Investing In Multi-Family Housing

In today’s tumultuous economy, companies and individuals alike are finding real estate to be a particularly interesting investment sector.  While this is not a new concept, participation in this market sector has increased  significantly. One appealing strategy is to own moderate and moderate-lower income multi-family rental housing situated in primary and secondary urban areas.  It is critical to have professional property management for these facilities.  This strategy is based upon the continuing shortage of good housing in these income brackets and areas as well as a history of low vacancy rates.

An attractive strategy is direct ownership in forthcoming real estate acquisitions:  10 up to 100+ units.  The common experience has been that a prudent direct multi-family property can yield more attractive operating as well as long-term returns than alternative opportunities. 

Consistent Returns

Multi-family investments tend to generate relatively consistent returns due to the fact that the demand is a function of population and income, neither of which are likely to change very quickly, and both of which can be identified in emerging markets.  This strategy statistically makes sense as well with declining home ownership rates which peaked at 69% in 2004 and dropped to 66.4% in 2010.  This rate is expected to continue to drop to 64% by 2015.  Demographic changes play a significant role with a substantial jump in the older population due to the baby boomers, and the fact that 5 million households over the age of 65 rent.  In addition, immigrants are now an important element with 26 million immigrant renters who make up 45% of all rental growth between 1998 and 2008.  65% of immigrant households rent.  When you add to this a decrease in the median asking price per unit for multi-family properties, the appeal becomes even more obvious.

Multi-Family Investment Strategy

Without extensive knowledge and experience in this arena, an investor needs to have a multi-family real estate strategy which should include:

1. Ongoing searches for real estate acquisitions that appear to be stable and profitable
2. Once identified, an objective financial and marketing analysis should be developed to eliminate any potential acquisition that fails to meet goals for performance.  Depending upon preferences and goals, current criteria generally seek cap rates of not less than 8% and “cash-on-cash” returns of not less than 12%, loan-to-value (LTV) ratios of 70% to 80% (depending upon whether recourse or non-recourse financing is used), and debt service coverage of at least 1.25.
3. Following an acceptable analysis, a Limited Liability Company (LLC) will often be established to ultimately take title to the property.
4. The LLC will then present an Offer and undertake the subsequent “due diligence,” e.g., professional property inspection, professional appraisal, title search, ASTM E-1528-00 Environmental Transaction Screen, and lead paint and asbestos inspections, if required.
5. The satisfactory completion of “due diligence” and ultimately a Purchase and Sales Agreement.  If the due diligence examination uncovers problems or deficiencies that cannot be cured, the negotiations should be terminated.
6. Following execution of the Purchase and Sales Agreement, negotiations will be initiated to secure mortgage financing.
7. All due diligence analyses and reports are made available to all parties to facilitate timely decisions as the goal is to negotiate expeditiously, which is in the best interest of the buyer and the seller.
8. All conditions of the transaction (i.e. terms, interest rates, amortization, and payment schedule) are to be designed to meet owner’s financial goals.
9. While understandably subject to the constraints of the Seller, the target is to complete a transaction within 60 to 75 days of the initial commitment to proceed.

This is a good list to follow.  Avid real estate investors will want to consider these types of opportunities because with the demographics listed above, a huge upward pressure on occupancy and rental rates may very well make this a golden age of multifamily housing!

Related posts:

1. Changes In Housing
2. Documents Needed To Buy or Sell Real Estate
3. Avoid Housing Discrimination
4. Time For A New Home?
5. Short Sale Q&A