mobility of the workforce, and the convenient locations of most multifamily complexes have caused many households to elect multifamily complexes as their residences.

The avoidance of property taxes and other homeowner costs is another incentive to seek multifamily housing. The National Association of Home Builders (NAHB) reports that the 26 million multifamily residents in the U.S. are similar in education and work status to all U.S. households, but they typically have fewer children to send to public schools and similarly make smaller demands of the roads and water systems.

What are the benefits of multifamily housing?

Multifamily housing is usually more affordable than single-family housing.

With the current real estate market as it is, it’s more difficult for people to buy a home and this is especially true for first-time buyers. Multifamily developments might contain subsidized units for low-income families, too. Either that or a mix of low-income and high-income. This makes them achievable for most families.

Multifamily housing reduces risks for the homeowner and investor.

For example, if one household in a multifamily property falls behind on their rent and gets evicted, it has no effect on the rest of the residents. The same goes for other problems that might arise in a multifamily property, like disputes, damage, or maintenance issues.

If managed correctly, multifamily properties can be easier to maintain.

When each unit has a different management team or maintenance personnel things could get difficult. However, on the whole, multifamily buildings are typically managed and maintained by a single company. Any issues or disputes that arise involve fewer parties and can be settled quicker.

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.

Contact Estateserve today and realize your cash flow goals.

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