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In terms of sales volume, multifamily is the largest asset class in commercial real estate, followed by industrial, office, and retail, per data from Real Capital Analytics. The segment currently has a national vacancy rate of 6.7%, according to CoStar, which projects that rent growth will moderate during the next 12 months from 3.7% to 1.8%. Still, many investors are standing by and watching as interest rates rise and recession fears swirl throughout the country.

Though it’s impossible to predict the future, multifamily has historically been known as a relatively safe investment compared to other commercial property types. Apartments, for instance, fulfill an ongoing need in society (giving workers a roof over their head!) and provide the potential of rent income from various streams, reducing overall risk. I often recommend it as a starting place for beginning investors looking to learn the ropes and build a portfolio.

In this article, the third of the series, “Making Investment Decisions in Today’s Real Estate Market,” we’ll explore the advantages of multifamily investments. (See the first article and second article of the series). I’ll also break down some of the disadvantages you may find in this asset class, along with ways to decipher your risk tolerance as you move forward. Understanding these elements before you jump in can increase your chances of ongoing success.

Here are five factors to consider as you think about multifamily assets:

1. Know what multifamily is.

Any property that is designed for two or more households is considered multifamily. Think duplexes, townhouses, condos, apartment buildings, and the like. The number of units in these properties can vary substantially, ranging from two to 10, 20, 40, or more. If you acquire one of these buildings and move into a space, it’s usually called a live plus investment property.

Regarding loans, you may be able to take out a residential loan if you purchase a multifamily with four or fewer units and reside in one of them. For commercial purposes, the focus tends to be on properties with five or more units. At this stage, you’ll need a commercial real estate loan, which will have different requirements and terms than home loans.

2. Have the right team in place.

Before signing and closing on a multifamily property with five or more units, I always encourage investors to consider their bandwidth and area of expertise. How practical is it to manage 10 or more units? How will repairs be handled? Who will collect and monitor rent? How will you decide which renovations to make and what rents to list?

Herein lies the difference a strong team can make. You’ll want to know and work with players who are able to give you insider tips to get the returns you’re looking for (and even outperform the market if you play it right). Keep these professionals in mind as you build your network: investment sales brokers (full disclosure: this is my line of work), rental brokers, mortgage brokers, property managers, accountants, and attorneys.

3. Understand the pulse of your market.

Post Covid, we’re seeing an uptick in demand for residences with spaces to work, like built-in home offices. The trend could present an opportunity to purchase and reposition an existing property. Before diving in, check the local market. You don’t want to provide features that renters aren’t interested in. Even though work-from-home is a national trend, you could find that the neighborhood where you’re investing has workers that go to the office every day. Or they might be satisfied with foregoing the extra space to save on rent costs.

4. Evaluate your financials.

What are other properties in the neighborhood selling for? What rents are being charged? What do units down the street look like on the inside? Are tenants moving in—or is the neighborhood changing in other aspects?

Most investors check the cap rate before making a move. The cap rate is the income a property generates divided by its current market value. A higher cap rate typically signals more risk while a lower cap rate means the investment carries less risk.

5. Review your limits.

Every property will come with parameters regarding what you can do with it (and what you aren’t permitted to carry out). Check for rent regulation policies, which establish limits on rent adjustments from year to year. If you’re buying a property that only allows rents to be raised 5% every year, you’ll want to compare that to your debt service and other expenses to determine your return.

Rent regulation can vary from state to state, and even from one city to the next. In New York City, you’ll find rent stabilization and rent control, which limit how much landlords can ask for from tenants. States such as California and Oregon have implemented statewide caps on rent increases, limiting how much you can raise the amount that tenants owe each month. When buying in these areas, look for a higher return out of the gates to offset any rent limitations that are already established. If you’re interested in units that are free to be rented at market value, carry out due diligence and bring in a landlord tenant attorney to help with the process.

