Is Now the Time to Invest in Multifamily Real Estate?

Posted on May 27th, 2022

There are multiple opportunities for investors in multifamily real estate.

Single-family properties can certainly add value to a real estate investment portfolio, but as rentals, they can be risky without the benefit of stable, long-term tenants. Multifamily properties, however, offer more potential because the ability to house more tenants results in more income, even when turnover happens.

While high property values make it tempting to sell right now, here's why you should look to keep and expand your investments in multifamily housing.

High property values are forcing many to remain renters

Property values are at all-time highs, and now mortgage rates are on the rise, forcing many to remain renters for a while longer. Some have even given up the idea. In fact, 22% of millennials say they'll be leasing for life, according to data from Apartment List. Additionally, the Pew Research Center reports that around 31% of young millennials (age 25-29) currently live in a multigenerational household, showing that more people are staying at home for longer as well.

Rent is high and vacancy rates are low

Rent prices, too, continue to break records. According to data from CoStar Group, rents soared nationally 11.3% last year. 

Vacancy rates might have been a problem for apartment landlords at the height of the pandemic, but per data from Apartment List, the national vacancy rate was 4.53% in March, which was even lower than it was pre-pandemic. 

Accessory dwelling units offer an opportunity for beginning investors

For investors who are just getting started with their income property portfolio or live in a particularly tight market that makes it difficult to purchase more properties right now, accessory dwelling units (ADUs) such as legal basement apartments offer promise. 

While local zoning laws and building codes have the final say on what can be done to a current home, converted garages, backyard dwellings, and other add-on units are helpful in adding housing to the local inventory. These income properties are a good way to grow a portfolio, but also when it comes time to sell, those former single-family homes will be worth much more.

The multigenerational housing trend continues

Multigenerational households have quadrupled from 1971 to 2021, according to the Pew Research Center. Lack of affordable housing is one reason that keeps more family members living under the same roof, but the pandemic also made families rethink their living situation in the age of social distancing. The desire to age in place rather than move to a senior community is also another big reason people are choosing to stay in their homes, and in many cases, this might mean having younger family members move in.

While a single-family home might be out of reach for one generation of a family, the strength of two or more incomes from multiple generations makes it much easier. Investors who want to sell a two- or three-family home could find eager buyers from this growing demographic of buyers

Adaptive reuse offers investment opportunities at lower costs

Adaptive reuse, which is the converting of older existing buildings for new use, offers a wealth of opportunities for real estate investors. In the wake of many office closings during the pandemic, many companies decided to shed their office space or at least downsize it in favor of remote or hybrid work situations. Adaptive reuse has been touted as the saving grace of commercial real estate by converting those empty offices into housing, particularly affordable housing. Investors can support their bottom line while also working to alleviate the housing crunch in urban areas. 

From an economic perspective, adaptive reuse is a near bargain in that there's no need to demolish and rebuild; the foundation and structure are already there, saving considerable time and money. From an environmental perspective, adaptive reuse also offers new life to old buildings and eliminates the need to start over on new land.

Residential REITs offer attractive passive income

If actively managing multifamily properties isn't your investment strategy, residential real estate investment trusts (REITs) provide an opportunity to create a stable, passive income stream. Residential REITs manage everything from single-family homes to mobile home parks to senior housing communities. They're deemed recession-proof because everyone needs a roof over their heads, whereas not everyone needs an office, as we learned during the pandemic. Of course, REITs still have their fair share of risk, so do your research and plan to buy and hold for the best return on your investment.

Whether you take an active investing approach as a landlord or a passive one as a REIT investor, you can look to multifamily housing to offer options for investors at every stage of the game. It remains to be seen whether rents can continue at this pace, but there will always be a demand for housing.

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