Real estate is one of my favorite asset classes to build wealth, which is why I own two physical properties in San Francisco and one condo in Squaw Valley, Lake Tahoe. However, one of my biggest regrets was not buying a multifamily property in 2005 instead of 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. We could have lived in one and rented out the other for maximum efficiency.
But I’ve learned my lesson and have focused much of my real estate crowdfunding investments in multifamily property with Fundrise, one of the largest real estate crowdfunding platform on the web today. 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 4.3 percent, multifamily remains one of the most attractive areas to invest in commercial real estate.
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 closed out 2017 at just over 95%.
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
According to the latest public offering documents by Fundrise for its IPO, the firm manages roughly $488 million in assets under management, has 63,271 active investors, and 76 employees. Their AUM grow and investor signups have been very promising.
Fundrise’s five-year average platform portfolio has also done quite well, yielding a 10.79% return versus 7.92% for the Vanguard Total Stock Market ETF and 7.4% for the Vanguard Real Estate ETF. Their massive 14%+ outperformance in 2018 versus the Vanguard Total Stock Market ETF is particularly impressive.
By generating a strong 5-year return, 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 Multi-Family Properties 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. Instead, 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.
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. You are clearly seeing a demographic shift away from coastal cities and towards the heartland in 2019 and beyond.
Fundrise is a great way to invest in lower value 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 by spending the next 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.
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