M&M Ventures Blog

Learn from industry experts all about the world of multi-family and commercial real estate property investment.

Investing in Multifamily Real Estate

Investing in multifamily real estate has long been a staple of many investors, and with good reason. Rents tend to increase over-time based on supply and demand, and values tend to follow. The use of moderate leverage can increase returns to equity as well. Let’s break down why investing in multifamily is so attractive today.

1 Investing in multifamily real estate gives you three ways to make money: cash flow, debt reduction, and asset appreciation. This is similar for all real estate except for certain segments (land doesn’t produce cash flow by itself, for-sale products like condos or single family home builders rely on a single sale to make money), but multifamily is a proven way to achieve the economic benefits of real estate ownership. 

Cash Flow 

Apartments are stable cash flow investments due to rents being paid by multiple residents each month. Compare this to owning a Wendy’s location, or a single-family property with one renter. Additionally, apartment rents are traditionally reset every year, which gives owners returns that mirror economic growth more closely. Compared to an office lease that can be set for 5-10 years with no chance of re-evaluation until the end of the lease term, apartment rents are reset each year.

Debt Reduction

As rents come in each month, typically debt service payments are made to the lender, reducing the amount of outstanding principal owed. Think of this as gaining equity each month as the debt is paid off. Additionally, today there are very favorable financing rates in the debt market. In some cases (Freddie Mac, Fannie Mae, HUD), debt is backed by the government and can offer lower interest rates to apartment owners.

Appreciation 

Multifamily appreciates when income increases and/or when capitalization rates decrease. Think of it like a business that produces more income, or is valued at a higher multiple by the market. Multifamily is great because many markets have seen rents increase 2%+ per year over the long-run. 

2 Multifamily has seen the best risk-adjusted returns of any real estate asset class since 1987.

Source: National Council of Real Estate Investment Fiduciaries (NCREIF)\

3 Multifamily is a great diversification for a portfolio, and among real estate, is becoming the institutional choice for investment. Multifamily is the largest real estate market and therefore attracts the greatest liquidity, so the ability to sell or refinance an asset is increased.

Source: National Council of Real Estate Investment Fiduciaries (NCREIF)