Overall, multifamily can serve as an incredible long-term investment. There are growth markets sprinkled in different areas of the country where rents are increasing from year to year. For best results, make sure your capital and your investor expectations align with your business plan.


By James Nelson.  I am also a serial real estate investor and have launched two real estate funds with total capitalizations of over $350 million. Now this far into my career, I find great joy in helping others achieve real estate success. I provide regular training through my podcast and Wall Street Journal best-selling book, The Insider’s Edge to Real Estate Investing (McGraw Hill Education 2023) which I co-authored with my writing partner Rachel Hartman. I give lectures at Columbia, Fordham, NYU, Wharton, and my alma mater Colgate, and share videos and resources at


Source:  Forbes


Rising interest and insurance rates are projected to slow down South Florida multifamily investments following a year of frenzied buying, according to a recent report from Franklin Street.

Dan Dratch, director of multifamily investment sales at Franklin Street’s Fort Lauderdale office, says real estate investors and developers could hesitate even as apartment rental rates continue to soar and vacancies shrink.

“We have been in such a low interest rate environment, which has been fueling sales in the last couple of years,” Dratch said. “There’s a little bit of uncertainty… [Investors] want to know if it costs more to borrow the money and put more money down, or pay less.”

Adding to the uncertainty is rising property insurance rates in the wake of extreme weather events. This hurricane season is expected to be a particularly busy one.

“I know owners who are seeing a 20% to 30% increase on insurance, sometimes higher,” he said. “We have not been hit with a major hurricane [in five years]. If that happens now, it will affect things even further.”

South Florida saw significant rent growth in the first quarter of 2022, according to a Franklin Street report on the multifamily market, with year-over-year rents increasing 16% in Miami-Dade, 20% in Broward, and 23% in Palm Beach County.

At the same time, multifamily buildings were trading at premium rates.

In Miami-Dade County, each apartment unit averaged at $412,612 for new top-of-the-line Class A buildings, $327,394 for Class B buildings, and $207,592 for Class C.

In Broward County, units averaged $419,137 per unit for a Class A, $313,599 for a Class B, and $205,736 for Class C apartment buildings.

In Palm Beach County, apartments averaged at $413,253 per unit for a Class A, $320,410 for a Class B, and $206,812 for a Class C apartments buildings.

There weren’t many available apartment units on the market during the first quarter either.

Palm Beach County had a vacancy rate of just under 1%. Miami-Dade’s dropped to 3.3%. Broward’s vacancy rate increased slightly from the previous quarter to 4.1%, yet the county “also saw more deliveries than the other two counties in the market,” the report stated.

When it came to construction deliveries, Broward County led the tri-county area with 719 apartments added in the first quarter of 2022. In Miami-Dade, 497 new apartment units were added. In Palm Beach, 171 units were completed.

All three counties had fewer apartments finished in the first quarter of 2022 than in each of the quarters of the previous year, the report noted.

In spite of rising interest rates, labor shortages, and supply chain issues, construction of new apartment units are still “above historical averages,” the Franklin Street report noted. In the first quarter, development has commenced on 1,402 multifamily units in Broward, 869 in Miami-Dade, and 976 in Palm Beach County.

The confluence of apartment building transactions, low vacancies, and migration of well-paid remote workers propelled rents in South Florida during the pandemic. Multifamily investors were quick to seize the opportunity and bought up properties at a record pace.

“Most of the owners we were talking to were surprised that they got into a situation where tenants are creating a bidding war for the unit,” Dratch said.

Often, when longtime local renters were given rent increases, they would renew, unable to find cheaper options.

“They are finding it might be worse elsewhere,” Dratch.

While rents are going up everywhere in the United States, the average rents in South Florida are higher than the national average.

According to the National Association of Realtors, the average effective rent — meaning the average rent a landlord receives after deducting expenses such as leasing commissions and tenant improvements — throughout the U.S. was $1,578 a month in the first quarter of 2022, a 12.2% increase over the year before.


Source:  SFBJ