Month: August 2019

Introduction to Apartment & Multifamily Investing

How many times have you seen a late-night commercial featuring some real estate guru promising to get rich quick returns with “no money down”? While most of us are smart enough to identify these ads as too good to be true, the excitement surrounding investing in real estate, specifically in multifamily investing, is well deserved. For many people, investing in multifamily properties is a pathway to create passive income and financial independence for themselves and their families.

When done properly, this unique corner of the real estate market can serve as a second career, and for the savvy investor could make them enough money to retire comfortably at a young age, kicking back and collecting checks. As with most things in investing however, winning big requires taking risks and doing your homework, so over the course of this article we will dive into the basics of apartment and multi-family investing to give you an entry point into this incredible opportunity.

Multifamily investing is exactly what it sounds like. An investor purchases an apartment building, a duplex, triplex, or quadruplex, and then rents these spaces to multiple different tenants to profit from the income.

For example, there are many kinds of properties that an investor can choose from when deciding on real estate investments. The most common types being apartments, townhomes, condos, duplex, triplex, and quadruplex units. Each of these is described briefly below.

  • Apartments: Apartments are most likely the most familiar type of multi-family unit. An apartment building is a large structure made up of multiple self-contained living spaces. Each apartment has its own kitchen, bathroom, and sleeping / living areas. Apartment buildings can have anywhere from 2 to 200 “units” and costs to purchase range accordingly. An important distinction to make here is that the term “apartment” usually implies that the building owner owns each unit, and the tenant is simply a renter.
    • Condos: A condo, short for condominium, is just like an apartment in that they are complexes of self-contained units that range in size. The key differentiating factor is ownership. Typically, condos are purchased from the building owner, each tenant is purchasing the unit that they live in rather than renting.
    • Townhomes: Townhomes are like the bigger brother of condominiums. Where a condominium tends to be smaller, townhomes tend to be a series of multi-story houses, built with an adjoining wall to the townhome next to it. Like condos, these units are usually purchased by the tenant, while the communal areas like pools, lawns, and other public spaces are owned by all the tenants equally or the company who owns the complex.
    • Duplex: A duplex refers to a property that in many ways resembles a single house, but that has been split into 2 units. Many times, “duplex” describes a single structure with 2 front doors, one leading to the upstairs unit, and the other leading to the downstairs unit.
    • Triplex: After learning what a duplex is, the other “plex” types of properties are self-explanatory. A “triplex” simply refers to a single house structure with 3 units.
    • Quadruplex: As mentioned above, the “plex” property types all fall into the same category, the only difference being the number of units within the house. A “quadruplex”, as the name indicates is a single house with 4 units inside.

So, what is the purpose of multi-family investing. Why would someone want to buy one of these multi-unit properties? As you may have guessed, the primary reason is to make money! As a brief example, a successful multi-family investor would seek to buy a duplex that cost him $1,500 per month to purchase, and then rent each unit out for $1,000 per month. This generates $2,000 in income from renting that not only covers the cost of the mortgage, but it also puts an additional $500 per month into the owner’s pocket. It sounds simple enough, but there is a lot that goes into a successful real estate “deal”.

Aside from simple income, renting out a multi-family property allows an owner to capitalize on his property. Rather than simply owning the building, why not have it generating some income? Each month that you are collecting rent and paying yourself whatever you collect above the monthly cost to you, you are also having an asset purchased in your name that has real value and should appreciate in value over time. This double barrel effect of adding cash to your pocket AND “equity”, or ownership in a property, to your personal assets column has a powerful positive impact on net worth and greatly accelerates a person’s pathway to retirement if that’s something they desire to do. Renting a property, when done successfully, should contribute to your personal net worth in two different ways.

So, if all that sounds good to you, your probably curious as to how someone gets started in real estate investment. You’ve already taken the first step in reading this guide, as the more information you have, the higher your chances of making a successful investment decision. So, step one is to read as much as you can regarding the type of multi-family investing that you’d like to do. The internet is a powerful thing and you can save yourself lots of trouble simply by gathering others experiences and using them to inform your decision making.

