Multifamily Investing Definition

A real estate investing strategy that focuses on properties suitable for multiple tenants, like an apartment complex or condominium. Multifamily investing typically refers to investing in properties with a large number of units so that economies of scale and greater total return can be achieved. This article covers quite a bit. Let’s set the table first: why should you, as an individual investor, care about multifamily investing? Let’s first outline a few top reasons that the multifamily asset class may be worth a look as a next step beyond a traditional portfolio of stocks and bonds:

1. It potentially offers both cash flow and appreciation/upside.
2. Unlike single-family investing – or “flipping” – it brings the benefit of a diversified tenant base.
3. Even versus other commercial real estate asset classes, multifamily is essential, irreplaceable, and in short supply.

As we will cover in more detail, we believe multifamily investing is a critical step to take for any self-directed investor looking to diversify into alternatives. Multifamily investing is the largest sector within commercial real estate. For many investors, it is also the simplest to understand. The demand drivers and fundamental uses of multifamily property are well understood. Relatedly, the multifamily asset class tends to be one of the most stable performers among all types of investments (more on this in a bit).In this article, we’ll review the essential things to know about multifamily investing, and look at the major advantages of multifamily real estate investing. 

Multifamily investing entails buying properties with two or more units that can be rented out to multiple tenants — like apartment buildings and condo complexes. Further, “multifamily investing” tends to mean investment into properties with many units in a highly structured manner, factoring in lease-up, value-add improvements, and other elements of a more nuanced business plan. As such, multifamily investments are considered one of the “core four” types of commercial real estate investment, alongside office, retail, and industrial. 

Real estate investors who acquire multifamily properties are typically looking to increase net operating income (NOI) by increasing occupancy rate, increasing average rents at the property, or both. Success in multifamily investing also hinges on exiting at a more favorable sale price, either through positive changes in the market, value-add improvements at the property, or both. As such, CRE investors typically pay attention to several key metrics when evaluating a potential multifamily investment:

• Occupancy rate
• Capitalization rate (or “cap rate“)
• Sales and rental comparisons (“comps”) in the area
• Population growth, job growth, and other demand drivers in the market

Like other investable assets, the performance of multifamily investments is subject to market forces: supply and demand. Supply constraints can drive up rents that operators can command at the property, the fair market value of the property as a multiple of rents, and the sale price at exit. Local factors – such as zoning and permitting – can influence supply in a given multifamily market. Macroeconomic factors also play a part. Generally speaking, the supply of rentable units in the United States is far below demand, which creates a constant positive factor for multifamily investing. As of 2024, the supply pipeline (the number of multifamily properties being developed) is strong for the moment but thins out considerably into 2025 and beyond, as rising interest rates put many new projects on hold

Multifamily Real Estate Investing vs. Single-Family

Often “real estate investing” is used as short-hand for buying and renting single-family homes or “flipping.” Commercial multifamily investing behaves differently in several key ways. Investors should be prepared to expect a few differences when investing in multifamily units compared to single-family homes. For instance, tenant turnover and vacancies in single-family homes can drastically impact or completely erase rental income. In other words, multifamily investing often benefits from a diversified tenant base; with more units, more tenants, and leases expiring at various moments, the asset is more insulated from vacancy risk.

Since owners will have access to multiple streams of income, multifamily properties can be less volatile assets compared to single-family rentals during times of an economic downturn or recession. Although multifamily units require a higher initial investment, investing in this type of real estate typically means fewer gaps in rental income and cash flow. Even with short rental agreements, leasing to multiple tenants provides a built-in hedge against inflation. Since multifamily tenant turnover is relatively high, rental prices can quickly reflect current market values and compensate for inflation. What’s more, it is common for multifamily operators to “capture” inflation in rents — in inflationary periods in the past, multifamily operators have commonly pegged rent increases to the CPI, automatically offsetting the effects of inflation.  

