Multifamily Investing: A Comprehensive Guide – Part 4

How Multifamily Investments Can Qualify for Unique Tax Deductions

What Are the Different Classes for Multifamily Investments?

Multifamily properties are graded in three main classes – A, B, and C – based on factors such as age, quality, amenities, rent levels, and location.

• Class A multifamily properties, especially in suburban areas, are considered top-tier and offer resort-like amenities such as pools, recreation areas, and fitness centers. These properties command the highest rents in their respective markets.
• Class B multifamily properties are a step below Class A in terms of building quality, location desirability, and amenities offered. They are often referred to as “workforce housing,” since they cater to median-income earners through relatively affordable rents.
• Class C multifamily properties are the lowest tier, consisting of older buildings that may have functional issues, outdated designs or systems, and require maintenance or renovations. These properties offer the most economical rental rates but lack modern amenities and features.

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. If you are investing through a platform  that can generate these comps and research should be readily accessible (market comps are a key part of each investment offering) platform).
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. Streamlined investing experience can facilitate diversification.

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

Various Investments Team (including ours) can maintain a proprietary scoring model for evaluating sectors of commercial real estate, as well as specific markets. For the reasons stated above, there are real estate professionals that feel that Multifamily is among the most timely real estate asset classes (alongside certain other residential strategies, like student housing and built to rent).

Because of the breadth of the multifamily asset class (and the supply/demand imbalance that supports the multifamily investing thesis) Various proprietary model scores multifamily markets on a number of factors:

These inputs are based on first-party and privileged third-party data sets. A highly weighted factor in evaluating multifamily markets is “market revenue per available square foot” or “MREVPAF.” This data is sourced through Green Street, a leading, non-biased provider of updated and in-depth real estate market data. This composite model is updated at least quarterly to provide originators a blueprint for sourcing multifamily investments that carry the potential for strong risk-adjusted returns.

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 do you 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 investing through a platform like EquityMultiple 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, both pros and cons exist. Some general risks include:

• Higher potential for tenant turnover, especially compared to other niche classes like industrial real estate
• Potential disputes between tenant
• 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 

Bottom Line

Multifamily real estate presents a promising investment opportunity. However, determining the profitability of such investments and understanding the various financing options available is vital to success in this arena. You may want to consider investing in multifamily properties for a number of reasons, including portfolio growth, the high demand for housing, the various available financing options, cost efficiencies and passive income creation. However Investments in Multifamily housing can be very tricky. Don’t venture down this road alone We live it and breath the industry. At SIMM Capital our investment strategy is to give everyone the chance to build wealth through real estate. We seek the best assets that hold the largest opportunities while delivering in rent growth year over year. We know the business. To see how we can help you with your Real Estate investments talk to an expert and click the link  www.simminc.com