Once you feel comfortable, and potentially have consulted with a professional or two, you need to start looking into the methods that you can use to acquire a property. There are many ways that one can go about doing this aside from simply putting down a bunch of cash to purchase a building or a complex. Let’s face it, most of us don’t have hundreds of thousands of dollars in liquid assets that we can sink into a house right now. This is where the concept of financing comes in. Just like you finance a car or take out a student loan to spread large costs out over time, using a mortgage allows you to put a small portion of the purchase price down today, and to pay in installments moving forwards.

The most common method of financing a mortgage is with a 30 year note in which you work with a bank who lends you the funds that you’ll need to complete the purchase. From there you will work with the bank to pay off the loan over time. It is critical to understand this part of the process, because your monthly payment will have a direct impact on your ability to “cash flow” a property. “Cash flowing” a property is real estate jargon for a successful deal. A property that is “cash flowing” is a property that produces an income to the owner above all the costs associate with the mortgage, renovation, and upkeep on the property.

Lets now take a more in depth look at the different methods that an investor can use to secure funding and move forward with a purchase. Aside from a simple bank loan or traditional mortgage, the government has many attractive programs for investors who are purchasing for the first time as well as for investors who are seeking to renovate properties. While this guide is not long enough to cover a comprehensive list of all the financing methods which exist, we will look at the most common and explain the costs and benefits associated with each.

While some real estate transactions are completed in full at the time of purchase, this is very rare. Obviously if someone has enough money sitting in their bank account to purchase their desired property, they are perfectly able to do so. Investors who are looking for true no money down strategies could approach what is known as a “hard money lender” someone with lots of cash who can buy a property outright. They will usually require their own method of repayment and will take a portion of the profit from your deal. This strategy is good for beginners who can find a passive partner. They put up the money, you find the deal and work out all its moving parts.

While this strategy is not totally uncommon, most of the time some sort of long-term payment is arranged at the time of sale. Most transactions involve an upfront payment of funds called the “down payment” followed by a series of monthly payments made up of some principal (the actual loan amount) as well as interest (the fee that you pay for borrowing the money).

Securing a loan will require a check of your credit history, an evaluation of your income, and your ability to make payments moving forward. If you are not able to put 20% down at the time of purchase, many institutions will require an additional monthly fee for “PMI” or mortgage insurance due to the increased risk of the loan for the bank.

For first time borrowers who may have less credit history or income, an FHA loan, short for Federal Housing Authority, can be helpful. This is very common tool used for first time buyers looking to break into investing as well. This is a special type of loan offered to first time home purchasers through the federal government that allows them to put as little as 3.5% down on a property. FHA loan standards are also lower due to the backing of the federal government, meaning lower credit scores and incomes may be eligible to receive the loan.

Once you have researched your preferred financing method and have started working with a mortgage broker to see what you qualify for its time to begin looking at properties. The research done on the front end of your real estate deal could make or break you. The more time you spend analyzing and understanding the features of the piece of property you are purchasing, the more likely you are to be successful in your first venture. Typically, investors look for a few qualities of property, although like many things in investing broadly, this comes with some risks.

Look for properties in good locations, with good schools nearby or near a downtown commercial hub. When selecting a multi-family investment property, you must put yourself in the shoes of your future tenants. When evaluating a home, imagine who might live there, this will give you a better idea of the potential challenges you might face in renting. Will you be marketing to college students each summer and trying to fill your property? Or will you be renting to families with young children. Will you be renting to long term elderly tenants? Study the demographics and behaviors in your area and use this information to inform your purchasing decision, especially if you’re a first-time buyer.

For the true rookie to real estate investing, one of the most common methods of getting started is referred to as “house hacking”. This strategy involves purchasing a duplex or other multi-family property, living in one of your units, and using the other units as rental income to offset your monthly rent costs. Many house hackers can live for next to nothing each month while having a lifetime asset purchased for them. This strategy is a great starting point as you will be able to be on site 24/7 to learn about upkeep, maintenance, and to keep an eye on tenants.