Multifamily Investing – a Recession-Resistant Asset Class?

The resilience of multifamily real estate investments, particularly during recessions and various business cycles, can be attributed to several key factors:

1. Stability in Demand: During economic downturns, while sectors like retail, office, and hospitality may suffer due to reduced consumer spending and travel, the demand for housing remains consistent. People always need a place to live. This enduring need for housing underpins the resilience of multifamily investments during recessions. For instance, during the COVID-19 pandemic, many people chose to stay in their current living situations due to health and economic uncertainties​​.
2. Increased Renting During Recessions: Economic downturns often make it challenging for individuals to qualify for mortgages, as lenders become more cautious and restrict loan issuance. This situation leads to an increase in the renter population, thereby boosting demand for rental apartments. Additionally, in times of financial uncertainty, individuals are less likely to make significant purchases like homes, further increasing the pool of renters​​.
3. Performance During Past Recessions: Historical data from past recessions, such as the Great Recession, show that multifamily properties can rebound quickly after initial volatility. For example, apartment Real Estate Investment Trusts (REITs) recovered and outperformed other commercial real estate asset classes and even the S&P 500 in the years following the Great Recession. Moreover, the U.S. Bureau of Labor Statistics reports that residential rents in the U.S. have generally risen each year, even during recessions, except for a brief period following the Great Recession​​.
4. Adaptability to Economic Changes: Multifamily investments have shown adaptability across different economic downturns, whether caused by financial crises, tech bubbles, or pandemics. For instance, during the early 1990s recession, multifamily was the only major property type to experience positive rent growth. Similarly, during the economic fallout of the pandemic in 2020, multifamily, along with industrial and retail sectors, experienced positive rent growth due to strong housing needs and government stimulus​​.
5. Income-Based Valuation: The valuation of multifamily properties is primarily based on the income they generate rather than market conditions. This income-based valuation adds a layer of resilience during market downturns, as multifamily units continue to generate rental income even when market conditions are unfavorable​​.

As of 2024, it seems increasingly likely that the “soft landing” scenario will come to pass — a gradual decline in interest rates and inflation without any significant harm to the economy. This is not a foregone conclusion, however — some form of downturn is common following a period of rapid rate increases like we saw between mid-2022 and late-2023. Multifamily may, hence, be a timely asset class to consider.

Advantages of Investing in Multifamily Properties

Multifamily properties, which range from duplexes to large apartment complexes, are a cornerstone of real estate investment for those looking to diversify their portfolios. These properties are more than just residential spaces; they are revenue-generating assets that can offer a more stable investment compared to the fluctuating stock market.

Why Multifamily?

For accredited investors – those with an annual income exceeding $200K or a net worth over $1M excluding their primary residence—multifamily investments present several distinct advantages:

• Stable Cash Flow: The ability to generate consistent rental income from multiple tenants is a key attraction. For example, a property that adheres to the 1% rule, where the monthly rent is at least 1% of the purchase price, can provide a reliable return on investment. This rule is a quick way to measure the potential profitability of a rental property and is particularly relevant in markets with strong rental demand.
• Scalability: Multifamily properties allow investors to grow their real estate portfolio more rapidly than acquiring single-family homes individually. This scalability is beneficial for investors looking to expand their holdings efficiently.
• Risk Distribution: The risk of income loss is mitigated by having multiple tenants. Even if one unit is vacant, the others can continue to generate income, which can help maintain profitability during tenant turnover periods.
• Tax Benefits: Real estate offers tax deductions such as mortgage interest, property taxes, and depreciation. These benefits are amplified in multifamily properties due to their size and income potential. For instance, cost segregation studies can accelerate depreciation on certain components of the property, enhancing the tax benefits.

Multifamily real estate is one of the most essential real estate classes and is continuing to experience lower vacancy rates every year. Among all commercial real estate asset classes, multifamily provides the most essential function – no matter what else happens in a local market or the economy writ large, people will always need a place to live

Is Multifamily Investing a Good Idea in 2024?

