One of my financial regrets was not buying a multifamily investment property in my late 20s. Instead of taking advantage of multifamily investment opportunities to generate more passive income, I decided to buy a four bedroom, three and a half bathroom single family home and live larger instead.
The house wasn’t huge at ~2,300 sqft. But it was too big for my girlfriend and I at the time. Two bedrooms and two bathrooms were hardly ever used. Not only was there so much wasted space, the house was a suboptimal use of $1.52 million. Taking on a $1,216,000 mortgage that cost $6,200 a month was a lot and sometimes stressful.
In retrospect, a better choice would have been to buy a two-unit building for a similar price. Each unit would consist of two-bedrooms and one and a half bathrooms around 1,350 sqft each. My girlfriend and I would live in one unit and rent out the other unit for at least $4,000 a month.
Not only would our living costs have been so much lower for more than a decade, our passive income today would be at least $2,000 a month higher. Investing in multifamily investment properties is a better bet when you are young and don’t have children.
Big Pent-up Demand For Multifamily Investments
With increasing anticipation of a strong recovery in 2021 thanks to a bevy of upcoming vaccines, it’s worth getting smart on the best multifamily investment opportunities post-pandemic. The value of cash flow has gone way up because interest rates have come way down. Meanwhile, mortgage rates will continue to be very accommodative.
For evidence of pent-up demand, look no further than Airbnb’s IPO on December 10. The company was valued at $49 billion at IPO, higher than the original valuation range offering. The shares then proceeded to double in the first day of trading.
Remember, hospitality is still largely shut down. Airbnb bookings are way down. Yet, Airbnb is now worth about $100 billion after raising capital in April 2020 at a valuation of only $18 billion.
The share price performance signifies the demand for travel, hospitality, and real estate will come roaring back by 2H2021. Therefore, you want to get long real estate before this happens. Thankfully, real estate valuations move at a much slower pace than stock valuations. Hence, the current opportunity.
I’ve invited CrowdStreet, my favorite real estate crowdfunding platform for accredited investors and Financial Samurai sponsor, to educate us on three types of multifamily properties they think are the most promising. CrowdStreet is free to sign up and explore.
The Best MultiFamily Investment Opportunities Post-Pandemic
1) Build-to-Rent (BTR)
The 2008 housing crisis led to a national decline in homeownership, which in turn drove an increase in demand for rental properties. The market responded and rental stock increased by more than seven million units.
This included both multifamily units and single-family homes, with the single-family share of all rentals growing from 31% to nearly 35%, the largest percentage share we’ve seen nationally since 1965. In fact, from 2005 to 2015, 56% of the gains in the rental market came from single-family homes.
And while renters fall in every demographic, the U.S. Census Bureau estimates that 65% of Americans under the age of 35 currently rent. Although 92% of millennials consider homeownership a good investment, 48% say they have to delay buying a home because of their student loans.
For many, the potential mortgage isn’t the problem. Rents in growing metros can easily be the same as a mortgage payment. The problem is having enough cash saved for the initial down payment. Then, qualifying for a mortgage is the next big obstacle.
Enter, Build-to-Rent properties.
Build-to-Rent (BTR) takes the best aspects of single-family rentals–yards, driveways, that “neighborhood” feel, etc–and develops all the homes inside a professionally managed community.
These BTR properties are similar to traditional, gated residential neighborhoods with great community amenities–swimming pools, tennis courts, dog parks, etc.–but without the HOA costs. Or a down payment.
The Attractiveness Of Build-To-Rent Properties
The Investments team at CrowdStreet has been keeping their eyes on potential BTR investment opportunities for a few reasons:
- In 2018, the National Apartment Association reported the average turnover rate was 46.8%. In comparison to traditional multifamily units, SFRs have experienced significantly lower tenant turnover rates. Less turnover means more durable income, lower operational costs, and fewer empty units and missed rents.
- The BTR market has also demonstrated a unique ability to achieve “Market Rate Premiums” over competing Class A multifamily assets. CNBC reported that, “…the rents for single-family are growing fast at 4.5% annually now compared with 3% rent growth for multifamily apartments…”
- As an asset class, BTR has seen exit cap rates that compare well with traditional multifamily assets, with cap rates ranging from 4.75% to 5.5%.
- The CrowdStreet Investments team believes that highly desirable renter segments–dual-income rental households and other high-wage earning households–will embrace this asset class thanks in large part to the amenities designed to cater to this demographic.
CrowdStreet launched their first Build-to-Rent investment opportunity in September and the project ultimately raised money from investors.
“We’ve seen that millennials are beginning to place a premium on space and amenities such as a backyard. This is a trend that has been further accelerated by the COVID pandemic. BTR fills this need for a cohort that is burdened with high levels of student debt and therefore not necessarily in a position to purchase that first home,” said Anna-Marie Allander Lieb, CrowdStreet’s Director of Investments.
Compared to BTRs, which offer more space to renters, micro-units are “a purpose-built, typically urban, small studio or one-bedroom using efficient design to appear larger than it is and ranging in size from as little as 280 square feet up to as much as 450 square feet.”
Micro-units cater to young, urban professionals in major metros where a single-bedroom apartment could easily cost anywhere from $2,000-$4,000+ a month.
