Homeownership rates have fallen in recent years due to rising home values and stricter underwriting standards. As a result of this and the increase in the number of people 34 years of age and younger, the prime age range for rentals, more U.S. households are renting than at any point in 50 years, according to the Pew Research Center.
The signs all point to an excellent opportunity for investment in multifamily rental properties. While the overall outlook may be favorable, however, not every multifamily investment is the right multifamily investment. Investors must dig a bit deeper to find the most profitable properties for long-term investment. Here are five things to consider before you make a decision on a multifamily investment opportunity:
#1 Market Growth Factors
Who are the renters? Working-class individuals have traditionally been a mainstay of apartment living, but we now have to consider the millennial generation, consisting of 85 million U.S. citizens born between 1977 and 1996. Whether due to student debt or the delay in starting a family, this large segment of the population is a big factor in the increasing demand for apartments nationwide.
#2 Age of the Complex in Question
In response to the growing number of people who prefer to rent rather than buy a home, new, shiny apartment communities are being built in cities across the nation. However, a survey done by RealPage found that retention rates for these newer, upscale buildings tend to be low, with less than half of the tenants opting to stay when their lease expires. Such turnover results in high expenditures for unit make-ready and marketing in order to attract new tenants. In short, net operating income is low if vacancies are high.
#3 Increased Demand Factor for Class B and C Apartments
With minimal investment in upgrades and amenities, the older Class B and C complexes can attract a wide demographic, including working-class individuals and millennials. For one thing, they are generally located in established middle-income neighborhoods. In addition, these apartment complexes are essentially recession-proof, which is important for tenant retention when the economy heads south.
#4 Lower Initial Costs Lead to Greater Long-Term Returns
Older complexes are often undervalued or overlooked by institutional buyers due to the significant investment in time and resources required to reposition the property. A smart investor will see the opportunity here, since by investing in the right kinds of upgrades and addressing maintenance and safety issues, these buildings can yield greater returns, significant NOI growth and overall capital appreciation.
#5 The Importance of Professional Management
Many older units suffer from absentee ownership, misalignment between owner and property manager, or unsophisticated owners/operators who lack professionalism and an institutional approach. Simply upgrading the units is not enough to improve value; professional property management is essential to protecting your investment. These days, that means more than simply hiring someone to keep the property clean and attractive, although those things are important; it also means working to make your tenants feel like part of a community. That takes an experienced, professional management team.