What is it?
Multifamily real estate is any property with multiple units rented out for people to live in — apartments, condos, townhomes, and even manufactured homes. Multifamily makes up about 25% of all U.S. commercial real estate and is worth over $5 trillion in asset value according to data from CoStar.
Types of Multifamily Developments:
These apartments are priced according to supply and demand, or the going rate, in the local area. Their rent fluctuates based on factors like building quality, amenities, location, and general market trends. Typically, they are the most expensive type of rental housing. Unlike other types of housing, market rate apartments receive no government subsidies or rent-control regulations influencing their price.
This type of development features rents that are significantly lower than market rate, often falling within a specific income range defined by government guidelines. Public funding, tax breaks, or government programs help keep rent payments manageable for eligible residents.
These apartments are typically built with middle-income earners in mind, often essential workers like teachers, nurses, and firefighters. Workforce housing bridges the gap between market rate and affordable, creating opportunities for essential workers to live near their workplaces. However, unlike affordable housing, workforce housing receives no government funding and functions like a market rate building.
This type of multifamily is also referred to as active adult apartments or independent senior living communities. Fifty-five plus function like normal apartments but with an age restriction in place and often include more robust amenity packages to promote an active and social lifestyle. . These can be positioned as luxury, mid-range, or affordable depending on location, unit size, and amenities.
Grades and Ratings
This class of apartments is characterized by luxurious amenities reminiscent of resort destinations. Class A multifamily properties typically command the highest achievable rents within their respective submarkets. More commonly, you’ll find Class A products in downtown areas or urban cores versus the suburbs.
This type of multifamily is often what you’d see as an amenity-rich building including things like club and game rooms, speciality fitness amenities like yoga studios and pickleball courts, work-from-home lounges, libraries, and more. These fulfill a crucial role in the housing market by offering market rate living solutions to the more middle-class. Workforce housing is often seen in this class as well.
Class C multifamily properties often offer functional challenges at a lower rental cost in second- or third-ring suburbs. These typically older assets may feature lower quality finishes and fewer amenities.
How Multifamily is Valued
Sales Comparison Approach (Price per Unit/Square Foot):
Multifamily properties are valued by their price per unit or price per square foot, offering insights into individual unit costs and market variations. For instance, an apartment complex in New York might be valued at $700,000 per unit, while a comparable one in Houston could be $220,000. Comparing these metrics allows for understanding relative affordability across markets and assessing a property’s value within its immediate context, considering age and condition.
Income Approach (Cap Rates):
Similar to other asset classes, multifamily properties can also be valued using cap rates. This method expresses the property’s income potential as a percentage of its price. Calculated by dividing net operating income by the property’s value, cap rates enable comparisons between different investments. A higher cap rate generally indicates lower potential returns on investment.
Whether you’re a seasoned investor looking to diversify your portfolio or a curious beginner exploring investment options, multifamily real estate offers compelling opportunities. Beyond the financial benefits, multifamily empowers vibrant communities, providing essential housing and fostering a sense of belonging. By entering this sector, you become an active participant in shaping the future of our neighborhoods and contributing to a thriving housing ecosystem. If you are interested in learning more about multifamily investing, please contact us today. We would be happy to discuss your investment goals and how we can help you achieve them.
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