Single-family homes can certainly add value to a real estate investment portfolio, but as a rental they can be risky without the benefit of stable, long-term tenants. However, multi-family homes offer more potential as the ability to accommodate more tenants translates into higher revenue, even if there are sales.
While high real estate values make it tempting to sell now, you should try to hold onto and grow your multifamily investments for the following reasons.
High real estate values force many to remain renters
Property values are at all-time highs and now mortgage rates are rising, forcing many to stay renters for a while longer. Some have even abandoned the idea. As much as 22% of millennials say they plan to rent for life, according to Apartment List data. Additionally, the Pew Research Center reports that around 31% of young millennials (ages 25-29) currently live in multi-generational households, showing that more people are also staying at home longer.
Rents are high and vacancies are low
Rental prices also continue to break records. Rents rose 11.3% nationwide last year, according to data from CoStar Group.
Vacancy rates may have been a concern for apartment owners at the height of the pandemic, but according to Apartment List data, the national vacancy rate was 4.53% in March, which was even lower than before the pandemic.
Additional residential units provide an opportunity for beginning investors
For investors just beginning their investment property portfolio or living in a particularly tight market that is currently making it difficult to acquire additional properties, accessory residential units (ADUs) such as legal basements offer promising opportunities.
While local zoning statutes and building codes have the final say on what can be done with an existing home, converted garages, backyard apartments, and other additions are helpful for adding living space to the local inventory. These income properties are a great way to add to a portfolio, but even when it’s time to sell them, these former family homes will be worth a lot more.
The trend towards multi-generation houses continues
Multigenerational households quadrupled from 1971 to 2021, according to the Pew Research Center. The lack of affordable housing is one reason more family members are living under one roof, but the pandemic has also prompted families to reconsider their living arrangements in the age of social distancing. The desire to age in place rather than move into a senior community is another major reason people choose to stay in their homes, and in many cases this can mean younger family members move in.
While a single family home may be out of reach for one family generation, the strength of two or more multi-generational incomes makes it that much easier. Investors looking to sell a two- or three-family home could find eager buyers among this growing group of buyers
Adaptive reuse offers investment opportunities at lower cost
Adaptive reuse, i.e. the conversion of older existing buildings for a new use, offers real estate investors a wealth of possibilities. With many office closures during the pandemic, many companies have decided to ditch, or at least downsize, their office space in favor of remote or hybrid work situations. Adaptive repurposing has been touted as a saving grace for commercial real estate, converting those empty offices into apartments, particularly affordable housing. Investors can support their bottom line while working to alleviate housing shortages in urban areas.
From an economic point of view, adaptive reuse is almost a bargain as no demolition and new construction is required; The foundation and structure are already in place, saving a lot of time and money. From an environmental point of view, adaptive reuse also brings new life to old buildings and eliminates the need to start over on new land.
Residential REITs offer attractive residual income
If actively managing multifamily homes isn’t your investment strategy, residential real estate investment trusts (REITs) offer an opportunity to create a stable, passive income stream. Residential REITs manage everything from single-family homes to trailer parks to senior living communities. They’re considered recession-proof because everyone needs a roof over their heads, but not everyone needs an office, as we’ve learned during the pandemic. Of course, REITs still come with their fair share of risk, so do your research and plan to buy and hold to get the best return on your investment.
Whether you’re taking an active investment approach as a landlord or a passive approach as a REIT investor, you can be mindful that multifamily properties offer options for investors at every stage of the game. It remains to be seen whether rents can continue at this pace, but there will always be a demand for housing.