Multifamily commercial real estate properties are properties with separate residences where multiple families can reside. Each residence must have its own kitchen, bathroom, separate entrance, and separate utility meters.
It’s important to note that only multifamily properties with over 5 units will qualify for commercial financing.
Common examples of commercial multifamily properties include apartment complexes, senior living, student housing, and more.
In this article, we’re breaking down these three types of multifamily properties, reasons to invest, financing options, FAQs, and much more.
Let’s dive in.
Types of Multifamily Properties
Let’s first examine 3 of the most common types of multifamily properties: 5+ units, student housing, and senior living.
5+ unit multifamily properties are also referred to as apartment complexes. Because they contain over 5 units, these properties qualify for commercial financing.
Multifamily properties typically fall into 1 of 3 categories: stabilized multifamily properties, value-add multifamily properties, and ground-up multifamily properties.
Stabilized multifamily properties are completed properties that have achieved an occupancy rate of at least 80% for a period of not less than 1 full calendar quarter.
Value-add multifamily properties are properties with areas for either physical or economic improvement. Investors purchase these properties at a discounted price, improve the property, and then sell the property in much better condition for a higher price. Think of value-add multifamily properties like “fix n’ flip” single home real estate investing.
Ground-up multifamily properties are multifamily commercial real estate properties constructed. investors start with raw, undeveloped land, or they tear down any existing structures. They then finance the construction of a new multifamily property.
Student housing is another subset of the multifamily asset class.
Student housing exists to provide a residence for undergraduate/graduate college and university students.
Both the recent demand for higher education and dependable cash flows make student housing an attractive option for commercial real estate investors.
Student housing offers leasing on a room/bed basis, not by unit. Leases typically run year-to-year, which leads to high annual turnover and a shorter leasing cycle.
Senior living refers to specific types of multifamily housing, including senior apartments, independent living, assisted living, skilled nursing facilities, and continuing care retirement communities.
As the Baby Boomer generation reaches retirement age, senior living has received more attention as a multifamily real estate asset class.
Multifamily Property Asset Classes
While you decide whether or not to invest in multifamily commercial real estate, it’s important to first understand the differences between multifamily commercial asset classes.
There are 3 classes of multifamily commercial real estate.
Class A properties are luxury buildings offering amenities like pools, cutting-edge fitness facilities, and more. These properties generate the highest rent, but they also require the biggest up-front investment.
Class B properties offer solid value in terms of quality, location, and function. That said, they lack the same luxury amenities of a Class A property.
Class C properties are functional but outdated. They offer the most affordable rents, and they generally require the least amount of upfront capital investment.
Reasons to Invest in Multifamily Commercial Properties
Easier to finance than single-family properties
Multifamily commercial properties are often (counterintuitively) easier to finance than a single-family home, especially if you intend to rent out your property.
Because multifamily properties often present less risk to your lender. Multifamily properties support multiple tenants, so there’s less impact on your bottom line if one tenant defaults on their payments.
Short term leases let investors adjust for inflation and market demand
Multifamily properties often offer short-term leases—a year or two, typically—which lets investors adjust these leases to match inflation and/or the current market demand.
Ability to quickly build a portfolio
Acquiring 12 units in a multifamily property is easier than buying 12 different single-family homes. Thus, investing in multifamily commercial real estate often lets you expand your portfolio quickly, while also saving time, energy, and money.
Cheaper shared services
Multifamily buildings have numerous shared services and features, which leads to lower expenses and a positive net monthly income for investors.
This frees extra capital that investors can use to update the property and increase its value.
High potential for appreciation
Multifamily commercial real estate properties have a high potential for appreciation.
It’s important to offer well-maintained facilities and amenities that attract and retain quality tenants. Doing so will ensure you fill vacancies and can even raise rental rates. A small investment of money in services—security cameras, laundry rooms, or usable communal living spaces—can both increase the satisfaction of your tenants and the value of your property. When you decide it’s time to sell, these improvements will garner a high price for your property.
All in all, multifamily commercial real properties are often easier to finance, compound returns at a high rate and benefit from economies of scale.
Where to Buy Multifamily Properties
When it comes to multifamily commercial properties, the old real estate adage still rings true: location, location, location.
Location should be a crucial element of your decision to purchase any multifamily commercial real estate property.
Choose property located in an area that will appeal to renters. Keep an eye out for quality school districts, up-and-coming areas of town, and areas with a high number of shops and attractions. In short, look for somewhere where you think other people would like to live.
A great location will attract quality tenants—they’ll want to pay you to live in your property.
Additionally, partner with a local real estate agent. He or she will understand the nuances of your local market, industry dynamics, and the fluctuations of local property and rental trends.
Your agent will also offer advice on where (and when) to purchase; he or she can help you determine if a property is overpriced.
Lastly, always do your own research.
Especially if you’re not familiar with the city, it’s important to take the time upfront to conduct your own due diligence. Visit specific neighborhoods on different days and times to get a sense of the vibe and the ambience. This legwork on the frontend will help you avoid purchasing a property in a bad neighborhood.
Multifamily commercial real estate can be a great way to jumpstart your real estate portfolio, for all the reasons listed above. However, before you purchase any property, it’s important to understand why that property might be a good investment for you.
What are the different types of multifamily commercial properties?
Numerous types of multifamily commercial properties exist, and we profile some of the most common ones above: 5+ apartment complexes, student housing, and senior living.
Where should I purchase a multifamily commercial property?
It depends, but generally in a good neighborhood with quality school districts, various attractions, and other qualities that will make renters want to live in your building. Avoid run-down neighborhoods with high crime rates, poor school districts, and unsafe reputations.
It depends on your specific property and the terms you agree to with your lender.
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