Multi-family housing – where smart money resides
When banks offer interest rates of 2% interest of less, and when stock market investment is fraught with volatility, a steady 7% – 8% investment starts to look very appealing. And that 7-8% may likely be an 8-9% within a year or two. This steady investment is multi-family housing.
Figures from the Wall Street Journal showed that the investment return on multi-family buildings averaged around 5.8% in 2007. In 2010 that average return had moved up to 7.1%.
To many people, mutli-family housing conjures up visions of block long buildings in big cities, teeming with apartment dwellers paying a couple of thousand dollars each in rent. While this may be a valid image of multi-family housing, it is only one version of that investment vehicle. And it is not likely to be the size of the buildings that are found in the portfolios of what we might consider the average investor.
Instead, the average investor is likely to hold one or several buildings ranging from 4 to 25 units. Often, a group of individuals will band together in order to buy their first building. As they see the tax advantages, and as they continue to accrue their 7% or greater return, they may continue to work together to build a larger portfolio of multi-family properties.
While real estate valuations have dropped since their peak in 2006, multi-family property continues to sell at a multiple of its earnings. Only now, because sensibility has returned to the marketplace, these multiples are starting once again to make sense. For example, at the height of the market, properties were listed at multiples of 15 and 20 times rent. Some investors were buying simply because real estate seemed to be doubling and redoubling in value.
However, in multi-family housing, there is only so much money that can be made, because tenants only pay a certain amount of rent. After all expenses are met, including payment of the mortgage, whatever is left over is profit. If the rent paid by tenants does not exceed the amount of expenses, there is no point in purchasing that property.
Of course, there may be exceptions to this rule. For example, if a property is decaying and / or tenants are paying under-market rents, then it may make sense to purchase that property at a price that temporarily exceeds expenses. But don’t make that purchase until you have thoroughly examined the area in which you’re planning to purchase, and discussed the possible up-side and / or down-side of the building purchase with attorneys and financial advisors. Be advised that such investments are not for the faint-hearted nor those whose cash reserves are thin.
Behringer Harvard, well known Dallas real estate investment firm, is also a big fan of multi-family property. In 2010 they purchased large, multi-family complexes in cities as diverse as Cherry Hill, NJ, Manhattan, NY, and Dublin, California. Their reasoning is simple and logical. In a down economy, these properties have lowered their prices into the realms of the sensible, so the returns on investment now make sense. Also, due to a lack of new construction, young people are moving into apartments.
Large, multi-family apartment complex may not fit into the budget range of the average investor. However, the 7% – 8% returns they generate are the same rates of return that can be found in 4 – 25 unit complexes, many of which are priced well within range of the average investor.
Marc Jablon, The Jablon Team
561 / 213 – 6139