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The Perfect Storm For Rental Apartment Investments



Multifamily Apartment Properties demand continues to remain strong. Homeownership rates are at 1970-1980 levels as a result of downsizing by “Boomers,” the desire by Millennials to delay or abandon plans to purchase a home, and the new wave of Generation “Zers” entering into the housing market.

Rental Apartment vacancy rates are at their lowest levels since 2000. 

 

There is an abundant pool of debt and equity capital available for Class A, B & C Rental Apartments from GSE lenders, Banks and Non-Bank lenders. This includes construction financing, turnaround/repositioning capital and long-term permanent loans. Purchasing rental apartment assets using inexpensive 10-year fixed rate financing is an attractive strategy for 2020, especially if you can find a good multifamily asset in a growing secondary or tertiary market. This approach should significantly mitigate the Market uncertainty risk during the next cycle.

 

Rental Apartments can generate very attractive (partially) tax-sheltered returns that keep track with inflation. Even greater returns can be achieved through modest capital expenditures in cosmetic upgrades, new energy-efficient appliances and “Smart Home” devices in each unit creating more value and higher rents.

 

Apartments can be refinanced tax-free for as long as they are owned. The prudent use of leverage is recommended, however.

 

New “Green” Class-A, Branded service-oriented Apartment Communities with state-of-the art technology features are now satisfying needs that have traditionally driven condominium demand. Significantly lower price-points, coupled with the flexibility of easily being able move to another Community within their Brand, makes this a very attractive alternative to purchasing a condominium residence.

 

50% of U.S. renters spend 30% or more of their income on housing. The lack of affordable housing is a critical issue in many communities throughout the U.S. This will continue to intensify over the next 5-10 years as roughly one million new households per year are projected through 2025. In addition, 3 out of every 4 new jobs in the U.S. will come with relatively low wages, further escalating the demand for rentals. If you can find aging 1970 and 1980 multifamily assets in a good Market that can be rehabbed and updated, there is plenty of capital for available for executing this strategy assuming the returns support the capital investment.

 

Finally, while interest rates have continued to decline, cap rates have continued to be relatively stable in most markets, with the exception of those coastal high barrier-to-entry markets. As debt service decreases, cash flow increases.

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