Why Are Multifamily Investments Easier to Finance?

When individuals consider investing in real estate, they tend to look toward single-family homes. The reason behind this impulse is simple: these homes cost much less than multifamily structures. In fact, investors can purchase a single-family dwelling for as low as $30,000 in some markets, whereas multifamily buildings can easily cost millions of dollars.

What may surprise some investors is that it can be much easier to secure financing for a multifamily structure than for a single-family home. This stems from the risks involved. Banks see multifamily structures as a source of consistent cash flow: even if the building has a couple of vacancies or tenants who miss their payments, the other units still provide cash flow. On the other hand, if a single-family home is left vacant or a tenant fails to pay, then the net income falls to zero.

For this reason, the likelihood that individuals will foreclose on an apartment building is much lower than with a single-family dwelling. As a result, banks see multifamily buildings as a less risky investment.

The Tortoise and the Hare Applied to Real Estate Investments

When novice investors enter the multifamily real estate market, they tend to go after properties in the “hot” markets and in metropolitan areas with the potential for explosive growth. This approach to investing represents the fast approach to making a profit. These investors go after the No. 1 markets without thinking about the volatility that may have led to the sudden jump to the top. Unfortunately, sudden jumps can precipitate sudden falls. In order to invest successfully in a volatile market, individuals need to have excellent timing. 

Conversely, the slow and steady approach to investing relies on predictability. When investing in predictable markets with slower but steadier growth, investors can make reliable forecasts that result in steady and consistent returns. 

It is helpful for all investors to think in terms of market conditions and market fundamentals. The “fast” approach is concerned with market conditions and the “slow” approach with fundamentals. Investors also need to listen to experts. For example, look to Texas and the cities of Houston and Dallas. Analysts predicted that falling fuel prices and market conditions would cause a downturn. However, in reality, these cities have remained steady for investors due to overall job growth and housing market expansion.

Three Networking Tips for Real Estate Professionals

In virtually every business sector, networking opens doors to new business and strategic partnerships. Here are three networking tips for professionals in the real estate sector. 

Mix it up: Since most real estate professionals specialize in one or more regional markets, it can be tempting to network only with people in familiar circles. By meeting people from different locations, you can expand your professional contacts and open up previously undiscovered business opportunities. 

Leave the sales pitch at home: Contrary to popular belief, networking events are not for closing business or lining up a new sale. Focus instead on finding common ground with fellow professionals and establishing a relationship. Make a connection, don’t make a deal. Later on, you will be able to draw on your professional network for business purposes. 

Listen: At a networking event, you should try to gain as much information as possible about potential business associates. To accomplish this, you should ask thoughtful questions and take time to listen to the answer. If you spend the whole time talking about yourself, you will leave with little to no useful information.

Your Guide to Property Classification Terms

If you’re new to real estate investing, you may have heard the terms “A Grade,” “B Grade,” or “C” Grade to describe particular properties. But what exactly do these classifications mean?

A Grade: These properties are the highest-quality buildings to be found in their market and area. Typically built within the last 10-15 years (or having received a major renovation during that period), Class A properties are well located, feature top amenities, are usually professionally managed, and have very low vacancy rates when overall economic conditions are strong. Rents for A Grade properties are the highest in the market, and there are few if any deferred maintenance issues.

B Grade: These properties are older than A Grade, but are mostly well maintained and feature good-quality construction B Grade apartments generally offer opportunities for adding value through renovations or common area improvements, which often have the effect of upgrading the property to a B+. While Rental income for B properties is lower, buyers can typically acquire a B property at a correspondingly higher cap rate.

C Grade: C Grade properties are usually over 35 years old, located in less desirable areas, and in need of renovations. Sometimes, substantial updates to the building’s infrastructure are required. In a market with other Grade A and B properties, C Grade buildings command the lowest rental rates. They may also require significant improvements in order to generate consistent cash flows.

Suburbs Can Be Profitable for Multifamily Housing

While a lot of attention has focused on the investment returns of multifamily housing in central business districts, or CBDs, recent analyses show that similar investments in “good suburbs” can prove equally profitable.

Using a database from the National Council of Real Estate Investment Fiduciaries, MPF Research closely examined the 88 percent of apartments owned by institutional investors not located in CBDs. Analysts found that multifamily housing investments in “good suburbs” showed the same returns as units in CBDs over multiple cycles. “Good suburbs” were defined as submarkets in the nation’s top 50 metros that were built in economically healthy areas and could charge monthly rent above the metro's average. They mirrored CBDs in occupancy rates and rent growth.

Like CBDs, “good suburbs” are areas that offer abundant job opportunities, convenience to thoroughfares and rail stations, high-priced housing, higher incomes, and more amenities. In low-rent suburbs in economically weak metro areas, investment returns were the weakest.