Independent landlords who own residential real estate typically own single-family homes, condo units, or maybe a small multifamily real estate property such as a duplex or triplex.
Multifamily real estate properties can require substantial capital and significant elbow-grease before being ready to produce positive income. Until recently, single-family and small multifamily properties were the primary way most individual investors could directly own private real estate.
Larger deals were cost-prohibitive for most investors.
With the advent of online real estate investing platforms, individuals can now access larger, multi-tenant properties at low minimum entry points and co-invest alongside experienced real estate professionals.
Today we look at the multifamily real estate asset class and the advantages of owning this kind of property through an investment platform as a passive investor.
This article is written in partnership with the real estate crowdfunding platform EquityMultiple*. EquityMultiple is a New York-based real estate crowdfunding platform that empowers accredited investors to access high-quality commercial and multifamily residential properties. Investments require smaller minimums and are managed by real estate professionals.
What is a Multifamily Real Estate Property?
A multifamily real estate property is simply a property with more than one residential unit on the premises. The term can refer to several styles of homes including apartments, condominiums, row homes, duplexes, triplexes, or even a home with a mother-in-law apartment (aka granny flat).
Properties can be owned by one entity such as an apartment complex owner, or separately owned such as condominiums and row homes.
Experienced real estate professionals often prefer multifamily real estate because they are more efficient to own. Multiple cash flowing units can be bought under one roof with a single investment loan rather than individual loans like in a portfolio of single-family homes.
Several expenses are shared between all the units bringing some economies of scale into the investment equation.
# Benefits of Investing in Multifamily Real Estate Properties
Beyond financing and economies of scale, there are other benefits of investing in multifamily real estate as a passive investor. As deals get larger, the benefits become more profound.
For individuals, these benefits have been elusive due to the higher minimums required to invest. However, loosened regulations and innovative investing platforms have made these kinds of investments more accessible to the masses.
Here are four reasons to invest in multifamily real estate properties as a passive investor.
1. Diversified Tenancy = Reduced Risk
Office properties, industrial buildings, and retail properties usually have only one or a small handful of tenants locked into long-term leases. Multifamily real estate properties, on the other hand, can have tens or even hundreds of diversely-structured rental agreements with tenants turning over on a rolling basis.
This arrangement provides downside-protection by minimizing vacancy exposure during economic downturns. Put differently, there’s an ever-present risk of 100% vacancy with a single-family home whereby the property may produce no income for months at a time as you seek a new tenant. The same can happen with single-tenant commercial properties.
A multifamily real estate property with several tenants will exhibit some degree of vacancy. But a vigilant operator can typically keep vacancies to less than 10% of the property’s units allowing the property to continue to operate in the green.
2. Consistent Lease Turnover and Inflation Hedge
With a multifamily real estate property, leases are constantly turning over because of the natural flow of tenants coming and going.
This allows the operator to gradually ratchet up average rents in accordance with prevailing market rates and commensurate with the rate of inflation. In a strong market with increasing demand, property investors can more easily realize rental income growth.
In periods when inflation becomes a concern, management of a multifamily real estate property can be more responsive to aggregate price increases.
Another advantage of consistent lease turnover is that vacancies can provide an opportunity to upgrade interiors of some units while covering costs with the cash flow from occupied units. This is particularly helpful for newly acquired properties that need a facelift.
3. Multifamily Real Estate Exhibits Low Volatility
Multifamily has historically been the least volatile among commercial real estate asset classes. Whereas markets for industrial, office, and retail more closely align with macro and micro-economic forces.
Multifamily real estate demand mirrors demographic trends such as where people live, family size, and the demographic makeup of populations within a given market or neighborhood.
Economic forces and demographic trends are interrelated. But since residential dwellings are the most indispensable function of the built environment, multifamily real estate properties tend to lag the economic fluctuations.
In other words, people need places to live more than shopping malls or office buildings. As such, the multifamily asset class tends to be more resilient through market cycles and exhibit fewer swings in asset values.
Empirically, multifamily has exhibited less volatility over the past few decades than any other commercial real estate asset class. Multifamily has also historically yielded the best risk-adjusted return.
4. Market Trends Favor Multifamily Investing
Homeownership rates reached historic highs at 69.2% in 2003 before the financial crisis.
It has dropped significantly since then, currently hovering around 64%. See the chart below (shaded areas indicate U.S. recessions). Mobile users turn your phone sideways or tap source link.
Source: Federal Reserve Economic Data (FRED)
Some of this can be attributed to the housing market. Lack of inventory, tight credit, and eroded faith in the merits of homeownership have all resulted in a higher-than-average percentage of renters.
Millennials, anyone born between 1981 and 1996, are in a prime age range for first-time homeownership. However, they remain persistently averse to homeownership versus prior generations.
