11 Reasons Why Multifamily Housing Is a Good Investment
In multifamily investing, it’s good to be a landlord. Interest rates and apartment vacancies have remained low over the past several years and are projected to remain this way for years to come. Further, investors can shield some of the cash flows generated by income producing property on their tax returns due to depreciation and private equity real estate investors are able to access an expanding pool of attractive debt capital today. That explains why nearly 60% of all commercial lending dollars, which will reach $700 billion in 2020, according to the Mortgage Bankers Association, will go to multifamily projects.
In fact, continued low interest rates prompted the MBA to raise its 2020 forecast on multifamily lending activity to $390 billion—a record high. At the start of 2019 the annual yield on 10-year Treasury notes was predicted to move upwards of 3%. Instead, long-term rates have stayed closer to 1.5%, with expectations that private equity real estate will have continued access to this low-cost capital.
Mortgage bankers aren’t the only professionals looking forward to a productive year for multifamily housing. National Real Estate Investor’s sentiment survey released last month ranks it the most attractive type of commercial real estate investment. And so do we; Origin’s income, appreciation and tax-advantaged funds all are devised to benefit from multifamily real estate investments. Here are 11 reasons why multifamily housing will continue to be a good investment in 2020 and beyond.
- Multifamily Money Is Readily Available. Banks are providing more debt capital for apartments, which makes getting approved for mortgage loans easier than for other property types. Multifamily bank lending grew to $100 billion in 2018, new figures from the Mortgage Bankers Association’s Annual Report on Multifamily Lending indicate. But multifamily projects have an even bigger source of capital, one not available for office, retail or other commercial real estate projects. The mortgage bankers report that 42% of multifamily loan capital, or $142 billion out of $339 billion in 2018, came from the government sponsored enterprises Fannie Mae and Freddie Mac. By encouraging a liquid loan market, Fannie and Freddie have made it easier to buy and sell multifamily housing.
- Multifamily Loans Carry Less Risk. Debt accounts for 60% to 80% of the capital stack in most private equity real estate deals, with investors contributing the remainder. While all types of commercial real estate stand to gain from an extended stretch of low interest rates, multifamily housing has one big advantage from the lenders’ standpoint: Rental income comes from a diversified pool of tenants, which makes multifamily lending a lower-risk proposition. Office or retail properties are built around a few anchor tenants, which are not always easy or cost-effective to replace. A loss of rental income can be extended and the cost to re-tenant can be substantial. Multifamily vacancies tracked by CBRE are at their lowest since 2000 and well-occupied properties produce higher cash flows.
- Apartments Provide Steady Income. The average five year cash flow of multifamily projects in the NCREIF Property Index is 8.58%, an enviable rate for a dividend stock. Of course, most investors will aim for above-average returns; like we do at Origin. More on that below.
- Rental Demand Remains Strong. Multifamily housing has gained a comparative edge in tenant demand. Regardless of the state of the economy, people need a roof over their heads. What’s more, momentum has shifted from condo to apartment development. Homeownership has dropped to 1970s and 1980s levels in the United States, the Federal Reserve Bank of St. Louis reports. Downsizing baby boomers are losing interest in owning, many millennials delayed or abandoned home buying plans, and Generation Z, now coming of age and the largest cohort to ever live, is entering the housing market with rentals first.
- Apartments Close the Luxury Gap. Multifamily housing developers have given families fewer reasons to consider a condo purchase. The quality of apartment construction has risen. New buildings are made more sustainably, with a focus on green space and entertainment options. Designs cater to modern lifestyles, combining technology with a service orientation geared to the customer experience. As a result, apartments now satisfy many of the needs that once drove condominium demand.
- Multiple Options for Multiple Price Points. Demand is also strong for older Class B and Class C multifamily housing, such as Origin’s first Orlando, Florida, investment. Owners often seek private equity real estate partners to provide capital for value-add renovations that will justify higher rents. These buildings can be efficiently managed without major renovations, making them profitable investments. Also, communities offer subsidies to landlords who house teachers, police and other median-income tenants.
- Improvements Unlock Hidden Value. Reinvesting in a property through capital improvements and property enhancements can have a nearly immediate payback because then they can command higher rents. Renters are generally willing to pay more if the improvements are of something that they value and receive a benefit from using daily such as appliance upgrades, in-unit smart home technologies such as Nest cameras and thermostats and package locker systems.
- Rentals Extend Record of High Returns. In successive five-year periods, multifamily properties in the NAREIT index have outperformed other commercial real estate shares. At the same time, the apartment sector has been less volatile than its office, industrial or retail peers throughout a quarter-century of returns, generating superior absolute and risk-adjusted performance.
- Rents Keep Pace With Inflation. Year-long lease terms position apartments to benefit from improving market conditions. When wages rise, rents can move higher as well, while commercial properties are locked into multiyear leases. Origin properties stagger lease expirations through the peak spring and summer rental periods when rent prices can be maximized.
- Growth Markets Improve Potential Return. Research substantiates Origin’s philosophy of multifamily investing in smaller, fast-growing markets. In some instances, larger cities that already have a low affordability ratio have less room for appreciation, and returns don’t always reflect the types of risks to which investors are exposed. This approach is echoed in the National Association of Realtors market outlook, which predicts more favorable conditions where apartment rents are affordable and vacancies are low.
- A Refi Can Offer Immediate Payback. Investors don’t have to wait until a building sells to realize gains. By refinancing their loans, they can borrow against the property’s higher value without incurring the taxes on capital gains that come with a sale. Multifamily property owners can refinance as often as they choose during their ownership, collecting tax-free distributions every time.
These advantages are intrinsic to multifamily properties. However, at Origin we employ additional strategies to even further ensure that our multifamily buildings are smarter real estate investments. You can read more about the techniques we employ in this article.