Discussions of the housing market recovery tend to focus on single family homes - but the multifamily sector has, in fact, bounced back more quickly. CBRE, a major commercial real estate services firm, predicted in a recent report that investments in U.S. multifamily properties could break pre-recession highs - topping $105 billion, a record established in 2007 - once all numbers are in for 2014. The report identified three trends that characterize recent commercial investment activity:
- Private, non-institutional buyers have increased investment activity
- Real Estate Investment Trusts are becoming less active in the multifamily market
- Foreign capital is moving into multifamily investment
There is downward pressure on capitalization rates and prices are rising for apartments and larger multifamily properties; the influx of buyers into the market has pushed up the average apartment sales price 5.9 percent per unit over the previous year to $128,000 in the third quarter of 2014.
Multifamily properties are popular with successful rental investors looking to expand their portfolios and take advantage of the economy of scale - more units in one place, and often under one roof, can result in cost savings. The cost per unit to build is lower, increasing the income per unit, and some expenses, such as utilities, landscaping, maintenance, marketing and management, are reduced due to the concentration of units.
The popularity of these properties has fostered competition and a rise in construction to meet demand. It's a dynamic market right now, with sales volume up 28 percent in the third quarter of 2014 - but multifamily buildings may not be within reach for the entry-level investor.
So, what should small investors look for if they can't raise the capital to break into the multifamily market? Crowdfunding is one option, but continuing to invest in single-family rental properties remains a solid choice - demand isn't dead by a long shot.
Younger renters are attracted to single family homes
There has been a trend for the millennial generation to remain at home or double up as roommates to save money during a tough economy and job market. However, brighter job opportunities for college graduates may break them loose to form their own households - and when those households add children, they are more likely to seek out single family homes. Although young families often choose apartments for their lower rents, the amenities of single family homes, such as yards and greater privacy, appeal to this age group. It's not going to be easy, though; they'll be balancing the likely lower rents for apartments with the amenities of a home.
Competing with apartments for this group
Price is always relative, and those who want the amenities of a single family home will be willing to pay more for it. One investment approach is to buy homes in lower-priced neighborhoods, as long as they are safe and clean. Reducing your buy-in cost enables you to keep rents low while maintaining a sustainable cash flow. Rehabbed older homes are another investment option, as they are frequently close to employment and activities.
Small two-bedroom homes give landlords rent flexibility and appeal to younger families. Many millennials will be doing at least some work from home, so even if they have no children, they may look for homes with a second bedroom that can be used as an office space. That's not to say that there isn't a market for one-bedroom rental homes, but they're harder to find and less in demand.
The Ideal Compromise?
If large multifamily properties are beyond your investment reach, consider looking for duplex, triplex and fourplex units in nice neighborhoods. You still get some economy of scale with multiple units under one roof, and rents can be more competitive with apartments while providing good cash flow. There can be a marketing advantage here as well. For example, offering rent rebates when tenants deliver other tenants can work well - they'll refer their friends if they like the units.
The housing market will likely continue on a slow path to recovery; many current renters who want to buy are unable to save for a down payment due to the high cost of rents. Thus, responding to rental demand will continue to be a great cash flow investment, and if demand begins to dissipate, it will be due in large part to renters becoming buyers. In that case, you can probably sell your unit at a nice profit and use the 1031 Exchange to roll up to another residential or commercial investment property.
