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Is Multi-Family Worth a Look for Your Portfolio?

02/05/2015 10:17 am ET | Updated Apr 07, 2015

More reports, studies and surveys are telling us that demand for rental properties is rising. It's to be expected when:

• Millennials are beginning to move out of their parents homes, but most can't buy due to credit or down payment situations.
• Though jobs reports are showing improvement, much of it is due to people dropping out and no longer looking, so renting is still more available to many than buying.
• College graduates aren't finding the high paying jobs they were expecting in many industries, though some are doing well, such as technology.
• The Boomer generation isn't always downsizing into another purchased home. Many are choosing to rent and stay more mobile in their retirement.
• There is overall a lack of confidence in home prices and near term appreciation.

The law of supply and demand is always in charge, and rental demand is rising while supply is struggling to keep up. For this reason there is a definite "boom" in multi-family property construction. Investors have noticed and are fueling the boom with their money. CBRE, a global real estate company, issued their U.S. Multi-family MarketView Report recently. It predicts a rosy near term future for investors in the multi-family market.

Multi-family investment is definitely leading the commercial real estate sector in funds infusion. Brian McAuliffe, a senior managing director at CBRE, cites three trends that represent recent investment activity:

1. Total investment activity is now seeing a rise in private non-institutional buyers.
2. More foreign capital is moving into the multi-family market.
3. REITs are less active in multi-family than in the recent past.

A verifying factor is the average price of an apartment unit. It has risen 5.9 percent year over year. According to Jed Kolko, chief economist at Trulia, "Nearly all of new household formation right now is renters. Young people are starting to move out of their parents' homes, and both young and older adults are having a hard time buying houses."

Multi-family properties can be a good expansion of a real estate portfolio. They attract investors with economy of scale, lower purchase and maintenance costs per unit. In the third quarter of 2014, multi-family sales volume rose 28 percent over the same period the previous year. More investor and tenant demand is spurring more construction, and that is increasing demand for funding.

Lenders are responding with some attractive terms and rates because they see the strong demand and cash flows. They're not getting careless however, continuing with conservative valuations and loan structure. This has led to an increase in interest for crowdfunding. This is where some small investors can get their foot in the door.

You don't have to buy one or more full units with crowdfunding. You simply invest your funds in the project and participate in the profits according to your share of ownership. It's a way for small investors with limited funds, sometimes just a few thousand dollars, to own a share of income-producing multi-family properties.

If you can fund a larger purchase, smaller multi-family properties like duplexes to four-plex properties are a great way to break into the market. You get the economy of scale that multiple units under one roof generate. This increases ROI and cash flow due to lower per-unit expenses. You can even expand your funding resources if you live in one of the units. VA and FHA loans may be available if you live in one of the units.

As the supply of foreclosure units continues to shrink, it may be time to look for opportunities in the multi-family market.

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