Investing in real estate is a great way to diversify your portfolio. Many of the wealthiest people in the United States have a significant portion of their investments in real estate. There are several different types of real estate assets that can produce significant returns. One of these options is multifamily real estate properties.
What is multifamily commercial real estate?
To be considered a multifamily property, the building/complex must have five or more dwellings. The properties vary in size and could be large apartment buildings in an urban area, single story units spread throughout a complex, or garden apartments in pristine locations.
Class A, B, C, and D properties
Multifamily real estate is broken down into classes that are referenced when marketed to investors.
Class A properties are the highest quality of properties. They are typically newer (built within the last 15 years), are professionally managed and have a very low vacancy rate. The tenants tend to be higher earners and the units offer modern amenities. They yield high rents with little deferred maintenance cost. As a result, their purchase price will be the highest for investors.
Class B properties could be new properties that have been built in a more economical way that A-properties or class A that are a few years old and have some wear and tear. The tenants will be lower earners and the property may require moderate maintenance. The rent obtained will be lower and vacancy rates may be higher.
Class C properties are often considered “value add” by investors as the value of the property can be increased through improvements. The improvements can be in the form of renovations, increased efficiency in management, lowering operating costs, better marketing to attract higher quality tenants, etc. Once the value is added, investors have the option to sell the property for profit.
Class D is the lowest of the tiers and the properties are generally in need of renovation. These properties are usually older than 30 years with considerable wear and tear. They receive low rental rates. Vacancy rates may be high and tenant turnover can also be an issue.
Benefits of multifamily real estate investing
Easier to finance your portfolio
Banks will typically only finance at 70%-80% LTV for investment properties, requiring you to pay 20%-30% down. This is true for multifamily properties as well, but you will find that you can finance a larger number of income producing units with just one loan.
Increased cash flow
If the property is managed efficiently, it will have a low number of vacancies, meaning there will always be a steady stream of income coming in.
Easier to manage
With all your rental units in one location, you will save time and money-making repairs, collecting rents, marketing, as well as every other aspect of managing your investment. If you can afford an onsite manager to assist in completing all the above tasks in exchange for rent, or reduced rent, even more time and money can be saved.
Demand will remain
The National Apartment Association estimates there will be a demand for an additional 4.6 million housing units by 2030. This would require 328,000 new units to be constructed every year to keep up with demand. Currently, only 225,000 units are added yearly, ensuring the existing housing units will appreciate along with rents.
As you look to diversify your investments and increase your wealth, take a good look and multifamily real estate. Multifamily real estate could very well be the addition you need to meet your financial goals.