In 2024 and the years ahead, we believe that macroeconomic factors favor multifamily investing. Here are some trends that currently favor multifamily investing:

• Homeownership has never been more expensive. With single-family homes in short supply and more costly than at any point in history, upward demand pressure is put on multifamily. With economists predicting rates to stay above 6% in the near term, it’s easy to see why many potential homebuyers are holding onto their apartment leases.
• The U.S. generally faces a significant housing unit shortfall, with robust new “household formation” expected. With job figures also remaining strong, demand for multifamily units should remain elevated relative to supply for the foreseeable future.
• While inflation has moderated, economists agree that we can expect it to stick around for some time. Given the inflation-hedging properties of multifamily, this trend also favors multifamily investing relative to other asset classes.

With historically expensive and few options for single-family homes, would-be buyers are increasingly renting later in life.

The multifamily construction pipeline was strong up until recently, but the surge in interest rates has changed the equation. The Census Bureau expects multifamily starts to be down meaningfully year-over-year, with the supply pipeline thinning in the years ahead. This means that multifamily investing is potentially a way to “do well by doing good,” helping to mitigate the massive shortfall of market-rate housing in the U.S. Workforce housing investments are needed, but any investment in density housing can potentially be considered a social impact investment. 

The Supply Picture

Among other things, an investment opportunity is dependent on market fundamentals: supply and demand. Less supply means less competition, and hence less supply of multifamily units coming to market is a boon for multifamily investors. This may well be the case for the foreseeable future.

April 2024 saw the fewest new multifamily project starts since April 2020, when the COVID-19 pandemic halted construction in many markets. This is mostly a function of capital markets conditions rather than a response to decreased demand. With higher interest rates and many mid-sized banks tightening balance sheets, the financing picture has grown more complicated for developers and operators. Those that can make projects pencil may face less competition, and hence more compelling investment prospects.

Multifamily provides consistent cashflow

As of this writing, inflation is at a 40-year high. This may sound concerning, but what does it actually mean for multifamily real estate investing?  While office, industrial and retail properties typically have only one or a small handful of tenants locked into long-term leases, multifamily properties often have dozens or even hundreds of individual rental agreements (1 for every unit) averaging 1-year in term, with tenants turning over on a rolling basis. This arrangement provides downside-protection by minimizing vacancy exposure during economic downturns. On the other hand, consistent turnover of leases in a multifamily property allows management to gradually ratchet up average rents in accordance with prevailing market rates and commensurate with the rate of inflation.

Multifamily real estate investing brings inherent advantages. But, there are a number of different strategies multifamily investors can employ to further diversify, such as targeting positions across the capital stack, and investing across strategies (such as value-add or core plus).

Multifamily exhibits low volatility

Peter Linneman, the principal of Linneman Associates, as well as the CEO and founder of American Land Fund and former professor at Wharton School at the University of Pennsylvania, recently described multifamily as a relatively safe investment. According to Linneman, multifamily has one truly unique advantage over other asset classes: the protection of Fannie Mae and Freddie Mac financing, which is predictable and readily available to borrowers large and small. context, federal agencies and government-sponsored entities hold roughly 50% of the total multifamily debt outstanding as of Q2 2022.

It’s also worth noting that since housing is an essential function, multifamily tends to be less impacted by fluctuations or structural shifts in the economy. As a corollary, we could say that multifamily should be more resilient through market cycles. This holds true empirically: multifamily has yielded the best risk-adjusted returns since the inception of the NCREIF Property Index (NPI) in 1988.⁴

How Multifamily Investments Can Qualify for Unique Tax Deductions

Commercial multifamily units that contain over five units often qualify for unique tax deductions that can include:

• Maintenance 
• Management
• Marketing fees
• Insurance premiums
• Repair costs
• Utility bills 

