What Is Multifamily Real Estate?
Multifamily investing is the largest of the “core four” commercial real estate asset classes, and is arguably the most straightforward of all CRE asset classes. Individual passive investors are increasingly tapping into multifamily investing to build more diversified portfolios. Investing in multifamily properties can help you earn passive rental income, scale your portfolio, and in some cases qualify you for unique tax deductions.
Simply put, if you are looking for your next asset class to diversify a 60/40 portfolio, multifamily investing could be a great fit. Multifamily investing is more accessible than ever before for individual investors. Like any asset class, it comes with its own set of risk factors and considerations, which we’ll discuss in detail.
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 is fairly comprehensive. Let’s set the table first — why should you, as an individual investor, care about multifamily investing? First, here a few top reasons why the multifamily asset class may be worth a look as a next step beyond a traditional portfolio of stocks and bonds:
- It potentially offers both cash flow and appreciation/upside.
- Unlike single-family investing — or “flipping” — it brings the benefit of a diversified tenant base.
- 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 that 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. We’ll also share some tips for investing in the asset class from the perspective of an individual passive investor.
Multifamily investing can offer a range of return profiles. Multifamily investments play a part in each of EquityMultiple’s three investing pillars.
Multifamily Investing Explained
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.
Single-Family Real Estate | Multifamily Real Estate |
Generally only one tenant | Can be occupied by multiple tenants |
Part of a larger buying pool | Generates multiple streams of cash flow |
Comparatively low upfront costs | Allows for engineering of cash flow through structuring of many leases |
Currently extremely low inventory | Better potential hedge against inflation |
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.
Examples of multifamily investments on the EquityMultiple platform.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
“Simply put, persistent under-building of market rate housing, combined with tight inventory and high prices in the single-family market, create a durable, robust investment thesis for multifamily investing … EquityMultiple’s house view on compelling residential investment markets, based on our proprietary investment framework, centers around cities that continue to appeal to strong in-migration and resonate with potential residents in terms of quality of life in the near future.”
— EquityMultiple 2024 Outlook Whitepaper
EquityMultiple’s proprietary research and modeling establishes multifamily as one of four key target CRE asset classes in 2024.
The case for multifamily investing as a recession-resistant asset class has quite a bit of historical precedent. During the Great Financial Collapse (perhaps the worst economic downturn in U.S. history) multifamily outperformed other asset classes. After the initial dip, multifamily REITs outpaced all other CRE asset classes and the S&P 500 for the duration of the recovery.
Further, delinquency rates on Fannie Mae and Freddie Mac multifamily loans hovered below 0.5% for much of the GFC, never reaching 1%, at a time when unemployment rates in the U.S. exceeded 10%. This low default rate speaks to the potential downside protection of multifamily investments, particularly in workforce and non-Class A assets.
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 Still a Good Investment 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. Although a recent report from Marcus & Millichap notes that supply pressure for multifamily has been increasing as of late, both elevated mortgage rates and stubbornly high sale prices will increase the overall rental pool, and new multifamily units will take some time to be absorbed into the rental market.
- 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.
Only around 40K units were started in Q2 of 2024, continuing this trend. While some industry watchers fret about overbuilding of the asset class, the general view within the industry is that only luxury multifamily has been overbuilt over the past decade; workforce and affordable housing in particular remain drastically underbuilt. (For more on the supply-demand picture in multifamily investing, refer to a recent edition of the Monthly Multiple.)
A brief note on multifamily cap rates:
According to CBRE research, prime multifamily cap rates averaged 5.06% in Q4 2023, up 170 basis points from Q1 2022 and exceeding the pre-pandemic 2018-2019 average by 85 basis points. In April of 2024 CBRE noted that prime multifamily metrics (including cap rates) had improved for the first time since the Federal Reserve began raising interest rates in early 2022.
The cap rate of an individual multifamily property should be a key decision factor. Prevailing cap rates in the local market are also critical to analyze.
Looking ahead, CBRE anticipates multifamily cap rates will widen by another 25-50 basis points in 2024, bringing the average to around 6%. Higher cap rates in general mean opportunity on two fronts:
- More attractive current cash flow potential, on average.
- An opportunity for “cap rate compression” — a phenomenon of values increasing for a given level of cash flow (this tends to align closely with interest rate movements).
How Falling Interest Rates Could Impact Multifamily Real Estate
On September 18th, 2024, The Federal Reserve opted to reduce its benchmark rate by a half a percentage point (50 basis points). The Fed’s messaging around the decision suggested potential for further rate reductions, with projections indicating a possible 0.50% decrease by the end of 2024 and an additional 1.00% reduction by the close of 2025. This shift in monetary policy could have significant implications for the multifamily real estate sector.
As interest rates fall, several key impacts on multifamily investments may emerge:
- Increased Liquidity: Lower rates typically lead to greater liquidity in the financial system. This could result in more available capital for multifamily investments and potentially easier access to financing for property acquisitions or improvements.
- Improved Cash Flow: Decreasing interest rates can enhance cash flow coverage for existing properties. This may lead to reduced loan loss reserves for banks, potentially facilitating more deal flow in the multifamily market.
- Property Valuation Changes: There’s often an inverse relationship between interest rates and property values. As rates decline, cap rates may also experience a slight decrease, potentially boosting multifamily asset values.
