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Multi-Family Housing - An Overview
October 21 | 2013

Multi-Family Housing

Crowdfunding for real estate is comprised of a number of different asset classes in which one can invest.  We’ve earlier discussed many different segments of commercial real estate, and in this article we’ll focus on an especially significant one – multi-family housing

The multi-family sector is considered one of the most “defensive” areas of real estate.  Apartment buildings tend to be less prone to economic cycles, since everyone needs a place to live, even when a drooping economy might cause significant vacancies in other types of commercial space.  Crowdfunding allows investors access to larger multi-family complexes that offer even more stability, since individual vacancies in those properties have a more limited impact on the overall rent roll than do vacancies in smaller two- to eight-unit multiplexes.

Apartment buildings represent almost 25% of the total U.S. commercial real estate market.  They can vary by location (urban or suburban), by the mix of units (e.g., studio, one bedroom, or two-bedroom), and by the type of structure (high-rise or garden apartments).  Garden apartments (usually two-or three-story buildings with more open space) often have a more favorable building-to-land ratio for purposes of the depreciation deduction.  They also sometimes exhibit more price elasticity, meaning that rent reductions or increases are more likely to affect demand; high-rise apartments tend to be more expensive at the outset, and thus pricing is often less of an issue.

Like other areas of commercial real estate, apartment buildings can be classified by quality level.  “Class A” structures are generally newer buildings in better market locations.  Amenities may include workout facilities, deluxe lobbies, and doormen, and the rents are reflective of these features.  Class B structures are usually somewhat older buildings in locations that are less upscale, with a more limited range of amenities.  Class C buildings tend to be the older buildings in the market area, usually with lower- and middle-income residents.

Apartment demand comes from a number of sources, including demographic trends, home ownership and household formation rates, and local employment growth.  Newly married couples and young adults moving out on their own are likely to initially rent an apartment.  Demand is also driven by relocations of existing households to new areas.  Also, many people who could conceivably buy a home still choose to wait until they are better able to bear the financial burden of a monthly mortgage payment.

Apartment leases are typically short-term -- one to two years.  At first, this might seem to be a disadvantage, but in fact a shorter lease term is an attractive feature to renters not wanting to make a long-term commitment.  It also means that multi-family properties can adjust quickly to market conditions, either to quickly implement rent increases in a “hot” market or, if the demand environment is not so great, to offer short-term rent incentives in order to minimize the vacancy rate.  Market rents depend on local median incomes as well as the cost and availability of home or condominiums to purchase as an alternative to renting an apartment.

As with other commercial properties, apartment complexes require competent property management if cash flow is to be maximized.  The tasks of rent collection, tenant relations, maintenance schedules, security, bookkeeping, and showing and renting space are all jobs that need to be done successfully to assure that the expected budget will be achieved.  The management function has only grown in importance in recent years; the shift of more real estate ownership to institutions that require strong reporting, and a significant increase in both litigation and regulation, all call for managers to increase their levels of documentation.

Since apartment buildings share many features with single-family homes, this type of investment is often more familiar to many investors.  The cash flows derived from multi-family complexes are usually relatively steady, assuming that the property is correctly managed.  Crowdfunding allows investors access to larger multi-family complexes that offer even greater stability.  Assuming the proper due diligence has been done in initially valuing the property, a well maintained and favorably located apartment complex represents one of the least risky forms of real estate investment.

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