Multifamily Housing Heats Up for Investors

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1MultihomeIf there has been anything positive about residential real estate in 2011, it has been the multifamily-housing market. Those who might have bought homes are renting apartments or condos instead, mindful of declining home values and coping with tighter lending requirements.

The latest national data, released in December by the Census Bureau, showed construction permits for multifamily projects skyrocketing.

Investment in rental property also is increasing, but as demand grows, prices grow too. Many of the more desirable locations are long gone, or soon will be.

If you are considering investing in an apartment building, what should you look for?

?Cash flow, buy in the best locations, and buy the Volkswagen in the Rolls-Royce lot,? said Philadelphia real estate broker and developer Allan Domb. In other words, be smart with your money.

Mark Wade, an agent with Prudential Fox & Roach in Philadelphia?s Center City district, said certain locales are consistently very popular. Because of medical students, for example, ?areas close to the University of Pennsylvania or Jefferson Medical Center always seem to make excellent investments,? he said.

Often overlooked by those looking to purchase rental properties, Wade said, is how long a unit might sit vacant.

Carl Dranoff, who has rehabbed or built several large rental projects in Philadelphia, said investing in properties both large and small is happening ?as never before.?

?Broadly speaking, buying bricks and mortar is more tangible than the stock market, over which you have no control,? Dranoff said.

In general, he said, this is a good time to buy rental property because the market has already shifted from one in which people want to own homes to one in which they prefer not to.

Obviously, it?s less expensive to buy existing units than to construct new ones or retrofit a building, although location determines how pricey any property is.

?Consider the condition of the building you are buying,? Dranoff said. ?Even if you buy in a great location but there is plenty of deferred maintenance, the building will end up costing you more.

The goal of any investor in rental property is slow, steady income, so you might want to buy a building in what Dranoff describes as a more established area.

?You?ll pay a little more, and the returns will be low, but you are in this for the long term,? he said.

Look at the taxes. Are they going to be reassessed when you purchase the property? The last assessment might have been 20 or 30 years ago, so you need to decide whether the rents in place will be enough to offset your costs.

Also, Dranoff said, you need to look at the tenants. In this part of the country, the law is pro-tenant, and if you have one with a poor payment history, the difficulty of an eviction will result in a loss of income.

That?s more crucial for a small landlord than for a big one. If you have a four-unit rental, and one tenant isn?t paying ? Dranoff quickly added that the reasons might beyond the renter?s control ? your income will be 25 percent lower.

?Try to lock in good tenants in a multiyear lease with modest rental increases,? he said. ?Because turnover costs are substantial ? it takes down time to get a unit ready, and there are often substantial fix-up costs ? you may build in modest increases, but when you factor in fix-up costs, you might come out ahead.?

Consider, too, whether you will hire a management firm or do that yourself? If you have a single property, it may be easier for you to do it. But for more than one property, Dranoff said, ?would you want to get every single phone call or have a third party as a paid buffer between you and the tenant??

As for financing, he said: ?My advice is lock in the interest rate for the longest period of time. That?s the key to peace of mind.?

Investing for the long term is Dranoff?s recommendation: ?The most successful investors build their portfolios slowly and conservatively.?

Source: MCT Information Services