A micro-unit costs roughly 20-30% below that of a conventional studio or one-bedroom. Micror-units are, therefore, more affordable without needing a roommate. Further, the building often leans heavily on amenities such as a common “living room” with a big screen tv, a large, reservable gourmet kitchen, shared workspaces, and so forth, to compensate for the smaller units.
While the units might be slightly smaller, there are benefits. Efficient and thoughtful design along with high end finishes make micro-units attractive.
Why Micro-Unit Apartments Are Attractive
- Micro-units can offer some of the highest rent per square foot of any multifamily property. Although they may cost more to build and operate, the premium rent per square foot achieved more than makes up for the added cost.
- The key to a successful micro-unit development is to provide an affordable alternative to young renters in highly desirable, urban locations. 82% of current micro-unit dwellers weren’t intentionally seeking out smaller units. However, for 97% of these renters the property’s location was the deciding factor.
- Micro-units are emerging across the country as one way to help address the affordable housing crisis. They increase housing stock and provide affordable homes within desired urban locations. Micro-units can cost between $30,000 – $60,000 versus the median home price at around $340,000.
- People who run businesses out of their homes, ranging from therapists to dog groomers, are no longer comfortable having clients in their actual residences. This is spurring the movement of more tiny houses.
- There has also been a sense of security attached to buying small during a pandemic, especially if that home is mobile. It’s almost a full-proof quarantine center.
- IPX 1031 found the most tiny home purchases in states with smaller populations. Vermont, New Hampshire, Maine, Wyoming, Washington, Idaho, Montana, Oregon, Rhode Island and Alaska were the states with the most sales.
As Allander-Lieb points out, “When evaluating micro unit apartments, location is key. We want to see developments located in sought after urban locations. These develops will offer a vibrant live work play environment. Further, they will have easy access to transportation.”
3) Student Housing
Student housing, like any market, must balance the forces of supply (the number of available beds) with demand (the number of students seeking beds). The long-term viability of a student housing market is highly dependent on consistent, sustainable growth in the student population it serves.
At the beginning of the pandemic, the student housing sector suffered as universities across the country shut down and sent students home. As a result, student housing vacancies skyrocketed.
When CrowdStreet first published their Investment Thesis back in July, the team specifically left student housing out.
As Ian Formigle pointed out, “At the time, there were still many unknown factors that loomed over the entire sector. Were universities really going to open in the fall? Were students actually going to return to campuses? How many students would defer to next year’s enrollment? Even if campuses opened, would they be able to keep students safe and remain open? How would larger public universities fair versus small colleges? As a result, we took a cautious approach to the sector and worked to gather as much information as possible.”
Positive Structural Changes In Student Housing
As some campuses reopened this fall, NREIOnline reported that, “A number of these universities are re-evaluating their on-campus housing strategies by eliminating double, triple, and quadruple occupancy bedrooms, while also taking entire on-campus dorms off-line in order to use as housing for COVID-19 positive students to quarantine. This has created a surge in demand as more students are pushed into the off-campus housing market.”
More Positives For Student Housing
- Despite the spike in student housing vacancies this spring, collections have remained high throughout the pandemic. Many student leases were backed by parents with strong credit.
- Student housing has consistently demonstrated that it is resilient, proving to be recession-resistant in 2008.
- Looking ahead, the 2021/2022 school year should show continued enrollment growth. Ironically, part of the growth is due to continued high unemployment, as well as 2020 deferrals.
- Along with multifamily apartment buildings, student housing is one of the few asset classes that benefits from cheap fixed-rate financing via Fannie Mae and Freddie Mac.
- When we exit the pandemic, the most desirable and best-capitalized universities will likely exploit their competitive advantage to attract the nation’s best students in record numbers. In turn, this will propel their student housing markets.
Multifamily Investment Properties: Great For Passive Income
Multifamily investment properties are laggards compared to the S&P 500, which is sitting near its all-time high. Take a look at VNQ, one of the largest REIT ETFs. It is still down about 15% from its all-time high.
As we eventually emerge from the pandemic, it seems likely that all three types of multifamily investment opportunities CrowdStreet has highlighted could outperform.
BTR: I know from recent firsthand experience the demand to rent larger, single-family homes with more outdoor space is strong. In the past, I would only be able to find four or five guys, which created more work. With my recent rental, I had demand from couples and families in addition to individual roommates.
Micro-Units: Micro-unit apartments have been all the rage in places like Hong Kong and Singapore for a while now. I’m assuming that post-pandemic, fewer people will want to have roommates. Affordable micro-unit apartments fulfills this structural demand shift.
Student Housing: With universities eliminating double, triple, and quadruple occupancy dorm rooms and moving housing off campus, demand for off-campus housing should increase. The desire for our youngest and healthiest population to get back to in-person interaction is the strongest.
Thanks again to CrowdStreet for giving us some insights on the best multifamily investment opportunities for the future. I’m glad CrowdStreet will be sourcing such opportunities for investors on their platform. You can sign up here for free to explore their latest offerings.
Readers, what are the best multifamily investment opportunities in your opinion? Once the vaccine is out, do you think multifamily investment properties will outperform? Once again, CrowdStreet is a proud sponsor of Financial Samurai.