Anyone involved in multifamily investing knows that it can sometimes be a challenging business with significant return potential. Historically, investing in multifamily units has been a powerful way to build generational wealth. Is it still one of the best investments in 2022? Here’s what you need to know (spoiler alert: it is!).
Historically, investing in multifamily units has been a powerful way to build generational wealth. Is it still one of the best investments in 2022, even with inflation and the changes in interest rates? Here’s what you need to know (spoiler alert: it is!).
Multifamily Investing Basics
First off, what is multifamily investing anyways? Multifamily investing refers to buying multifamily properties such as apartment buildings, a duplex, or triplex that provide multiple units for tenants to rent! Investors can typically invest in multifamily by buying the multifamily property themselves, starting a multifamily real estate syndication, or investing with a real estate syndication passively, leaving them to do all the work of operating the property! Investing in multifamily is a very desirable investment vehicle as it offers investors cash flow from the rental units, appreciation, and tax benefits on their investment.
Multifamily Investing in 2022: The Pros
2022 is already shaping up to be an exciting year for the real estate market. There are numerous macro and microeconomic forces at work that are buoying the market substantially. Indeed, there are three pros that investors need to know for this year.
Of course, please remember that all these pros and cons are merely opinions. All investments risk loss and past performance is no guarantee of future returns!
The Appreciation and Rent Potential Is Significant
Both real estate and rental rates have appreciated far faster than in the past decade. That appreciation has meant that multifamily properties are in more demand than ever. Indeed, rent climbed 10% in 65 of 150 major metropolitan areas. Perhaps even more surprising is that these high rents did not deter people from occupying the units. The occupancy rate rose to 96.5% in 2021, surpassing the previous record set back in 2000. Rental rates and tenant retention is strong; according to the latest study by moody analytics,
renters across the nation are staying in their apartments longer and paying more across the board; despite an average 10% rental increase across the nation, the number of renters remaining in their apartments rose by 3.5 percentage points year over year in April to 57%, according to Carrollton, Texas-based RealPage. In more affordable class C apartments, 65% of renters have renewed in the past year, while apartment retention averaged 51.5% from 2010 to 2019. (source).
These factors – high occupancy and high rents – mean that multifamily properties will likely be excellent sources of passive monthly i. Still, they will also have strong appreciation potential. After all, if rents keep rising (fueled by strong demand and the lack of supply) so will the building’s value as a money-making mechanism to another investor.
Multifamily Investing Now Means Stability in Many Markets
This positive aspect of multifamily investing is a bit of a corollary to the occupancy rate, but it’s worth noting and analyzing independently.
Part of the upward pressure on rents is that the housing market has skyrocketed. Renters who would have thought about buying in the past are waiting for a slowdown in property prices. These 20%-per-year increases in prices for single-family homes will likely not continue forever. For many people, renting makes financial sense because property prices have increased so much. Homeownership is no longer the financially savvy choice.
Having increased numbers of renters means lower vacancy rates. With more units rented (and a quicker turnaround time if someone leaves), landlords now see incredible stability in their income streams. Whether you own a 100-unit apartment or a 4-apartment complex, you likely see most – if not all – of your units rented at once. Even if someone leaves, your overall income will not take as much of a hit as it may have just five years ago!
As noted earlier, this high occupancy rate is a new record, so at no point in the past have landlords been able to fill multifamily units and gain income stability quite like today! Couple this with the lack of supply in the multifamily housing industry and the incredible population growth and demand; rates are not projected to drop anytime soon.
There Are a Few Ways to Get Involved as a Multifamily Investor
Compared to investing in other real estate ventures, investing in multifamily properties through a real estate syndication is straightforward. Real estate syndications allow investors with zero experience in the industry to contribute capital that will then be used to acquire multifamily property and earn substantial returns on their investment- completely passively. Tenants, toilets, and termite issues are all delegated to the real estate syndication company, and investors can participate in this lucrative investment opportunity without the work or stress.
If you have the time, capital, and experience, owning your own multifamily property may be the path for you. Owning your own multifamily homes can be incredibly rewarding and highly profitable. However, keep in mind this is a full-time job. Without extensive experience in the business, it can be a risky endeavor when taking down a multifamily property on your own.
And Now the Cons of Multifamily Investing in 2022..
Of course, no investment is perfect and devoid of all risk! Multifamily investing does have its share of risks and potential problems in today’s market. Here are the top two!
Inflation and Multifamily Investing
Inflation is the worry on everyone’s mind right now. So far, in some respects, inflation has been good for multifamily owners as it is likely at least partially responsible for increased rents and building values. When it comes to inflation, outward expenses (like lumber, materials, etc.) will continue to track inflation. This hypothetical scenario could squeeze multifamily investors who have costs escalating rapidly. However, one very important factor to multifamily real estate is as rates for materials and labor rise, unlike other commercial real estate assets, leases can be renewed on a 6-12 month basis allowing ownership to adjust rents according to the increase in operational expenses.
Interest Rate Hikes and Multifamily Investing
However, nobody knows how continued inflation will affect the economy if the Federal Reserve cannot lower it. And, even if the Fed can slow the rate down, the increase in interest rates may cause other issues for multifamily syndicators, especially if their property has a variable mortgage.
Interest Rate spikes also make finding deals that fit desired return metrics more challenging as real estate syndicators adjust their underwriting criteria according to the changes in debt. Although great deals are still in the market, they are harder to find as rates continue to rise!
High Cost of Entry For Multifamily Investments
Investing in multifamily units has a relatively high barrier of entry. In major markets like New York or Los Angeles, multifamily buildings can be tens of millions of dollars. You will likely need 20% down to purchase the building, which is still a large sum of money in many major metropolitan areas. Even buying a triplex in today’s market is incredibly pricey for the everyday investor.
If you don’t have the funds to buy a multifamily building yet, there are other ways, like apartment syndications, that require far less capital!
Multifamily Investing in 2022: Still More Pros Than Cons
2022 is shaping up to be a year of inflation uncertainty. However, there are still far more pros than cons regarding multifamily investing.
The fact that occupancy rates and rents are reaching all-time highs in many major markets (with no signs of slowing down) demonstrates significant potential for investors to buy these multifamily real estate properties. Additionally, consider the simplicity of purchasing these multifamily properties. You have a recipe for a straightforward, high-potential ROI investment – something that can be hard to find in changing times!
If you are considering multifamily investing – now would be a good time!
If you are considering investing in multifamily homes, now would be a good time! If you are looking for ways to start investing in multifamily through real estate syndications, feel free to reach out to us at Disruptequity.com/invest to stay in the loop on our open multifamily investment opportunities.