Investing in Multifamily: What does the Data Say?
Over the 25-year period from 1992 through 2017, multifamily real estate provided the highest average annual total returns (9.75%) of any commercial real estate sector with the second lowest level of volatility (7.75%), according to research cited in a 2018 report by CBRE, the world’s largest commercial real estate investment firm.
That statistic alone should give investors a reason to consider multifamily real estate to potentially diversify their investment portfolios. In the remainder of this article, we will discuss five reasons that multifamily, and an increasingly in-demand subset of multifamily called workforce housing, might represent a smart investment opportunity, and discuss ways for investors to access such an investment.
1. Millennials are placing strong demand on rental properties
According to data from the U.S. Census Bureau, renting represents the most common form of housing for the millennial generation, the largest generation in U.S. history. In fact, whereas the national rate of homeownership for the population overall was 64% in 2016, for millennials aged 25 to 29 it was just 31%, and for millennials aged 30 to 34 it was only 45%.
There are several reasons for this trend toward renting for the large millennial generation, including the fact that steadily rising median home prices put homeownership out of reach for many people in this generation. Millennials also tend to value mobility and flexibility over the benefits of owning property, and for this reason they are more likely than previous generations to prefer renting.
2. Baby boomers are increasingly opting to rent
At the other end of the age spectrum, the baby boomer generation is increasingly opting to rent property over homeownership. According to a Forbes report, between 2009 and 2015, the biggest shift from homeownership to renting came from those aged 55 and older (in other words, boomers). More recently, the National Multifamily Housing Council and National Apartment Association cited in a 2017 report that renters aged 55 and above account for more than 30% of rental households.
As the Forbes report notes, older tenants are drawn to renting not because they have difficulty purchasing a home like millennials (they do not), but rather because the right multifamily property can offer hassle-free, amenity-filled luxury living that appeals to this older generation.
3. Shorter-term lease agreements allow for faster increases in rent
Another reason multifamily property can potentially be an attractive investment is its ability to adjust more quickly to changing market conditions, specifically increasing rent quickly due to market demands or inflation.
Whereas leases of five years or more are standard with other types of commercial real estate (office and retail, for example), multifamily leases are typically just one year. This means property owners are more easily able to raise rents quickly and consistently as market conditions change.
4. The data suggest increasing demand for workforce housing
Workforce housing generally refers to multifamily properties for middle-income households, although it can include families earning anywhere from 60% to 120% of their area’s median income. These properties are often Class B and Class C apartments that do not have the amenities of the higher-end complexes, and serve people who are being priced out of the market for units in the more attractive buildings.
The key long-term benefit of investing in workforce housing, according to the 2017 State of the Nation’s Housing study by Harvard Research, comes down to simple supply and demand. As the study found, while construction of high-end Class A properties has increased in recent years, it has fallen for the Class B and C properties. In other words, workforce housing is facing a shortfall of units.
That study found, for example, that in the decade between 2005 and 2015, the supply of rental housing stock increased by nearly 100% for high-end units, but during that same period the stock of affordable units fell by 2%.
5. Preferential investment for financing
Finally, the data also indicate that multifamily investments enjoy a preferential mortgage market and better funding terms relative to other types of commercial real estate.
According to 2017 research from Real Capital Analytics, multifamily investors enjoyed better terms for funding than investors in the broader commercial real estate market. For example, the typical mortgage rate of 4.25% for multifamily was lower than the overall commercial real estate sector, at 4.5%. Multifamily investors also received higher loan-to-value ratios (67% on average) than the broader pool of commercial real estate investors (who averaged 59%), as well as lower debt-service-coverage ratios (1.25, versus 1.74).
Keep in mind multifamily investments and workforce housing have specific risks, such as changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily or workforce housing properties. Investors should do their due diligence prior to making an investment in multifamily properties.
Invest in multifamily and workforce housing without the day-to-day management responsibilities
While every investment in every asset class carries some risk, multifamily and workforce housing have the potential to make smart additions to an investment portfolio.
However, purchasing and managing such properties can be a daunting undertaking, not to mention risky without any prior experience making such investments. One solution is to invest directly in multifamily properties through our online platform.
With RealtyMogul, investors can buy directly into a REIT that invests in multifamily real estate property prescreened by our experts, and then leave the day-to-day management responsibilities to the professionals.
Introducing MogulREIT II, the multifamily-focused Real Estate Investment Trust (REIT)
MogulREIT II is a public, non-traded REIT that invests only in multifamily properties spread across the U.S. The REIT intends to invest in established, well-positioned apartment communities that offer value-added opportunities, and which have demonstrated consistently high occupancy and income levels across market cycles. The goal is to realize capital appreciation in the value of its investments over the long-term, and to pay stable cash distributions to stockholders.
Additionally, the 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.
Multifamily Properties Currently Included in MogulREIT II
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.