Many people invest heavily in
paper assets like stocks, bonds,
and mutual funds.
A whole industry has been built around selling you these paper assets. There are thousands of websites, dozens of magazines, and several dedicated TV networks entirely devoted to reporting on the stock and bond markets. Our society has become saturated with their message.
These investments have their merits, but their efficacy in your portfolio is not what they used to be. From 1982 to 2000, the United States saw the greatest bull market in history. During that time, investors could park their money in mutual funds and watch the magic of compound returns.
Unfortunately, those days are gone.
In their search for better investments, more and more people are turning to real estate.
While high-quality commercial multifamily real estate is one of the most proven asset classes in history, some have shied away for a variety of reasons that include lack of information, insufficient experience, and insufficient capital, just to name a few.
In this Special Report, I will seek to demystify the subject of commercial multifamily real estate investing as well as provide an overview that discusses the What, Why, When, and How of investing. I will also provide you the convincing collection of research that led me to diversify into this asset class.
In their search for better investments, more and more people are turning to real estate.
The What of Multifamily
Real Estate Investing
When I first got started, I thought the only way to own real estate was to be the landlord. So I purchased a few quads (4-unit properties). What I didn’t realize then and it would have helped me tremendously, is that there are several types of multifamily properties.
Let me overview them quickly here.
Residential real estate: 1 – 4 unit properties
This designation encompasses single family homes, duplexes, triplexes, and quads. Some people do make money in this asset class, but without the economies of scale that come with bigger properties, residential real estate tends to leave a bitter taste in the mouth of most investors. It is operationally intensive, subject to ebbs and flows in both value and income, valued based on per square foot comps vs. income, and primarily subject to full recourse lending.
Small Apartments: 5 – 70 units (technically commercial)
These properties can begin to take advantage of some economies of scale. However, they tend not to reach their full potential due to the fact that on-site management typically does not make economic sense in this sized property. Consequently, off-site management is more economical at this size, but also tends to underperform. Additionally, full recourse lending remains the main option for these properties.
Commercial Multifamily (70 units and up)
These sizes warrant professional on-site management and can maximize economies of scale for potentially larger and safer returns. Those who tend to invest in this class are high net-worth individuals, private investment companies, REITs, and AAA rated life insurance companies. Due to the fact that commercial multifamily can provide a stable return in a hard-asset that is inflation resistant, it is typical to see these life-insurance companies have 25% or more of their entire portfolio in real estate.
Now that I have defined the range of resident occupied properties you can invest in, you should ask yourself a couple of questions before you start looking for properties. The first is, “Do you want to be an active or passive investor?” Passive investors have no involvement in the operations of the property. They do their due diligence to find a good operator on the front end prior to investing and if successful reap the rewards of regular income and equity growth on the backend.
As the name implies, active investors are actively involved in the operations of real estate. Active investors can act as property managers, asset managers, or both. Property managers are involved in the day-to-day operations of the property. They collect rent, respond to complaints, arrange repairs, and the numerous other duties that property management requires. Asset managers oversee the property manager. They also create the operating budget for the property, the plan for capital improvements, and the exit strategy.
While active investing has its merits, most people don’t have the time, interest, or inclination to be actively involved with real estate. For those, passive investing is likely the better option.
The key with passive investing is due diligence. Thorough investigation of the market, neighborhood, asset and the asset manager is critical prior to investing.
Once you have decided if you are better suited for passive investing or active investing, the next question to ask is “Do you want to invest in residential or commercial real estate?”
As stated previously, residential real estate encompasses one to four units. Due to the relatively low entry price, most active real estate investors initially assume that residential real estate is their only option.
This is exactly how I got started as a real estate investor. I purchased several 4-unit apartments (quads) as rentals to create additional income and ramp-up my retirement plans. In the beginning, this is where I thought I had to start.
Over time however, I found that owning the smaller residential income properties was not as profitable as I wanted or needed and I eventually turned to commercial multifamily real estate. Let me explain why in the next section.
Once you have decided if you are better suited for passive or active investing, your next decision is whether to become a residential or commercial real estate investor.
Next Steps
To learn more about how you can benefit from this asset class, schedule a 15-minute phone consultation today.
Don’t hesitate as the consultation is complimentary and there is No Cost and No Obligation to you. We welcome the opportunity to assist you in reaching your financial goals.
References & Sources
- WikiBooks. Real Estate Financing and Investing/Sources of Funds.
https://en.wikibooks.org/wiki/Real_Estate_Financing_and_Investing/Sources_of_Funds - J.P. Morgan Asset Management. Real Estate: Alternative No More. July 2012.
https://am.jpmorgan.com/blobcontent/131/169/1383169203231_11_559.pdf - The Street. Real Estate: Best-Performing Asset Class During the Past 20 Years. October 2016.
https://www.thestreet.com/story/13861401/1/real-estate-best-performing-asset-class-during-the-past-20-years.html - MetLife Investment Management. US Core Real Estate: A Past, Present, and Future View. 2017.
https://www.metlife.com/assets/cao/investments/US-Core-Real-Estate-Par-Present-Future-View.pdf - Mortgage Bankers Association. Commercial/Multifamily Mortgage Delinquency Rates for Major Investor Groups. Q2 2016.
https://www.mba.org/Documents/Research/2Q16CMFDelinquency.pdf - Forbes. Five Reasons 8 Out Of 10 Businesses Fail. September 2013.
http://www.forbes.com/sites/ericwagner/2013/09/12/five-reasons-8-out-of-10-businesses-fail/#605955d55e3c - Inc. Why 96 Percent of Businesses Fail Within 10 Years. August 2015.
http://www.inc.com/bill-carmody/why-96-of-businesses-fail-within-10-years.html - Business Insider. Millennials Are Getting Stuck Renting For Way Longer Than Previous Generations. August 2015.
http://www.businessinsider.com/millennials-renting-for-very-long-time-2015-8 - CNBC. Millennials will be renting for a lot longer. September 2016.
http://www.cnbc.com/2016/09/09/millennials-will-be-renting-for-a-lot-longer.html - National Multifamily Housing Council. Apartment Supply Shortage Fact Sheet.
https://www.nmhc.org/Advocacy/Apartment-Supply-Shortage-Fact-Sheet/ - Bloomberg. Student Debt Is Stifling Home Sales. February 2012.
https://www.bloomberg.com/news/articles/2012-02-23/student-debt-is-stifling-home-sales - Freddie Mac. Multifamily Research Perspectives. 2015 Multifamily Outlook Executive Summary.
http://www.freddiemac.com/multifamily/pdf/2015_outlook.pdf