Multifamily Rentals: A Sound Investment

Renting is neither a trend nor a fad but instead is a consistent, reliable, and attractive housing option for millions of Americans. Today, an estimated 35% of housing units are rentals, totaling roughly 45 million units. Renters span all age demographics. And current economic conditions make the renting lifestyle an even more attractive one.

THE APPEAL OF RENTING

Renting spans all age groups: The 2010s saw a 7% increase in renter households for those 34 years of age and under.  Renter households jumped 17% (2.8 million households) for those in the 35-59 age group. The 60 and over age demographic experienced a meteoric rise in renter households, jumping 43% with the expectation of continued growth (Rental Housing Journal).

The appeal of renting is multi-faceted. Renting can be a longer-term, more permanent living situation; however, renting has the ability to be a short-term arrangement, with the flexibility to move based on changes in job or economic changes. Renting avoids or reduces costs often associated with home ownership: real estate taxes, homeowner’s association fees, landscape and maintenance costs and responsibilities, and more.

A number of economic factors have made renting even more appealing in the current decade:

Home prices: In 2020, the median home price was $329,000; in the second quarter of 2023, the median home price rose to $416,500 (Caporal). This jump alone, assuming a consistent mortgage rate (7.9%--the average on a 30-year fixed rate in Pennsylvania, at the publication of this article) and controlling for a 20% down payment, would increase monthly mortgage payments by $500 to over $2,400 (without factoring in property taxes and homeowner’s insurance).

Mortgage rates: But that is not even factoring in the jump in mortgage rates--and they have jumped. January, 2022 saw 30 year-fixed mortgage rates at 3.2%; today the rate on the same type of loan is nearly 8%. Let’s talk about this effect in real dollars. A buyer of a 2023 median home price with 20% down with a 7.9% rate on a 30-year fixed will pay an astounding $353,336 MORE than the buyer of the same home with 20% down on a loan with a favorable January, 2022 mortgage rate. Rising home prices combined with increased mortgage rates make renting an increasingly enticing option.

Less $ to go around: As home prices and mortgage rates surged, the cost of goods also rose. While economic signs point to a cooling of inflation in the summer of 2023, US consumers have experienced increased prices at the pump and the grocery store, with inflation peaking at 8.2% in August of 2022 (Wile). The prices of a gallon of gas starting with a 3 or a 4 has become the new standard, and the budgeted grocery allotment does not feed the family for as long as it did a year or two ago. Simultaneously, wages have stagnated. Looking for margin between disposable income and expenditures, RENT--rather than a mortgage with real estate taxes and homeowner’s insurance and the cost of upkeep--has become and will continue to be an attractive option for millions of Americans to make living more affordable.

MULTIFAMILY APARTMENTS: A WISE INVESTMENT

Renting is a fiscally responsible option for millions of Americans. With population projections forecasting a growth of over 50 million by 2050, the market for rentals will likely continue to grow. From an investment perspective, investing in MULTIFAMILY rentals is a safe, predictable, and profitable investment as part of a diversified portfolio.

[NOTE: MULTIFAMILY rentals are apartments or townhomes with five units or more.]

Here are some of the many reasons that investing in multifamily rentals is a wise investment.

1. Housing is EVERGREEN. People need a place to live, and this need is perpetual. While the purchase of certain consumer goods and services may ride economic waves, people cannot go without the fundamental need of housing; it is an evergreen need.
2. Apartments are RECESSION-PROOF. In economic downturns, consumers may cut back on certain expenditures--dining out, entertainment, or travel--but, as stated previously, people will need a place to live. They may find the need to downsize, or they may look for more affordable housing: rentals provide a safe haven even in times of economic downturn. A shift may occur from home to apartment or from large apartment to small apartment; apartment rentals of varying rents and property classes are largely resistant to recessions.
3. Multifamily rentals feature STABILITY. An advantage of multifamily living is a diversified rent roll. Rent payments come from multiple tenants, perhaps tens or hundreds depending on the size of the complex. To illustrate the advantage, let’s compare a duplex to a multifamily with each experiencing a temporary vacancy. A vacancy in a duplex drops the rent roll by 50%, a sizable difference even if only for a short period of time. In a multifamily rental of 20 occupied units, that one vacancy drops the rent roll by only 5%. This illustrates one of the main features of multifamily rentals: stability.
4. Multifamily rentals have HIGH OCCUPANCY RATES. The average occupancy rate over the last five years for multifamily rentals was 94% (O’Brien). Again, the predictable and stable nature of this asset fueled by a large and expanding supply of renters makes multifamily rentals an attractive investment.
5. Rentals serve as a HEDGE AGAINST INFLATION. Short lease terms (typically 12 months) that are typical of rentals allow for rents to be adjusted against inflation, keeping them in line with market values. A hard asset, income-producing real estate can offer investors the potential of increasing asset value over time (due to appreciation as well as inflation), providing a recurring return on the capital invested through the net cash flow generated by tenant rent payments. 
6. Multifamily rentals have access to FINANCING. Multifamily rentals have great availability of debt capital through government-sponsored enterprises such as Fannie Mae and Freddie Mac. Meeting the underwriting requirements of these GSEs, such as liquidity, stability, affordability to the housing market, multifamily rental investments can often find a financier in government-backed agencies.

We would love to talk more about investing in multifamily properties. If you are interested in learning more please contact our office at (724) 900-0009 or e-mail Mark Brooks at mark@evergreen-pgh.com 

Sources:

Caporal, J. (2023, July 31). Average House Price by State in 2023. The Ascent. Link. 

O’Brien, K. (2023, May 19). Ranking US Apartment Occupancy by Geographic Region. RealPage. Link.

Renters Over 60 Grew by 43 Percent Over the Past Decade. (2019, March 5). Rental Housing Journal. Link.

Wile, R. (2022, October 13). Inflation holds grip on the US economy as September rate hits 8.2%. NBC News. Link.

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