Making the Jump to Multifamily Investing

Posted on December 21, 2015

Multifamily properties are a great asset class for local investors. Many successful owners actually started as accomplished single-family investors who became involved with properties in their area. Once you start counting the benefits of multifamily properties, it becomes pretty clear why many steer their money into these investment after they’ve gotten their feet wet with single-family assets.

Consolidated costs: Apartment properties are a great example of economies of scale. All of your costs, including maintenance and repairs, landscaping, waste removal and cleaning, are lower on a per-unit basis compared to single-family properties. Having shared common areas and expenses helps efficiently consolidate costs. Professional management of apartments also typically costs less, allowing owners to concentrate on other things.

Less risk: The stock market isn’t the only place where it’s smart to have diversification. One tenant moving out of a 10-unit complex is going to hurt a lot less than one tenant moving out of a single-family property. It costs less money and takes less time to replace an apartment tenant. The market for renters looking for apartments is also much larger than that of renters looking for houses. Apartments historically do well no matter if we are in a strong market or a downturn; people always need an affordable place to live. They are also a more attractive asset class for buyers when it comes time to sell.

More value-add opportunity: Apartment property value is not as dependent on market comparables as values of single-family properties. The value will be based more on a multiple of the net income for the property, which owners control for the most part. Increasing rents to market, finding savings on expenses, adding new amenities and making property improvements are all steps that will improve cash flow and the property’s value. That larger property will also very likely have a greater net appreciation, and build that appreciation much quicker.

Because of the strong rental market and consistent demand for investment properties, there is a wide range of capital sources available that can offer competitive financing for new acquisitions. Every commercial loan request will have its own unique challenges and complexities, but there are a few common takeaways on what will be different compared to single-family lending.

While most single-family investors may be used to financing through their local bank, there are several sources not typically available directly to borrowers that will offer the most competitive opportunities for multifamily loans. These include investment divisions of life insurance companies, Wall Street conduits and non-bank commercial real estate lenders. Guidelines to determine eligibility and loan terms are not as readily available as with residential loans, as these lenders’ parameters are constantly changing and often negotiable based on a number of factors. Property analysis will be a major focus of commercial loan underwriting. The scope will be broader than with single-family, and encompass an examination of the commercial market, tenant and trend analysis, highest and best use evaluation, inspection of the property and other related surveys to determine suitability. A detailed cash flow analysis to determine an accurate net operating income (NOI) will be used to evaluate the property’s debt coverage ratio (DCR) and/or debt yield, among other financial measures.

Investors should expect to be able to finance 70 to 75 percent of the investment if the cash flow of the property is sufficient, with multifamily loans typically offered with a 30-year term and amortization with a shorter fixed-rate period. Multifamily appraisals and inspection will cost more because they are more time-intensive and complex, but lower on a per-unit basis compared to single-family properties. Rates will also typically be lower than for single-family investments and determined based on a number of factors related to both the property and the borrower. Good investment opportunities don’t always equate to good loan qualification. Having both go hand-in-hand is crucial to making sure your next step is in the right direction.