Strong Demand - Several studies have shown that the US is expected to experience a significant demand for rental housing. The priority has shifted from home ownership to a strong demand for rentals.
After the global financial crisis back in 2008 home ownership rate have dropped from 69% to the present rate of about 64%.
Further, millennials are less interested in home ownership and place a higher priority with flexibility and lifestyle. Millennial home ownership in the US is at a record low. According to the Census Bureau, the share of spending on renting increased by 3.2% in the decade through 2015 while homeownership fell by almost 10%.
Downsizing Baby Boomers are selling their homes and moving into apartments - What used to be a lifestyle optimally suited for the young — millennials today — is increasingly attractive to boomers who are looking for a “hands-free” lifestyle without the headache of owning a home. More than 5 million baby boomers are expected to rent their next home by 2020.
In addition to the strong demands, investing in multifamily provides unique financial advantages as outlined below.
With single-family homes, when the tenant leaves, you are left with a 100% vacancy. However, in multifamily properties, 10 simultaneous vacancies out of 200 units results into only 5% vacancy. This hedge allows us to continue to cash flow.
The building, not the land depreciates and hence, reduces your taxable income. Many syndicates also utilize accelerated depreciation techniques as well.
Unlike single-family homes, multi-family property is valued by its ability to produce income. Income can be increase by adding value to the property such as interior/exterior upgrades, carports, playgrounds, and laundry rooms. Further, in commercial valuation, Market Value is equal to NOI/CAPrate. (A cap or capitalization rate is simply what an investor should expect to earn if they paid 100% cash for an apartment.) Assuming the cap rate stays the same and we are able to increase the NOI even modestly per the equation above, the market value will almost exponentially increase. This concept called forced appreciation is what makes apartment investing and commercial real estate for that matter so powerful.
Example: Assuming a stable 6% CAP rate, we created a value of $1,000,000 by installing a covered parking that costs $25/mo to the renters. $25 x 200units x 12months = $60,000. $60,000/.06 = $1,000,000 in value.
Apartments cash flows from the rents generated less expenses. This can be paid out monthly or quarterly. We often see distribution in the 8-12 % range and investors typically receives a preferred 8% return meaning the limited partners get paid first up to 8% before the general partner gets paid.