Because it is unusual for a bank to offer more than 2 – 2% interest these days, and since the stock market presents continuous volatility, it seems natural to consider an investment that pays a steady 7% - 8% or more almost all of the time. This investment is multi-family housing.
Today's Wall Street Journal indicates that the return on investment of multi-family housing buildings was averaging around 5.8% in 2007. Today, however, the average return has increased to 7.1%.
To many people, mutli-family housing conjures up visions of block long buildings in big cities, teeming with apartment dwellers paying a couple of thousand dollars each in rent. While this is a valid image of multi-family housing, it is only one version of that investment vehicle. And it is not likely to be the size of the buildings that are found in the portfolios of what we might consider the average investor.
Instead, the average investor is likely to hold one or several buildings ranging from 4 to 25 units. Often, a group of individuals will band together in order to buy their first building. As they see the tax advantages, and as they continue to accrue their 7% or greater return, they may continue to work together to build a portfolio of multi-family properties.
While real estate valuations have dropped since their peak in 2007, multi-family property continues to sell at a multiple of its earnings. Only now, because sensibility has returned to the marketplace, these multiple are starting once again to make sense. For example, at the height of the market, properties were listed at multiples of 15 and 20 times rent. Some investors were buying simply because real estate seemed to be doubling and redoubling in value.
However, in multi-family housing, there is only so much money that can be made because tenants only pay a certain amount of rent. After all expenses are met, including payment of the mortgage, whatever is left over is profit. If the rent paid by tenants does not exceed the amount of expenses, there is no point in purchasing that property.
Of course, there are exceptions to this rule. For example, if a property is decaying and / or tenants are paying under-market rents, then it may make sense to purchase that property at a price that exceeds the rent roll. But don’t make that purchase until you have thoroughly examined the area in which you’re planning to purchase, and discussed the possible up-side and / or down-side of the building purchase with attorneys and financial advisers. Be advised that such investments are not for the faint-hearted nor those whose cash reserves are thin.
Behringer Harvard, well known Dallas real estate investment firm, is also a big fan of multi-family property. According to the Dallas Journal, they’ve just purchased large, multi-family complexes in cities as diverse as Cherry Hill, NJ, Manhattan,NY, and Dublin California. Their reasoning is simple and logical. In a down economy, these properties have lowered their prices into the realms of the sensible, so the returns on investment now make sense. Also, due to a lack of new construction, young people are moving into apartments.
While such large, multi-family apartment complexes may be out of reach of the average investor, the 7 – 8% returns they generate are not. Those same percentages of return are available from 4 – 25 unit multi-family properties, and many of these properties are priced well within range of the average investor.
Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / 561 / 213 – 6139
www.marcjablonhomes.com/
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