4 Common Misconceptions about Multifamily Investing
For the past quarter-century, multifamily investing has delivered strong returns to investors. According to a 2017 report by CBRE¹, the world’s largest commercial real estate investment company, between 1992 and 2017 the multifamily asset class has generated an average annual return of 9.75%, which is a higher average annual return than any other type of commercial real estate.
This 9.75% average annual return that multifamily investors earned between 1992 and 2017 is also higher than the average annual return for owners of single-family properties across a substantially similar period, according to a study reported in Arizona Central².
Due to common misconceptions about the multifamily asset class, some real estate investors shy away from multifamily investing and focus instead on investing in single-family homes to rent out. Since the Investor Relations team here at RealtyMogul speak to thousands of investors each year, we wanted to share in this article what we have found to be the most common misconceptions about multifamily investing compared to single family home investing.
Purchasing a multifamily property is likely to cost more than purchasing a single-family home in the same geographical area. However, calling a multifamily property “too expensive” misses two key points.
First, one advantage of investing in multifamily is that it potentially enables investors to acquire residential property for less, on a per-unit basis, than building a portfolio by purchasing one home at a time. In that sense, one could argue that purchasing single-family residences one-by-one can become too expensive and that investing in a multifamily building may be the less expensive approach.
Second, although it will likely cost more money upfront to buy a multifamily property than a single-family residence, this does not necessarily mean an investor cannot afford a multifamily investment. There are several ways to obtain financing to acquire a multifamily property, including a conventional bank loan, private financing, and even through an online platform like RealtyMogul, which enables investors to purchase fractional shares of a multifamily property or of a multifamily-focused REIT and gain exposure to this asset class with just a few thousand dollars of investment.
With a single-family home, an investor needs only one tenant to be 100% occupied, whereas that investor would need to find and maintain multiple tenants to fill a multifamily building. Consider the flip side of this point.
With a single-family home, if the one tenant vacates, that investment immediately goes from fully occupied to completely vacant. This means the income on the property drops to zero and will remain there until the investor can find a new tenant.
A multifamily property, on the other hand, has the benefit of an income stream from multiple tenants, which can be viewed as more stable because even if one tenant leaves, the property will still be generating income from the other tenants, while the investor seeks to fill the one vacant unit.
Residential loans are often based on the borrower’s personal financial situation pertaining to income, existing financial obligations, outstanding debt, credit score, and so on. By contrast, lenders primarily evaluate multifamily commercial real estate loans based on the property itself. Therefore, if an investor can find a viable multifamily property with strong financials and characteristics that a future investor may pay more for, the investor should be able to secure suitable financing.
The thought of paying to maintain and operate an apartment building (even one of only four units) might seem too daunting and out of reach for the typical investor.
However, multifamily properties benefit from economies of scale, allowing for proportionate cost savings due to an increased level of production. In other words, because there are several individual housing units contained in a multifamily building, and a fixed set of costs for the entire property, the investor can potentially realize savings in expenses on a per-unit basis.
Another way to understand this concept is to consider the relative expense of owning a four-unit apartment building compared to owning and renting out four single-family homes. Each of the homes will have its own expenses and costs for maintenance and upkeep. With a multifamily property, by contrast, any expenses such as landscaping, painting, fixing the air-conditioning system or patching a leaky roof can potentially be applied to the entire property. Fixing the air-conditioning on a four-unit building essentially means fixing the air-conditioning for all four units at the same time.
Therefore, as the Forbes article, “The Great Real Estate Debate: Multifamily Properties Vs. Single-Family Rentals”³ explains the per-unit costs of maintenance and expenses can be lower for a multifamily building than for single-family residences.
Having made the case for multifamily property as a potentially viable real estate investment strategy, it is also worth pointing out another misconception that some people have about real estate in general: it is a passive investment.
Unfortunately, this is simply not the case. No matter how smoothly a given multifamily property (or single family, or any type of real estate investment) seems to be running, if an investor buys the property directly, that investor becomes an active investor. Even if it is possible to outsource all the daily operational duties to a property management company, the investor will still have to make decisions, answer questions, and deal with issues regarding the property. That is more active than passive investing.
If the potential returns of multifamily investing sound appealing but taking on the direct responsibility to manage a multifamily property does not, there is another option that is truly passive: investing in multifamily properties through our online platform. RealtyMogul provides investors access to investments in multifamily properties vetted by our team of experts.
Of course, real estate investing of any type, including multifamily investing, carries risks and passive income assets all carry the ongoing risks of the loss of both principal and regular income either due to problems with the investment itself or general market downturns.
MogulREIT II, the multifamily-focused Real Estate Investment Trust (REIT)
If multifamily investing sounds intriguing, one opportunity to consider is MogulREIT II. MogulREIT II is a public, non-traded REIT that invests only in multifamily properties geographically diversified across the country. The objective is to realize capital appreciation in the value of its investments over the long term and to pay attractive and stable cash distributions to stockholders.
Additionally, our underwriting team for the REIT seeks under-managed assets in high-demand neighborhoods to invest additional capital in cosmetic improvements, as part of the offering’s “value-enhancement” strategy to reposition the properties to increase both average rental rates and resale value. Investors can potentially gain exposure to multifamily properties without the hassle and upkeep of purchasing real estate directly.
For more information, please review the Offering Circular prior to investing.
Disclaimer: All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. We suggest that you consult with a financial advisor, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity.
Investing in MogulREIT II’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include, but are not limited to illiquidity, complete loss of capital, limited operating history, conflicts of interest and blind pool risk. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties.
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