Multifamily investing is one of the most popular types of real estate investing, and for good reason. Multifamily properties may be able to adapt to changing market conditions more efficiently than most other commercial real estate property types due to the leases typically being much shorter in duration, typically six months to one year. This market efficiency presents an opportunity for monthly income on a multifamily investment to potentially grow rapidly, but there are potential risks and a few key considerations to keep in mind, particularly when it comes to housing affordability.
The cost of housing is rising in many markets
This means that even though rents have been increasing, many tenants are struggling to keep up with the increases and may be forced to move if rent prices continue to rise. ,1 making it even more difficult for families to keep up with their monthly mortgage or rent payments. This can put a strain on family budgets and cause financial hardship.
There are a number of factors that are contributing to the rising cost of housing. 2 This can drive up prices, as there are more buyers than there are homes available for sale. In many markets, there is simply not enough apartment units to meet the demand for housing.
Taking into consideration the rising interest rate environment and the on-going increases in home purchase prices, in many markets the cost to rent an apartment is significantly less than the cost to own a home. As the following chart shows, the difference between monthly mortgage payments and monthly rental payments continues to grow.
Assessing housing affordability in a multifamily investment
As an investor, you need to be aware of rising costs of housing and factor it into your investment decision. If you’re considering a multifamily property in a market where housing costs are rising quickly, you need to make sure that the property is affordable for tenants. Otherwise, the property could end up with high vacancy rates and experience difficulty filling units.
There are a number of ways to assess affordability, but one simple method is to compare median rents to median incomes in the area. If median rents are eating up a large chunk of the median income, it’s likely that affordability is an issue in the market. When looking at these numbers, it’s important to keep in mind that not all renters are created equal. Some may have higher incomes but still struggle to afford rent, while others may have lower incomes but be able to find more affordable options. It is important to invest with partners you trust to carefully underwrite deals based on the particular demographics and circumstances at play.
Another way to assess housing affordability is to compare the cost to rent an apartment per month to the monthly costs of owning a home. 4
Multifamily investors face a unique set of considerations when it comes to housing affordability. As such, it is important for multifamily investors to be aware of the various ways in which their investment decisions can affect housing affordability, both positively and negatively. Here are a few key considerations to keep in mind:
- Rental rates: The rental rates charged for units in a multifamily property have a direct impact on affordability. By taking into consideration rental rate affordability, investors can have a better understanding of how likely it is that a market will be able to bear rental rate increases during their investment.
- Location: The location of a multifamily property can also have a significant impact on affordability. Properties located in areas with high demand and limited supply are often the most expensive, while those in more rural or underserved areas are typically more affordable.
- Amenities: The amenities offered at a multifamily property can also impact affordability. For example, properties with high-end finishes and luxurious amenities are often priced out of reach for many renters. On the other hand, properties that offer basic amenities at a lower price point can be more affordable and attractive to a wider range of renters.
- Unit mix: The unit mix of a multifamily property can also have an impact on affordability. Properties with a higher percentage of smaller units (studio or one-bedroom apartments) are often more affordable than those with a larger percentage of larger units (two- or three-bedroom apartments).
Multifamily investing can be a great way to earn a steady income stream for some investors, but it’s important to do your homework and understand the market before making an investment. There are many potential risks involved in multifamily investments including but not limited to: risks associated with construction and renovation, leasing risks, risks related to working with unknown developers and co-managers, and permitting and entitlement risks.
As an investor, it’s important to be aware of trends in housing affordability when making investment decisions. The cost of housing is rising in many markets, which can impact tenants’ ability to afford rent increases. When evaluating an investment property, be sure to consider the individual characteristics of the investment property as well as the potential impact of affordability trends in the market. Keep these considerations in mind to ensure that your multifamily investment is a success.
Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.
1 Dickler, J. (2021, November 10). Home prices are now rising much faster than incomes, studies show. CNBC. Retrieved October 3, 2022, from https://www.cnbc.com/2021/11/10/home-prices-are-now-rising-much-faster-than-incomes-studies-show.html
2 U.S. population growth: Where is housing demand strongest? Freddie Mac. (n.d.). Retrieved October 3, 2022, from https://www.freddiemac.com/research/insight/20210128-population-growing
3 Lawrence, P. (2022, April 12). Rising construction, labor costs increase rents, contributing to the Affordable Housing Crisis. Novogradac. Retrieved October 3, 2022, from https://www.novoco.com/notes-from-novogradac/rising-construction-labor-costs-increase-rents-contributing-affordable-housing-crisis
4 Housing affordability. Real Estate Investment Services. (n.d.). Retrieved October 3, 2022, from https://www.marcusmillichap.com/research/special-report/2022/08/housing-affordability-special-report