Aside from the intangible aspects of a property like location and local culture, many spreadsheets and applications are available for free online to do more concrete analysis of a property. Find one that works for you and evaluate your potential investment from a number’s perspective. How much are similar units renting for? Will you have to account for vacancy throughout the year? What about a savings fund for potential repairs? Try to factor in things like cost of garbage removal, cable, and internet. At this point you will be able to decide if you offer these services as a package with your property or if you should leave those to tenants to pay.

At this stage you can also evaluate the cost per square foot and some other metrics of your investment to see what kind of deal you may or may not be getting. While in the research stage it is important to ask lots of questions and seek guidance from others who have more experience. At the end of the day more people putting their heads together usually leads to a better result.

Done properly, multi-family investing can allow someone, with relatively little money down, to create a passive stream of income for themselves, all the while purchasing real estate that will most likely increase in value indefinitely over time if its kept up and monitored. Given the potential rewards, the risks are great. Before jumping into anything its important to understand that a bad real estate transaction can permanently hobble you financially. A purchase involving a house that needs thousands more in repairs than anticipated, or one that goes unrented for extended periods of time can send investors into bankruptcy and completely derail your financial plans. Investors should steer clear of complicated transactions their first time around and should only proceed after consulting with several professionals.

One of the most difficult aspects of multi-family investing is the family part. You occasionally will deal with tenants who do not pay on time, who destroy your property, and who can make managing your property a nightmare. Forums across the internet are full of stories of “tenants from hell” who appeared to be perfectly normal before destroying their units and worse. Carefully vet any tenants who you agree to rent to, its difficult to get someone out of their unit once an agreement has been signed, once again, careful research on the front end could save you lots of headaches. Ultimately your name is on the deed and anything your renters do while on the property will come back on you if not dealt with properly.

To summarize the article in a few lines, multi-family investing is a challenging and potentially risky endeavor. It requires time and patience to find good deals and executing them is even more challenging. For those who can navigate these challenges however, a potential life changing income source, and long-term wealth building can be attained. To learn more about investing in real estate, and to get into more detailed guides, click here for our FAQ page, or here to subscribe to our monthly newsletter.

What Can AI Do for Commercial Real Estate Investors?

Emerging AI tools can help investors access property data and manage properties more efficiently.

As we approach the top of the real estate market cycle, commercial real estate investors are being forced to look at the bigger picture and become more adaptable to maximize their portfolios and stay ahead of the competition. The good news? Tech-enabled solutions are helping to drive strong returns and create new opportunities for investors to get the most out of their properties and access the data necessary for strong valuations.

Just looking at the sea of change being driven by new technologies across industries, it’s no surprise that artificial intelligence (AI) has quickly become the biggest disruptor in the commercial real estate industry. Numerous software platforms now use machine learning and predictive analytics to help investors ensure the profitability and sustainability of their portfolios, while reducing the often high level risk factor of top-tier investments. Unfortunately, only those who are willing to adopt these new tools will see maximized returns in a shifting real estate market. In short, staying ahead of the competition is now predicated on staying ahead of the technology curve.

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Build to Rent Still Booming

As homeownership continues to fall, the single-family rental market is picking up steam.

Traditionally, single-family homes were just that: residences for homeowners. But times are changing. Tour a single-family development and you may discover that all the occupants are renters. What’s afoot?

Changes in the tax code have made owning less advantageous, and consumers are no longer buying into the American dream of homeownership. Those two trends are fueling the growth of what’s known as build-to-rent (B2R). Today B2R is one of the fastest-growing sectors of the U.S. housing market, and demand from renters and investors is exceeding supply.

A popular new real estate asset class, B2R is attracting niche players and such high-profile operators as Toll Brothers and Lennar, which recently announced new investments in the space.

Statistics Tell The Story

· More than one-third (39%) of all U.S. rental properties are single-family homes – the highest percentage since 1965 – while homeownership is at an all-time low.
· About 16 million rental properties today are single-family homes, and another 13 million rental households are expected to be formed by 2030, the Urban Institute reports.

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Multifamily occupancy rates keep rising

More Millennials opt to rent instead of own

Apartment occupancy rates climbed in July to their highest level since in since 2000, according to a report from RealPage, which revealed that occupancy rates rose 0.4% from last year to reach 96.2% last month.

