Over the last decade, real estate investments increased across the country as a way to generate income and build wealth. While investors often gravitate to single-family homes, multifamily properties can supplement a stock portfolio because they can hedge against inflation and tend to have less volatility.
Stability
Many investors choose multifamily investments for their stability. Apartment complexes can be more predictable than single-family homes because of the large number of tenants, reducing risk and increasing profits. They tend to provide steady income through rents and hold their value better than stocks. The current housing shortage is driving demand and leading to higher levels of appreciation. In the right market, values could continue to rise even in declining economic conditions, serving as a hedge against inflation.
The average annualized rate of return for multifamily properties is 9%. This means investing $500,000 in multifamily units could produce an income of $45,000 annually.
Appreciation
As property appreciates, you build wealth. Several factors determine the level of appreciation achieved. These might include the following:
• Buying below the current market value.
• Existing tenant rents cover all overhead associated with owning and operating the property but are below the surrounding market, leaving room for rent increases after improvements.
• The complex is located in a high-growth area that will drive both rent growth and appreciation.
Property Improvements
One effective way to force appreciation is through strategic property renovations or adding popular amenities. Residents often pay more for exterior amenities such as dog parks, gyms, and swimming pools. In-room amenities that attract residents include smart locks and thermostats, fireplaces, and balconies.
Rents
Increasing the appeal through amenities raises the property value and escalates demand, making room for more significant rent increases. Rental income often provides ongoing cash flow for investors, provided it exceeds operating expenses and renovation costs.
How Investors Make Money
Multifamily properties generate revenue through rents, which can create cash flow during the years of ownership. The property value will also likely increase, leading to capital gains and more profits for investors when the complex is sold or refinanced.
Multifamily commercial real estate returns profits to investors through:
• The tenant rents create monthly cash flow to cover operating costs and pay investors distributions.
• Property improvements drive rent growth and appreciation.
• Apartment buildings in high-growth areas benefit from higher appreciation due to market conditions.
Commercial real estate tends to operate at a regional level, providing access to profitable deals even in a declining market. To effectively build wealth, the investment must earn enough revenue to pay operating costs plus extra for unexpected expenses. It will also have higher levels of appreciation in areas where values are rising due to wage and population growth.