Real estate investing provides numerous benefits that we have discussed in prior articles. There are many different classes of real estate that you can choose to invest in including Apartments, Single Family homes, Commercial Rentals, Storage, Mobile Home Parks and the list goes on. We are particularly fond of Multifamily Apartment Communities.
Investing in apartments is conceptually familiar to most people. The business model is simple and understandable; renting an apartment is simply exchanging the use of space for an agreed-upon fee. Housing is one of the basic human needs. We all need somewhere to sleep at night. You probably have rented an apartment or know of someone who has.
Like any good investment strategy diversification helps to mitigate risk and provide the best overall returns. Below we have listed out a few of the advantages of investing in Multifamily Apartment Communities.
It’s a Basic Need
As mentioned before housing is a basic human need. Apartment Communities fulfill that need by providing a place where people can sleep each night. Unlike retail stores which may be replaced by Amazon or other online e-commerce stores there is no replacing this basic need. In good economies and bad economies the need still exists. Now and into the future people will need sleep and rest. Multifamily Apartment Communities are the answer.
Increasing Renter Demand
Everyone needs a place to live and the largest generation in the US, millennials, are entering the growing pool of renters. Millennials, straddled with student loan debt and rising house prices, are getting married at a later age and choosing to buy houses at a later age. A recent Goldman Sachs study notes that 60% of millennials choose to rent. This trend is expected to continue as Gen Z becomes of age to enter the renter pool as well. To add to the mix there is also a sub-set of baby boomer retirees that have become renters by choice. These baby boomers are choosing to give up the burdens of home ownership to relocate and live in apartments with amenities where all the upkeep is taken care of by someone else. RentCafe noted that between the years of 2007-2017 there was a 43% increase in renter households aged 60 and over compared to a 31% increase in owner households over the same time period.
In the “Workforce” or “Affordable” housing space there has been limited increase in supply of housing due to various reasons such as cost of construction. This leads to a low level of supply to meet the increased demand. We will dive deeper into Workforce/Affordable housing in a separate article.
An introductory class in Economics will teach you that when there is high demand and low supply there is increase in value. This forms a recipe for increase property values, rent growth and consequentially increased returns on investments overtime.
Economies of Scale and Diversified Risk
Multifamily buildings will have 2 or more units. When there are 5 or more units these apartments are now viewed under the lenses of commercial buildings (as opposed to residential buildings of 4 or less units.)
The increased unit counts provide economies of scales – cost savings that occur as production becomes more efficient. This particularly happens as costs are spread out over a larger number of goods (in this case apartment units) creating lower costs per unit. This concept can be seen when shopping at wholesale retailers such as Walmart or Costco – when you buy a larger number of products the individual price per product is lower.
Imagine that you have a 100 unit apartment building; if you have to do a roof replacement, fix a broken boiler, buy building material, engage a contractor to do painting or another job, the overall costs of that new roof can now be repaid using rental income from not just one unit but 100.
Additionally, because you are doing work on a larger scale the contractor and hardware store will offer you discounts due to the volume of work. If you only had 1 unit then you would have to hope that your rental income is sufficient to cover those repairs. It would be even worse if that 1 tenant moved out – now there is no rental income to cover the cost of the repair. If 1 tenant moves out of your 100 unit building you still have 99 units to help pay for the repairs. Further, when you have a multifamily apartment community these 100 units will all be in the same location as opposed to 100 single family units. When all the units are in the same location this makes them easier to manage and obtain operating efficiencies. Through these efficiencies gained through easier management owners are able to save more cost and see better returns on their investments.
As you can see there are many benefits to investing in multifamily apartment complexes. We particularly like to invest in “Workforce” or “Affordable” housing. This term refers to apartment communities that cater to individuals who are renters by necessity – whether that be by lack of financials means to buy a house or desire to be close to their job location. This is usually low to median income workers.
This particular class of multifamily assets provides a great means of protection against recessions as marginal luxury renters move down to affordable housing in times of recession. There is also benefits in times of economic growth as lower income renters that receive pay increases move up to this class of apartments. No matter what part of the economic cycle – there is always demand!
As a recap the reasons why investing in multifamily apartment communities is so attractive are:
It’s a basic need
There is increasing renter demand
There is low supply
Investors can gain economies of scale and diversify their risk