Any fees associated with attracting new tenants and keeping your investment healthy, which you can then write off as marketing and maintenance costs. Investing passively in multifamily generally allows for “pass-through” tax benefits; in other words, you can leverage the same tax benefits as the sponsor. Please note that Equity Multiple does not provide tax advice. Be sure to consult with a tax professional if you are considering multifamily investing. The Ascent Income Fund is structured as a REIT, offering potential tax advantages. This income-oriented fund also capitalizes on the broad demand for multifamily in the U.S., helping to provide private credit for operators across the U.S. and thereby offering attractive, diversified yield to individual investors.

They Allow for Passive Investment

If “landlording” doesn’t sound appealing, you can also invest passively in multifamily properties through online marketplaces like Equity Multiple. This allows you to enjoy the lifestyle benefits of remote ownership. Remote ownership in multifamily properties can provide steady cash flow and help you diversify your portfolio by taking advantage of far-away markets. The best part? You get these benefits without the headache of property management and maintenance.

Types of Multifamily Investment Properties

“Multifamily” is often used as shorthand for “apartment properties.” While apartments may make up the bulk of multifamily investment assets, there are other forms of multifamily, or “subasset classes.” 

All types of multifamily properties benefit from the same underlying dynamics: a tangible asset with an essential use and the ability to deliver cash flow and hedge against inflation. However, various types of multifamily strategy may entail different risk/return profiles and considerations. Smaller multifamily properties like duplexes, triplexes and quadruplexes might have less maintenance costs but are generally smaller in total capitalization, and so do not have the same potential for scale and achieving total return. 

The investment strategy – or type of business plan – is also a critical component of multifamily investing. A core or core-plus investment will entail less risk and less total return potential. However, core and core-plus assets typically have more stable occupancy, and so may provide more reliable cash flow. Opportunistic or value-add real estate investments carry higher risk and higher total return potential. Be sure to understand the business plan as you consider multifamily investing.

A platform like EquityMultiple can help you invest passively alongside experienced, professional asset managers and tap into larger multifamily projects. Here are a few of the property subtypes that are often grouped into the broader multifamily asset class:

Apartment Buildings

Apartment complexes are the most common type of multifamily property on the market, with nearly 22 million units across the country. Construction pipelines are expected to thin considerably, however, as the effects of higher interest rates make it more challenging for operators to finance new projects. Unlike small multifamily units, large complexes require involved property management teams and routine maintenance. Tenant turnover is typically high, however, so rent prices can quickly be adjusted to reflect current market values.

Duplexes, Triplexes and Quadruplexes

Duplexes refer to two individual units that occupy the same building. Oftentimes a wall is shared between the two units and both rentals are identical. Triplexes and quadruplexes are built with the same configuration in mind — three or four units are all housed within one complex. Since these configurations house a small number of units, they’re potentially a good fit for newer investors. Fewer units usually mean fewer maintenance and management responsibilities, making duplexes, triplexes, and quadruplexes a great portfolio add for experienced investors as well.

Townhomes

Townhomes are popular property rentals for those who desire affordable privacy within a gateway market. Although most townhomes share a wall with other units, they’re generally more spacious and can come with amenities like garages and private yards. The private outdoor spaces associated with townhomes have awarded them the name “garden apartment.” Townhomes can also be great properties to hold and sell for a profit, particularly for investors who aren’t keen on renting out their real estate investments.

Condo Complexes

Condos are attractive investment opportunities for those who want a low amount of maintenance responsibility. Most homeowners association (HOA) costs will take care of maintenance and management fees. This type of multifamily unit is a great investment choice for desirable markets like tourist destinations or popular cities. It’s possible to own one condo unit within the complex or invest in entire condominium complexes.

Student Housing

Student housing is such an appealing strategy that it is often considered to be its own asset class. In addition to the usual benefits of multifamily investing, student housing assets offer addition recession hedging: while a tenant base for an apartment building may fluctuate based on macroeconomic factors, demand for student housing usually does not. If anything, downturns put upward demand pressure on post-high school education, and hence on student housing.

