Multifamily real estate allows investors to take a Goldilocks-like approach when assessing a deal and their acceptable level of financial risk.
Some investors may find a potential deal too hot for their liking, presenting a high upside at considerable risk. Others may find the low-risk, low rewards stakes of more stable multifamily investing leave them feeling cold and indifferent. However, with the guidance provided by working with the team at Vistia, investors can successfully identify multifamily real estate deals that are just right for their financial strategy.
Continue reading to learn more about the different classes of multifamily real estate deals, the risks they represent, and the rewards possible when opportunity meets timely investment.
The Current State of the Housing Market Offers Appeal to Multifamily Investors
Before diving into the different classes of multifamily housing investing, it’s worth looking at the current housing market.
Single-family home prices soared during the pandemic as inventory levels of houses on the market failed to meet demand. Unfortunately, while the pandemic may have ended, potential buyers are not finding the market any more conducive to finally purchasing a home.
Rising interest rates and affordability concerns have locked many potential homeowners out of the real estate market as the availability of single-family homes hovers near historic lows in some markets.
Concerns over inflation and the lingering threat of a recession have created uncertainty among buyers now facing higher home prices, which have only recently started to decline after values increased by an average of 19% nationally from 2020 to 2022.
With few available options, multifamily real estate remains poised to provide exciting new investment opportunities for those interested in capitalizing on the current housing market.
Multifamily real estate investing offers the potential to build wealth through unique development projects that help to enrich communities by providing new housing opportunities.
While the opportunity for multifamily home development seems promising in the current housing market, investors interested in exploring the possibility of multifamily investing need to understand their available options to identify which opportunity best aligns with their financial goals and risk tolerance.
How to Analyze Multifamily Investment Opportunities
Before deciding on whether to invest in any multifamily real estate project, it’s necessary to answer three questions:
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Is the investment property a type desired by renters?
A rental property offers little value without tenants. For example, an affordable housing development in a community with a high median income level might struggle to attract renters if it doesn’t include the type of amenities offered by other housing complexes in the neighborhood.
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Is the market continuing to grow or poised to enjoy a growth spurt?
High-growth markets offer investors a competitive advantage due to the influx of new jobs and residents. Specific markets in the U.S., such as Jacksonville, Tampa Bay, Birmingham, and other cities across the Sun Belt offer increased potential due to their growing population and the need for housing.
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Is the targeted investment in a desirable neighborhood, or does the neighborhood offer untapped potential?
Even in high-growth markets, not all neighborhoods present an equal investment opportunity. Strategically targeting projects in up-and-coming or established neighborhoods where rental demand remains strong will help to protect an investment’s viability while reducing potential risk.
By answering these, and other questions, investors can better determine whether an investment opportunity will meet with their short or long-term financial strategy.
How to Invest in Multifamily Real Estate
Three primary multifamily real estate investment opportunities exist — Class A, B, and C. Each of these investment opportunities offers its own level of risk for investors.
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Class A: Low risk
Class A properties are built from the ground up and offer the latest design styles and amenities. These are the types of properties that get noticed when construction starts, and interest builds as prospective tenants eagerly await their opportunity to move in. Class A properties are usually built in desirable neighborhoods, offering quick and easy access to a city’s most desirable bars and restaurants. The appeal of living in class A properties for young professionals and individuals with higher paying jobs helps to make this investment low-risk.
A primary example of a class A property is a high-end condo complex with premium amenities like a pool, 24-hour group training gym, game room, public meeting space, 24/7 security, and pet care facilities. Some class A properties will include a foundational tenant in the building, such as a grocery store or coffeehouse, offering additional appeal to renters and the neighborhood.
The majority of tenants in class A properties have higher paying jobs and a steady income. They also tend to enjoy higher credit scores and are more likely to pay their rent on time. Class A properties are located in safe neighborhoods with quality schools, hospitals, and major employers nearby. They rank as one of their market’s most desirable locations and are places where people want to live.