- Refinancing Opportunities: Falling rates present favorable conditions for refinancing, especially for investors with loans nearing the end of their terms. Refinancing can lead to lower monthly payments, improved cash flow, and freed-up capital for renovations or new acquisitions.
- Portfolio Expansion: The combination of potentially lower borrowing costs and stabilized valuations in major markets could create opportunities for multifamily investors to grow their rental portfolios. This might include expanding into new geographic areas or diversifying into related asset classes like mixed-use or retail properties.
- Adjustable vs. Fixed Rate Considerations: While adjustable-rate mortgages tied to short-term rates like SOFR or Prime will directly benefit from Fed rate cuts, fixed interest rates are influenced by longer-term economic outlooks and inflationary expectations. Investors may need to weigh the pros and cons of each option in a changing rate environment.
It’s important to note that while rate reductions are anticipated, they are expected to occur gradually and will be contingent on economic data. Additionally, the extremely low rates seen in recent years are considered anomalous, and a return to near-zero interest rates is unlikely.
For multifamily investors, this evolving interest rate landscape presents both opportunities and challenges. Diversifying across different moments in the next phase of the cycle may be key to maximizing return potential on multifamily investments.
Versus single-family properties, multifamily investing allows for scale. With more units and larger total capitalization projects, multifamily allows for economies of scale like professional property management, engineering of value in lease structuring, and property-level marketing. Consider the following advantages while contemplating whether multifamily investing is right for your investment portfolio.
Larger multifamily projects can also offer benefit from value adds like laundry facilities, fitness centers, and dog parks.
Pros of Multifamily Investing | Cons of Multifamily Investing |
Quickly expands your real estate portfolio | Requires a relatively high amount of initial investment capital |
Potential tax benefits | Can require extensive hands-on property management |
Generates multiple streams of passive rental income | Marketing (to ensure healthy occupancy levels) can be costly |
Fortunately, a platform like EquityMultiple can allow for tapping into the benefits of multifamily investing while mitigating the cons.
Multifamily provides consistent cashflow
As of this writing, inflation is at a 40-year high.1 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.
For more on how private real estate can serve as a hedge against inflation, please see this article.
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.2 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.2
“Multifamily has better depth and predictability of capital than any other sector. And in that sense, it is unambiguously safer.”
— Peter Linneman
For context, federal agencies and government-sponsored entities hold roughly 50% of the total multifamily debt outstanding as of Q2 2022.3
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 EquityMultiple 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 EquityMultiple. 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.
Value-Add Acquisitions vs. Ground-Up Development
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. Other, more opportunistic value-add real estate investments (as well as ground-up development projects) tend to carry higher risk and thus have 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.
What Commercial Multifamily Investors Should Know
Apartment buildings are one of the most common types of multifamily real estate, with nearly 22 million units in the United States alone.1
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.
Examples of perennial offerings on the EquityMultiple platform, which include the Foundations Portfolio: Multifamily.
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.
A platform like EquityMultiple can offer you broad access to these various types of multifamily investments. The thing to know as an individual investor: diversification across various strategies and types of multifamily property is recommended.
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.
Building a Multifamily Real Estate Investment Thesis
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.
- Understand the local market. Take a look at rental and sales comps in the local market. If you are investing through a platform like EquityMultiple, these comps and research should be readily accessible (market comps are a key part of each investment offering page in the EquityMultiple platform).
- 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.
- 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.
- Diversify above all else. No matter your objectives or risk tolerance, a diversified approach is recommended. With a platform like EquityMultiple, you can invest fractionally and passively, at relatively low minimums. This streamlined investing experience can facilitate diversification.
Note that when you invest via EquityMultiple, experienced real estate analysts perform comprehensive vetting on your behalf. Still, you may want to do your own diligence on any potential investment to make sure you’re comfortable.
EquityMultiple’s Investor Relations Team is standing by to assist should you have questions about any particular multifamily investment.
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
EquityMultiple’s Investments Team maintains a proprietary scoring model for evaluating sectors of commercial real estate, as well as specific markets. For the reasons stated above, EquityMultiple’s real estate professionals feel that Multifamily is among the most timely real estate asset classes (alongside certain other residential CRE 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) EquityMultiple’s 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 EquityMultiple’s originators a blueprint for sourcing multifamily investments that carry the potential for strong risk-adjusted returns.
The top markets, per this model, as of Q1 2024:
This does not mean that EquityMultiple will not source multifamily investments outside this list (the model stack-ranks 50 multifamily markets) but these markets, particularly those on the rise, will receive extra focus.
Charles De Andrade, CAIA, Director, Capital Markets, discusses EquityMultiple’s proprietary algorithm for scoring real estate investment markets, including multifamily markets.
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:
- A blend of cash flow and upside.
- The underlying asset is an irreplaceable, essential good. This contributes to the stability and potential downside protection of multifamily investing.
- May provide a hedge against inflation.
- May offer tax benefits.
Here’s another way to think about it: no matter what happens in the stock market, or the broader economy, everyone will always need a place to live. There simply are not enough market-rate housing units in the United States. This macro supply imbalance creates a durable investment thesis and opportunity for investors. With EquityMultiple, you can easily allocate to multifamily real estate.
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 CRE 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 like EquityMultiple.
Can I invest in multifamily properties through EquityMultiple?
Yes, EquityMultiple offers a range of commercial real estate investment opportunities, including multifamily properties. These investments are curated and vetted, providing accredited investors with access to high-quality opportunities.