Meanwhile, rent growth held firm in July at 3.1%, as average rent prices across the U.S. rose to $1,414.

Of the nation’s 50 markets, each one saw at least 1% growth, RealPage said. Of the nation’s 150 major markets, 91 of them met or exceeded the national norm for occupancy and hit the effectively full mark of 95%.

Rental occupancy rates in the Northeast hit 97% last month, followed by the Western region at 96.5% and the Midwest at 96.4%. In all, each region saw their occupatncy rates rise by 0.2 to 0.5 points from a year ago.

“Millennials are a large reason why the current rental market is thriving,” said Ten-X Chief Economist Peter Muoio. “Though we expect homeownership in this important age group to increase over the long term, so far they remain focused on renting.

“At the same time, there continues to be new rental properties hitting the market,” Muoio added. “However, construction is expected to scale down next year, causing vacancies to rise to a predicted 5.7% before quickly being absorbed due to the continuing increase of household formations.”

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Yardi Matrix Outlook: Rents Rise 3% by Midyear 2019

Despite strong fundamentals, Yardi notes a rise in trade tensions and slowing economic growth.

Rent growth has stabilized at 2.6% in the first half of 2019 and 3.3% year-over-year, with 2.6% rent growth expected over the full year, according to the Yardi Matrix Multifamily Outlook for summer 2019.

Based on this prediction, 2019 would mark the seventh year in a row that rents have risen above the 2.5% long-term average.

South and Southwest metros are leading the nation in rent growth, due to their fast-growing economies and existing affordable housing, but most metros are seeing strong gains. Rent growth is strong across most markets as of midyear; only a handful saw rent growth of 2.5% or less. Apartments aimed at the middle and lower end continue to lead in rent growth, as new supply is still concentrated in the luxury sector.

However, with the national average rent rising to $1,465 as of June 2019, cost burdens have led to accelerated migrations from high-cost metros in the Northeast and Midwest out to the Southeast and Southwest. According to U.S. Census data, the populations of Austin, Texas; Dallas; California’s Inland Empire; Las Vegas; Orlando, Fla.; and Phoenix have risen at least 300% since 1970. Rents in many of these markets are among the fastest growing in recent years; Las Vegas tops the nation in rent growth at 8.4% YOY, followed by Phoenix at 8.1%.

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Apartment Turnover Rate Continues to Fall

Fresh data shows tenants staying put longer.

A recent brief published by CBRE shows the turnover rate for multifamily housing has fallen to 47.5%, which is the lowest level in two decades. CBRE quotes numbers from RealPage that show a drop of 80 basis points. The decline is confirmed by additional evidence culled from six major real estate investment trusts (REITs). AvalonBay, Camden, Equity Residential (EQR), MAA, and UDR all show a lower turnover rate in Q1 2019 as compared with 2018 with an annual average drop of 2% to 42%. Essex showed a 1-point rise to 41%.

The drop represents an overall trend that has been happening since at least 2000, when the rate was clocked at 65%. According to CBRE, “lower turnover rates are generally interpreted as positives for the industry and a sign of favorable market strength at this point in the cycle.” Turnover ticked up a bit in the mid-2000s but then tumbled again during the Great Recession.

CBRE quotes the National Apartment Association’s estimates that turnover costs are at least $1,000 per unit and can easily rise to over $3,000. Yet owners often achieve more rent growth when units turn. Short-lived seasonal effects on the turnover rate take effect in fall and winter months as the rate trends down. The highest rates happen in the second and third quarters of the year.

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Apartment Cap Rates Creep Higher in the Country’s Top Markets

Cap rates on apartment buildings in the nation’s top markets have been creeping higher, but lower interest rates might yet change the trend.

Multifamily investors continue to pay high prices for new acquisitions and accept historically low yields. Average multifamily cap rates have been historically low for some time and fell even further in the first half of 2019.

There are a handful of markets, however—New York City, San Francisco, Los Angeles and Chicago—where multifamily cap rates have inched higher. These are some of the same markets where developers have built the most new apartment units in recent years. Housing advocates have also pressed lawmakers to pass new rent control laws in New York City, California and Chicago, worrying some investors.