Class A properties offer a low risk for investors due to the high number of renters wanting to live in the neighborhoods in which they are located. This increases the likelihood that units remain rented and the continuous generation of revenue.
Class B: Medium risk
Class B properties sit between classes A and C. They offer average upside potential and risk.
Class B properties were often once considered Class A, but they’ve aged just enough to no longer be considered the most desirable places to live in town. These are duplexes or condos located in decent neighborhoods and typically include a few amenities, but nothing on the scale of what a class-A property might include.
Class B properties are typically located in good neighborhoods that sit on the fringes of class A neighborhoods. Most class B tenants will have a stable rental history and good credit scores. However, their income levels are often below those in class A properties.
Since class B properties are considered a greater risk than class A, investors can usually acquire these properties at a higher capitalization rate. However, these properties do carry more risk. Uncertainty exists around the renovation and maintenance costs, which are typically higher in class B properties compared to class A. A tenant base with a lower income is also more susceptible to economic changes, such as a recession.
Class C: Highest risk
Class C properties represent the highest risk while offering the highest reward of any multifamily real estate opportunity. These properties are often decades old, need significant repair, and are located in less-than-desirable locations.
Depending on the state of the property, some class Cs may need a revamping of their electrical, HVAC, and plumbing systems, typically due to poor or inadequate maintenance by the previous owner.
Many class C neighborhoods are located away from major schools, hospitals, employers, and transportation hubs. They can also have higher crime rates and poorer infrastructure.
Tenants of type C properties tend to be less financially stable and are more likely to default on their rents. As a result, class C properties carry far more risks, but investors who identify the right properties and make suitable upgrades can enjoy far higher profits than class A and C developments.
The key to class C properties is identifying up-and-coming neighborhoods early on while property values remain low. Investors who successfully identify the right neighborhood can reap significant profits as rents increase along with the neighborhood’s desirability. Conversely, selecting an investment opportunity in a neighborhood that fails to revitalize can lead to a loss.
Helping You Make Sense of Multifamily Real Estate Investing
At Vistia Capital, we seek exciting new opportunities to connect developers with investors looking to build wealth. Our seasoned advisors work with you to identify the best properties, partners, and opportunities that align with your investment goals.
Why invest in multifamily real estate? That’s a question best answered by your strategy for growing and protecting your wealth. Schedule a consultation today with a wealth management expert to determine whether multifamily real estate investments suit your financial needs.
FAQs
What are the risks associated with multifamily real estate investing?
Multifamily real estate investing offers different levels of risk, depending on the type of property. Class A properties offer the lowest risk, as they are built from the ground up and offer the latest design styles and amenities in desirable neighborhoods. Class B properties have average upside potential and risk, and are typically located in good neighborhoods that sit on the fringes of class A neighborhoods. Class C properties represent the highest risk while offering the highest reward of any multifamily real estate opportunity and are often decades old, needing significant repair, and are located in less-than-desirable locations.
What type of properties are Class A properties?
Class A properties are built from the ground up and offer the latest design styles and amenities. These are the types of properties that get noticed when construction starts, and interest builds as prospective tenants eagerly await their opportunity to move in. Primary examples of class A properties are high-end condo complexes with premium amenities like a pool, 24-hour group training gym, game room, public meeting space, 24/7 security, and pet care facilities.
What type of tenants are in Class A properties?
The majority of tenants in class A properties have higher paying jobs and a steady income. They also tend to enjoy higher credit scores and are more likely to pay their rent on time. Class A properties are located in safe neighborhoods with quality schools, hospitals, and major employers nearby.
What type of rewards can I expect from multifamily real estate investing?
Multifamily real estate investing offers the potential to build wealth through unique development projects that help to enrich communities by providing new housing opportunities. Class A properties offer a low risk for investors due to the high number of renters wanting to live in the neighborhoods in which they are located. This increases the likelihood that units remain rented and the continuous generation of revenue. Class B and C properties offer higher rewards, but also higher risk. Investors who identify the right properties and make suitable upgrades can enjoy far higher profits than class A and C developments.