Like any real estate investment, successful multifamily investing requires careful underwriting and a detailed understanding of the market. Consider the following tips while considering multifamily investing opportunities. 

1. Understand the local market. Take a look at rental and sales comps in the local market. 
2. Understand the business plan. How much risk is the sponsor taking on (and, therefore, would you be exposed to as an LP investor). What is the extent of capital improvements that must be made? What is the current occupancy level and where does it need to be in order to hit modeled returns? What leverage is being used? Be sure to get a sense of the risk factors and a feel for whether projected returns are appropriate given risk factors.
3. Understand the structure. The real estate capital stack can be complex, especially for multifamily assets with a higher number of units. Be sure to understand where you fit in and what contractual rights you have as an investor, including what the promote structure is and whether cash flow is guaranteed or at the discretion of the sponsor.
4. Diversify above all else. No matter your objectives or risk tolerance, a diversified approach is recommended. 

How to Evaluate Multifamily Real Estate Markets

Let’s take a closer look at a key component of multifamily asset selection: which market to invest in. Not every multifamily market offers the same opportunity. Depending on a variety of factors, local markets may offer better opportunity and/or a different potential return profile when it comes to multifamily markets. These factors include, but are not limited to:

• The diversity and strength of the local economy.
• Zoning codes and building restrictions.
• Quality of life factors and the general cache of the city or market.
• Prevailing cap rates in the market and trends in average cap rates.

Multifamily Investing: The Bottom Line

Multifamily assets are a potential bedrock of a truly diversified portfolio. The asset class is a great entry point for individual, passive investors looking to get into commercial real estate. Historical data and current market trends both support the thesis. Let’s take a moment to recap the potential benefits of private-market multifamily investments:

1. A blend of cash flow and upside
2. The underlying asset is an irreplaceable, essential good. This contributes to the stability and potential downside protection of multifamily investing.
3. May provide a hedge against inflation
4. May offer tax benefits

If you are a self-directed investor looking to build a more diversified portfolio, multifamily investing may be a great next step.

FAQs about Multifamily Investing

How to Analyze Multifamily Investment Opportunities

Analyzing multifamily investment opportunities can be complex. You should consider factors like the local market conditions, the condition of the property itself, and the potential for rental income. You should assess the average rental rate for the area, how many units are currently occupied, and whether there’s potential for rental increases. You should also consider any potential upcoming renovations or improvements that could add value to the property. It’s also important to keep track of the area’s vacancy rate and the potential for finding reliable tenants. Finally, you should consider the cost of any necessary repairs or renovations, as well as the potential for long-term capital appreciation.

Why is Multifamily a Good Investment?

The unique characteristics of multifamily units, like the ability to produce multiple streams of rental income from one property, make it one of the most viable ways to hedge against inflation  Private portfolio additions can help balance your investments during times of economic downturns and high volatility in public markets. If you’re an accredited commercial investor who has access to initial investment capital, private multifamily investments might be the right fit for your portfolio.

What makes multifamily investing different from single-family investing?

Multifamily investing involves properties with multiple tenant units, offering the potential for higher income and diversification. It also requires different management and financing strategies compared to single-family properties.

What Risks Does Multifamily Investing Entail?

For those considering investing in a multifamily property, some general risks include:

• Higher potential for tenant turnover, especially compared to other niche CRE classes like industrial real estate.
• Potential disputes between tenants, and
• Unexpected repairs or renovations that could incur additional costs

Furthermore, rent control laws and other regulatory changes could affect the profitability of a property. The local economy and the state of the wider real estate market must also be considered when selecting a location for a multifamily property.  Alternatively, if you want to reduce these due diligence burdens, you might consider investing in multifamily properties through a curated marketplace. .