By Christina S. Porter

Investment real estate comes in all shapes and sizes. These “shapes and sizes” can be broken down to basic asset classes; each with a unique set of characteristics that address a wide range of investor needs.

The different types of asset classes can be classified by the type of use, such as Residential Rental Housing, Office, Industrial, Hospitality, Land and Retail.

This week, we are going to look at Rental Housing (also known as “Apartments” or “Multi Family”).

The basic appeal of Multi Family is that we all need to live some place, no matter what the economy is doing. Performance of Multi Family investments is driven, as all markets ultimately are, by supply and demand.

Demand for Multi Family is sensitive to expansion or contractions of local population, affordability and desirability of other forms of housing, be it condominium or single family residences. As demographics change (the socio-economic climate of a location), both supply and demand for Multi Family is affected.

For example, over the last several years, interest rates have been historically low, making ownership in single family homes and condominiums attainable to many renters. This has put upward pressure on the supply of single family homes and condominiums, while putting downward pressure on rents. As interest rates rise, we are seeing the opposite occur, making Multi Family an attractive investment because of potential future rent increase.

Some points for consideration in evaluation of a Multi Family investment are:

- Location

The type of neighborhood is a major factor; is it established or new?

If the demographic includes children, then proximity of schools is significant. Overall, access to churches, synagogues and convenience of amenities such as shopping and entertainment are major considerations.

- Demographics

Who lives in a particular area and how likely are they to rent? The “who” in the equation is governed by the type and location (commute time) of jobs in the area. The level of income governs their propensity to rent. Generally, the more affluent, the less likely renting will be the choice. However, in the more upscale areas such as New York and San Francisco, residents don’t have an option. Renting may be the only realistic choice.

- Economic Cycles

Most Americans prefer to own, but economic cycles clearly influence our ability to do so. Recent history illustrates this concept, as low interest rates allow would-be renters to become homeowners. Increased demand for ownership sparked a boom in converting apartments to condos (condo conversions), effectively decreasing the supply of Multi Family properties for investment. As interest rates increase, demand for ownership decreased, forcing the converted apartments back into the rental market.

- Market Supply

Vacancy rates, competing projects, current projects under construction, zoning and possible future zone changes, in addition to land available for future competing projects, are major factors affecting market supply.

- Characteristics of the actual Site and Building

Proximity to transportation, safety, noise, the age of the building and unit mix (demand factor) are also a significant part of an investor’s evaluation.

Younger investors are attracted to Multi and Single Family investments for the simple reasons that they are most familiar with residential properties (we have all lived in some form of residential property), and the low financial barriers to entry (10 percent to 20 percent down payments, with generally lower interest rates on debt).

When considering Residential Rental investments it is important to take into account the potential impact on the quality of life of the investor. Historically, successful investors have built their wealth with residential investments, adding value by managing the property themselves. While many younger investors welcome the opportunity to build their net worth by managing rental properties, older investors frequently find the management aspect of Residential Rental investments an unacceptable burden.

It is common for investors to accumulate significant wealth by investing in Multi Family properties in the first half of their lives, then switch to other, less management-intensive, asset classes as they grow older.

Examples of non-management types of investments are triple net lease single-tenant properties (Walgreen’s Drug Stores, for example) or Tenant in Common properties. The advantage of the Tenant in Common form of ownership is that the investor can easily lower their investment risk by diversifying their portfolio, while still investing in asset classes with which they are familiar.

Contact Christina Porter at (877) 4TM-1031 or Christina@tm1031exchange.com. TM 1031 Exchange assists investors and planning and executing real estate investment strategies.