A Good Time to Invest in Multifamily Properties
… And Three Hotspots for the Real Estate Investor to Consider
By Erica LaCentra
As rising inflation and interest rates persist in 2023, it is understandable that real estate professionals who enjoyed strong performance in the rental market over the last two years are taking a more cautious approach to their investment plans in the coming year.
Rental growth is continuing to slow, and investors are likely seeing property cash flow getting squeezed due to higher capital costs. Because of these factors, many investors are shifting their focus from investing in single-family rentals to multifamily properties. Multifamily properties offer numerous benefits, so even in a time when the market is somewhat turbulent, it is easy to see why investors might see the appeal of this asset class.
So, let’s get into why it is a good time to invest in multifamily properties, and what markets are particularly attractive for investors.
Grow and Diversify Your Portfolio Fast
One of the reasons why multifamily properties are so attractive to investors is that multifamily properties add a larger number of units, thereby expanding their portfolios at one time. Rather than having to purchase numerous single-family homes, by purchasing a multifamily property, an investor can reap the benefits of five units or more right off the bat.
With multifamily properties, an investor can also expect to have a cheaper cost per unit than they would spend for a single-family home in the same area. This means greater cash flow and a more manageable way to increase consistent revenue and boost net operating income because there are simply more rental units the investor can lease in that singular property.
Owning multifamily properties also creates a more diverse real estate portfolio. Having diversity within a portfolio is crucial in times when the economy experiences a downturn, certain property types are struggling or there are vacancy issues. For example, if an investor owns a single-family home and loses their tenant in a down market, it could be a strain on their finances to have to cover the operating costs of the property until they can fill that vacancy. With a multifamily property, even if there is a vacancy in one or more of the units, there is still the cushion of having income from the other leased units.
It is not uncommon for larger multifamily properties to still be profitable or at the very least, break-even, with higher vacancy rates.
Finally, when it comes to valuing the diversification a multifamily property can bring to a portfolio, there is the fact that multifamily properties have the potential to appreciate significantly over time, often well above appreciation levels of single-family homes, if and when the time arises when an investor may need to sell.
In fact, due to the ongoing lack of housing in the U.S., prices of multifamily properties have skyrocketed in markets across the country due to the significant demand. And while single-family homes are more hearkened to market conditions, like comps in the area and the general supply and demand fluctuations that will directly impact resale value, multifamily properties are a bit more insulated. This is because a multifamily building’s inherent value lies in the income it generates.
So, in many cases, an investor could force appreciation for a multifamily property by improving operational efficiencies, and increase cash flow for each unit by renovating or improving units and charging higher rents making it a more valuable property overall.
All of these factors make multifamily properties highly desirable to investors, especially with current market conditions. So, for investors that are looking to start investing in multifamily properties, it now becomes a matter of knowing where to look for that next opportunity.
Promising Markets for Multifamily
When researching markets to invest specifically in multifamily properties, investors should be looking at factors such as population growth, job market growth, general demographics that may indicate higher proportions of renters vs. homeowners, property price appreciation, general demand, and occupancy levels. All of these factors can come into play when determining the ultimate success of that property.
So, let’s dig into the top three markets that have been identified as hot spots for multifamily investing in 2023 and what makes them so attractive.
First up we have Madison, Wisconsin. While it may come as a surprise for some, or even far off the radar, Madison checks many of the boxes that make it an attractive city for multifamily investing. Nestled about 150 miles from Chicago, IL, and 80 miles from Milwaukee, WI, Madison made a strong rebound following the onset of the pandemic and by the fall of 2021 already had unemployment rates back at pre-pandemic levels. Thus, there was an ongoing need for workforce housing and rentals were in high demand as seen in the occupancy rates which stood at 98% as of November 2022.
Developer activity remains high in Madison, with close to 8.000 units underway as of December of last year, meaning there is plenty of opportunity for investors to reap the rewards and take advantage of this affordable metro.
While Madison saw a 68% year-over-year increase in per-unit prices, it still falls well below the national average of $215k at a per-unit price of just over $139k, meaning there is plenty of room for future growth.
This metro will likely come as no surprise to investors, as Dallas-Fort Worth continues to lead the way for multifamily investment opportunities. DFW checks all the boxes for multis as it has been the single best market for total population growth over the past 10 years. This has been driven by ongoing job growth across most major employment sectors as corporations continue to migrate down south to reap a variety of benefits. This continued increase in population spells a greater need for housing which makes multifamily properties a great investment in this metro.
And since there is a more diverse employment mix in DFW, the local economy is more likely to be able to withstand market fluctuations because the market is not overly exposed to just a single industry. This spells long-term success for investors.
Finally, although pricier than the other two hot markets for multifamily this year, New York City tops the charts as one of the top metros for multifamily investing in 2023. NYC is often known as a city of renters rather than owners, and as of 2022, 67% of households were renting rather than owning. Couple that with occupancy levels continuing to climb and approaching just over 79% last year vs 73% in 2021, and NYC is an extremely attractive metro for investors that can stomach higher costs of real estate.
However, with those increased upfront costs, investors should keep in mind that rents are also increasing, with an average rent increase of 27% year-over-year, which means they can expect significant cash flow for their multifamily properties.
The Potential of Multifamily Properties
For investors that are unsure of how to proceed in the coming year or are taking a long hard look at their investing goals, multifamily properties seem to be a great avenue for generating income and growing long-term wealth.
The benefits of this asset class are clear. It just comes down to researching the right location, running the numbers, and if the value is there, hitting the ground running.
