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What Is Multifamily?

Multifamily real estate is a residential asset class in which multiple tenants occupy the same development. Multifamily buildings include apartment buildings, condominiums, townhouses, manufactured housing, public housing and build-to-rent schemes.

Key Takeaways

  • Multifamily can be thought of as where people live outside of single-family homes.
  • There are about 4.4 million multifamily properties in the nation, making it one of the largest asset classes in real estate in terms of sheer aggregate value. It is also considered the most popular asset type for trading and often sees the highest investment volume of any real estate asset class.
  • Multifamily assets, especially non-luxury units, are often considered safe bets during economic downturns, as renters will still need a place to live even in recessions.

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Who owns multifamily?

Multifamily owners come in many shapes and sizes. Some own just one or two buildings and manage a few units on their own. Other owners have tens of thousands of units across national portfolios. Some multifamily owners may also be developers, who oversee a building’s construction and lease up the building with tenants. Others may hold buildings for years or decades then pass them along to family members.

Multifamily owners include:

No matter who they are, multifamily owners typically operate by collecting rents from individual tenants. Owners’ costs include property taxes, utilities, renovations and often a separate property management company and payments to other vendors and service providers. The total revenue minus the total operating costs of a multifamily building is known as its net operating income, or NOI.

How do you break into multifamily?

If you hang around real estate events, you may overhear attendees asking each other, “How did you buy your first building?” The first step into the world of multifamily is often the hardest, as it usually involves inventing an acquisition strategy from scratch, not to mention convincing some investors to put their faith in you.

Here are some steps to take if you are thinking about trying to break into the world of multifamily ownership:

Research the market you’re interested in. Successfully buying and operating a multifamily building takes a deep knowledge of the local area. Potential buyers should look at demographic trends, local zoning and tax laws, renter preference surveys and the latest deals in the market and submarket.

Decide on an investment strategy. There is no formula for how to build a capital stack. Some buyers may want to put up all the equity themselves, while others would prefer to spread the risk — and the reward — around with a small group of friends or even crowdfund the acquisition. You will also want to consider how to structure your purchase for tax purposes. 

Start to research properties. Crunch the numbers on properties you’re interested in. Consider the number of units in each property and research average rents for the area, as well as all the costs associated with those buildings (taxes, utilities, renovations). Use that to calculate cash flow and the property’s cap rate. Compare this to other similar properties in the same area and think about which ones have the most investment potential.

Secure a loan. How much debt do you need to take on for the acquisition? Is there a large renovation component to the project, or is the property fully stabilized? These questions and more will determine what kind of lender you should turn to in order to buy the building.

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Multifamily and the housing crisis 

Over the last few decades, the cost of housing in American cities has risen dramatically, far faster than wage growth. The result is that 38% of renter households are rent-burdened, spending 30% or more of their income on housing. As the problem has deepend, many Americans have been forced out of neighborhoods where they have lived for years, or have lost their housing, becoming homeless. This set of socioeconomic issues is typically referred to as the housing crisis or, more recently, the affordability crisis.

The lack of affordable housing in American cities can be partly chalked up to a simple lack of housing. Even as cities’ populations have swelled, they have failed to create adequate housing to accommodate new residents. The real estate industry has consistently pushed for denser multifamily housing as a solution, but some cities have restrictive zoning policies that bar multifamily buildings from being built. In some suburban areas, so-called NIMBYs have hung up new developments to preserve a single-family feel. 

However, real estate developers are not blameless in this regard — looking to capture the largest possible profit, developers in urban areas have typically built units for high-income renters rather than affordable or workforce housing. As more luxury apartments came in, areas that were once affordable became gentrified and inaccessible to many of their longtime residents, although economists dispute whether new high-end apartments actually raise rents.

As rents have grown faster than wages, calls have increased for rent control policies. Rent control places a limit on how much landlords can increase tenants’ rent. In the U.S., rent control regulations are left up to each state to decide. Currently, four U.S. states — California, Maryland, New York and New Jersey — and the District of Columbia have some type of rent control in effect throughout their cities. Other than those, 37 other U.S. states have laws that expressly prohibit or preempt rent control and nine states allow individual cities to enact rent control regulations, but so far none of them have. 

Multifamily News

Surprise State Rules Ban Broker Fees Charged To NYC Renters

Can Microunits Help Solve LA's Housing Crisis? One Developer Is Betting On It

What Apartment Developers Are Saying About D.C. Increasing Affordable Housing Requirements 

2010-2019: The Decade Of Older, Richer Renters 

Landlords Cut Back On Apartment Renovations In Wake Of Rent Regulations