Multifamily investing has many different shapes and sizes. For the most part, this class of real estate asset breaks down into the following categories: market rate apartments, senior living, student housing, affordable housing, and sometimes mobile homes. There are even subsets of these classifications, but for our discussions here we will stick to market rate apartments.
So why is apartment investing so beneficial? The first of three reasons; your vacancy risk is mitigated through unit volume. As you increase the number of units of ownership, then the percentage influence of one vacant unit becomes less significant. This is to say, if 10 people decide to break their lease tomorrow, this picture looks different from a 20 single-home investor versus a 100 unit apartment owner. Apartments allow for quick scalability of volume and therefore quicker risk mitigation. The second benefit; financing is more favorable for multifamily than other commercial real estate. This is because apartments serve a housing need AND are a commercial investment. Financing includes both Freddie and Fannie as well as a host of other loan products. Furthermore, I would venture to guess that the apartment industry has the biggest variety of loans you can get. The last major benefit of owning apartments is the opportunity for “passive” income. If done correctly, apartments have some of the best returns for the effort. Apartments generate some of the highest investment returns and depending on the apartment, can also be considered a recession proof real estate investment. Let me interject here and say there is no such thing as a purely passive investment. Even the most coveted land-lease investment still requires a bit of elbow grease. In general, apartments have many benefits, but now we must talk about the other side of the coin.
There are a number of key challenges with investing in apartments. There are two major ways: getting tired or lacking effort. All property has a shelf life. As time progresses, a property wears down and the question is, “what is continually being done to maintain this thing?” As apartments deteriorate and become “tired” then the price a tenant is willing to pay decreases. It’s simply the equation of quality versus price. As quality lowers so does the price the market is willing to pay. Less money for rent is less money for ownership. At this point you either rehab the heck out of the thing or sell it by the pound. Getting tired refers mainly to the physical nature of a property. Lacking effort refers mostly to management. The aforementioned passive investment can be achieved, but the challenge of effort becomes someone’s concern if not the owner. The best passive investments I’ve seen occur when good process and understanding happen between ownership and management. A 100 unit complex has at least that many humans interacting with it every single day. Leases, work orders, noise complaints, smoke alarms are all part of the program. Management can have great news and terrible news, and even though you won’t get calls about busted pipes, you will get a call asking how to pay for all of that water damage the next morning. When there are good processes in place for checks and balances and a deep understanding of investment strategy then that’s where the magic happens. An owner doesn’t need to micromanage, and often times micromanagement causes way more harm than good. Set expectations, observe progress, periodically review. All this is to say, good quality = good prices and good management = good passivity.
So you’ve wrestled with the thought of plopping down that big bag of down payment cash. You’ve secured a general idea of financing, you’ve communicated with a management company, and you’ve located your first investment opportunity. You can win because you have volume on your side, a full basket of loan options, and you want to retire someday with “passive” income. Don’t let the property get tired, and make sure the effort is there, and everything is going to work out. Remember: the race is long and Rome wasn’t built in a day. Happy hunting