There are likely several contributing factors to this trend:
- Preference for starting families later in life
- Affinity for live-work-play urban areas where single-family homes are increasingly expensive
- Widespread student loan debt
- Skepticism of the ‘American Dream’ of owning a home
At the same time, many Baby Boomers are trending toward “right-sizing” by eschewing the suburbs for renting in urban areas with more amenities, convenience, and cultural opportunities.
While homeownership rates are rising from historic lows, there are indications that demand for multifamily housing will remain strong, especially among fast-growing urban areas.
Some may claim that we’re nearing the peak of the market for real estate investing and that opportunities for yield are drying up.
Demographic trends and demand indicators paint a different picture. Fast-growing metros like Tampa, Phoenix, Portland, Washington D.C., and Austin continue to exhibit strong labor market figures and plenty of opportunity for multifamily investment.
New Opportunities in Multifamily Real Estate Investing
Buying and managing a multifamily property with tens or hundreds of tenants is off the table for most individual investors. It’s a full-time job best left to institutional investors with deeper pockets.
The good news is that now, with platforms like EquityMultiple and other crowdfunding sites, individual investors can passively invest in large multifamily and commercial deals with as little as $5,000.
These are investment opportunities alongside well-capitalized, experienced real estate firms enabling the individual investor to reap the benefits of multifamily investing.
With low minimums and the passive nature of platform-based investing, individual investors can diversify across markets and project types as they begin exploring the multifamily asset class.
EquityMultiple is for accredited investors only. That means an individual or married couple must have a net worth of at least $1,000,000 (excluding the value of their primary residence). Or, have an income of at least $200,000 each year for the last two years for a single person, or $300,000 combined for a married couple.
Learn more at EquityMultiple. Please also read my comprehensive EquityMultiple review.
EquityMultiple vs. Fundrise vs. PeerStreet
I’ve highlighted several innovative investing platforms over the years on this blog. Real estate crowdfunding is one of my two favorite passive income streams (alongside dividend growth investing) because it offers nearly equivalent returns to the stock market but less volatility.
Considering the volume of deals being funded the traditional way, there is plenty of room for multiple platforms to thrive.
EquityMultiple is much different than the other two real estate crowdfunding platforms that I endorse. Fundrise (review) is meant for non-accredited investors and offers more diversification through non-traded eREITs instead of individual deals. All U.S.-based investors can get started with as little as $500.
PeerStreet (review) is also for accredited investors only. But PeerStreet focuses on first lien debt-only deals and doesn’t offer equity or preferred equity investing.
In general, EquityMultiple provides the opportunity for greater returns through participating in individual real estate deals. Each deal is placed into a separate LLC and each investor becomes a part owner in the entity. The greater returns are a function of taking a higher risk by investing in individual deals.
This model is very similar RealtyShares. RealtyShares decided to stop offering new deals due to lack of venture capital continuance. They grew too fast. However, all the deals set up on the platform are still active and solvent.
EquityMultiple has taken a measured slow-growth approach but still competes in the top tier of real estate crowdfunding platforms. They’ve partnered with an established real estate investment firm that offers deep financing and managerial experience.
Like all investments, investing with EquityMultiple is not risk-free. Though they heavily vet every deal that comes across their table, they only accept 10% of deals. Each deal for consideration is paired with significant data for your own due diligence.
If you’re a former RealtyShares investor or someone looking for higher risk/reward opportunities in direct real estate investing, consider taking a look at EquityMultiple.
Multifamily real estate investing is an asset class I wish I had gotten into earlier in my life. My condo is a single unit, so it doesn’t realize the benefits of multiple units under one financing umbrella.
If I were getting started with real estate investing in a low-cost market, I’d look to buy a duplex or triplex, then live in one unit and rent the others. Purchased correctly, you can cover your own cost of housing with the rent from the other units.
* RBD partners with several brands and online investing platforms. I only endorse services I use or have vetted via research and conversations with the companies. I was not compensated for this article. However, I may be compensated if an EquityMultiple account is opened by a qualified investor via a link on this page.
Photo by Florian Wehde via Unsplash
Favorite tools and investment services right now:
Fundrise - The easiest way to invest in high-quality real estate with as little as $10 (review)
Empower (Personal Capital is now Empower) - A free tool to track your net worth and analyze investments.
M1 Finance - A top online broker for long-term investors and dividend reinvestment (review)
SaveBetter - SaveBetter is a simpler way to access high-yield, FDIC-insured savings products.
Buy, Hold Long says
Very interesting, can’t say I’ve heard much about it to be honest. Thanks for sharing.
Caroline at Costa Rica FIRE says
Good round-up of the pros of multi-family. We have a rental portfolio across several US states and Costa Rica. We have 1 multi-family, and it’s been a good buy. We would definitely consider doing more. As with all real estate, it’s all about location. If you’re targeting a neighborhood with mainly single family homes, then that’s where you may have to start. When we were starting our portfolio, the multi-family homes were not in the best neighborhoods, or they were prohibitively expensive in the regular neighborhoods. So more than just the question of single- v. multi-, you want to look at the overall revenue potential, costs, tenant quality, etc.