Cap rates are definitely moving up in some of the top markets of the country,” says Jim Costello, senior vice president with research firm Real Capital Analytics (RCA).

Lower interest rates may have already begun to push cap rates back down—even in these top markets.

“Cap rates did move up move up in the latter part of 2018 and early part of 2019 in prime urban submarkets in the top six markets… But CoStar data shows a decrease in multifamily cap rates since the first quarter of the year, for all markets, including the top six,” says Andrew Rybczynski, senior consultant with research firm CoStar Portfolio Strategy.

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The Fed’s Interest Rate Cut Could Boost Industrial Sales. Or Disrupt Them.

While the rate cut will lower hedging and borrowing costs, it can also drive values even higher in an already highly valued sector.

Can the new interest rate cut lead to an asset bubble in the industrial sector? Or will it result in more sales?

The Fed cut the federal funds interest rate Wednesday by a quarter of a percentage point to about 2.25 percent to protect the U.S. economy from an economic slowdown. As justification for the first rate cut since the height of the Great Recession, the Fed cited concerns over the slowing global economy and trade war with China.

In the short term, “commercial real estate investors will likely take the decision as a signal to continue buying property, even at lofty valuation levels,” says Ryan Severino, chief economist with real estate services firm JLL. “This could extend the trend real estate markets worldwide have seen during the last decade, with investors piling into the (industrial) asset class amid a hunt for higher yields and stable returns.”

The rate cut will also likely decrease the cost of construction and give REITs a boost, notes Byron Carlock, national real estate leader with consulting firm PWC.

In the longer term, however, Severino says the rate cut “risks widening the rift between market expectations and the underlying economic reality, which could form the seeds of an asset bubble. Since we did not see a strong chance of the economy backsliding into negative growth over the rest of this year, if there was no cut, the risks associated with the Fed’s decision may be greater than any boost to the market.”

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Smaller Unit Occupancy Outperforms All Others, Especially in Core Submarkets

A recent CoStar analysis shows renters are sacrificing size for the sake of location.

Occupancy rates are on the rise for the nation’s smallest apartments, according to a recent CoStar Group analysis, outperforming larger units. This is especially true in high-demand submarkets where soaring rental rates and strong job growth lead renters to prioritize location over total living space.

Overall, demand for rental housing has outpaced supply in 2019, and the average apartment rent has been 24% above pre-recession highs. At the same time, total student debt has risen to $1.49 trillion, and household incomes have only risen by 2.9% each year—far from enough to keep up with the pace of rent growth, at 4% each year.

The national average vacancy rate for the smallest one-bedroom apartments has fallen by 40 basis points since 2015, or 30 basis points below the vacancy rate for the largest. In core submarkets, the spread is wider, with the vacancy rate for the smallest apartments falling 120 basis points over the same period.

Given this trend, and developers’ desire to fit more units, the size of new one-bedroom apartments has declined significantly over the past decade, down 6.5% from 800 square feet in 2007 to 755 in 2018. In urban submarkets, one-bedroom sizes have fallen 9.4% in the same period.

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Fannie Mae: One-third of homebuyers didn’t shop around for a mortgage

Borrowers are “leaving money on the table,” Fannie’s Duncan says

More than a third of 2018 homebuyers say they did not shop around before selecting their mortgage lender, according to Doug Duncan, chief economist of Fannie Mae.

“Although homebuyers who received only one quote didn’t usually express regret, most still reported trying to negotiate mortgage terms with somewhat less success than those who did shop around,” Duncan said. “By not shopping around to give themselves leverage when negotiating their mortgage, some homebuyers are leaving money on the table.”

The biggest reason people gave for not shopping around was a pre-existing relationship with a lender, he said.

“Many recent homebuyers who received only one quote reported doing so because they were more comfortable with that particular lender,” Duncan said. “Non-shoppers also reported much less concern with competitive terms when selecting a lender, citing other non-financial priorities, such as customer service/responsiveness and having a preexisting account with a lending institution.”

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