Real estate is one of my favorite asset classes to build wealth. However, one of my biggest regrets was not buying a multifamily property in 2005. Instead, I bought a single family home that was two big for my girlfriend and I at the time.
Instead of paying $1,520,000 for a four bedroom, three and a half bathroom home, we should have bought at least a two-unit building with two bedrooms, one and a half bathrooms each. Two-unit buildings are the classic type of multifamily property in San Francisco. We could have lived in one and rented out the other for maximum efficiency.
At least I was able to sell the single family house for $2,745,000 in 2017. I reinvested the proceeds in real estate crowdfunding for higher returns.
The multifamily investments I've made consist of 100+ units each. No way could I have ever bought these properties myself, hence why I went the crowdfunding route.
Since the depths of the financial crisis, in which average multifamily cap rates rose to around 7.5 percent, the broad multifamily market has seen steady drops in vacancy, increases in average annual rents and relatively low volatility.
With average cap rates today hovering around 4.0 percent, multifamily property remains one of the most attractive areas to invest in commercial real estate.
CrowdStreet is quite interesting because they focus on 18-hour cities, those secondary cities where valuations are cheaper and job growth rates are higher.
The Benefits Of Multifamily Investment Property
Baseline Level of Demand: Regardless of the state of the economy, people need a place to hang their hats. This creates a baseline level of demand for most multifamily assets. According to Yardi, the national occupancy rate for stabilized multifamily assets in 4Q2022 was 96%.
Diversified Cash Flow: Multifamily properties produce monthly rents, with the risk of default spread among multiple tenants. A single tenant represents a relatively small percentage of overall income, and minor changes in occupancy should not significantly affect cash flow.
Economies of Scale: Overall management and maintenance costs are more efficiently shared within multifamily properties. When multiple units are located under one roof, certain operational costs—like those relating to security or overall upkeep—are reduced.
Diverse Financing Options: A number of financing options exist for multifamily developments, including loans from government-sponsored enterprises like Freddie Mac and Fannie Mae. These programs enhance the availability and reduce the cost of credit for qualifying multifamily projects, increasing the efficiency of the capital markets for such housing developments.
Less Competition: Due to higher barriers to entry, including overall higher sales prices, multifamily properties are often less popular among investors than single-family homes. This limited competition can make it easier to find high-quality assets in the space.
Fundrise Growth And Performance
Fundrise has seen strong growth in recent years. In 2023, the firm now manages over $3.2+ billion in assets under management compared to $488 million at the start of 2019.
Active investors have also grown significantly from over 63,000 in 2019 to over 387,000 in 2023. Their expansion and performance has been very promising.
Fundrise’s average platform portfolio has also consistently outperformed public REITs, the S&P500 and bonds. Take a look at their 2022 performance below as well as their historical returns from 2014 through 2020.
I'm happy to invest in real estate crowdfunding during times of uncertainty, especially in 2023+.
By generating strong returns year after year, Fundrise has taken a huge step forward in proving out what they have believed for so long: that a model of individuals diversifying into real estate through a direct, low-cost technology platform is a superior investment alternative to owning only publicly traded stocks and bonds.
Focus On Multifamily Property In The Heartland
I personally believe that coastal city real estate is too expensive and peaking.
You are seeing a slowdown in places like New York City, Washington DC, Boston, and Seattle as new supply property floods the market.
People want to flee expensive, densely populated areas thanks to the rise of remote work. Folks also want to live in less densely populated areas due to the coronavirus pandemic.
I recommend focusing your investments in the heartland of America, where cap rates are much higher and job growth is also much higher due to corporate and job migration. Multifamily property is the type of property I would focus the most on.
Thanks to technology and the internet, there is no reason you have to be stuck living in San Francisco, paying $4,500 a month in rent for a 2 bedroom apartment when you can pay a third that price living in San Antonio, while making a similar amount of income. We are clearly seeing a demographic shift away from coastal cities and towards the heartland in 2023 and beyond.
Best Way To Invest In Multifamily Property
Fundrise is a great way to invest in multifamily properties with higher net rental yields across the country. They are a platform for all investors, not just accredited investors.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
FinancialSamurai.com was started in 2009. It is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, and Bloomberg. Related: Main Reasons To Invest In Multifamily Real Estate