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Multifamily Real Estate Investing

Multifamily Real Estate Investing

Investing in multifamily properties is a great option for those looking to get into real estate investing and feel comfortable with the responsibility and time commitment. Done right, they can be a great source of passive income. However, it’s important to have an in-depth understanding of how to find properties that will provide worthwhile returns on your investment, and subsequently acquire them. Crunching the numbers instead of being influenced by extraneous factors will quickly give you comprehensive insight into an overall project.

multifamily investment financing

What is multifamily housing?

A multifamily property is any residential property that consists of more than one housing unit and allows more than one family to live separately. Duplexes, triplexes, townhomes, apartment complexes, and condominiums are all examples of multifamily properties. Buildings with more than four units are considered commercial properties.

As the owner of a multifamily asset, you can either live in one of the units and rent out the others or live in a different property and rent them all out. If you live in one of the units, the building is considered an owner-occupied property. If you don’t live on-site, you’re considered an investor. This is important to know because the rules for obtaining a loan or mortgage are different for occupying owners and investors.

Real estate financing options for multifamily investments

Financing options for multifamily housing investments include cash financing, hard money lenders, banks, seller financing, and peer-to-peer lending. Generally speaking, every opportunity will be different, and which financing route you choose will depend on your timeline, your financial situation, and other factors. As mentioned previously, if you choose to live in one of the units while renting out the others, your property would be considered owner-occupied. This means that when you’re looking for financing options, the second unit’s income will be factored into the lender’s qualifying factors and may make it harder to find a loan.

How to buy multifamily properties

Much like purchasing a single-family home, there are real estate websites such as LoopNet.com that allow you to filter results for the type of property you are looking for. Another option is to work with a real estate agent who specializes in multifamily housing. They may have a greater understanding of opportunities in your area and even some that have not yet hit the market. If you’re looking to invest in a duplex, triplex, apartment building, or condominium complex, you can begin your search with this checklist:

  • Location: Location is one of the most important factors for real estate investors, particularly for multi-family properties. You should choose an area with high employment, well-maintained neighborhoods, population growth, and where housing is in high demand.
  • Number of units: Evaluate the property as a whole. Investors should consider the number of units in the property, including the number of rooms in each unit. If you’re a beginner, we recommend beginning your real estate search with three types of multifamily properties: duplexes (two units), triplexes (three units), or four-plexes (four units). Typically, these properties have the most upside with the least amount of risk.
  • Potential income: The next step is to determine how much income a property can generate. There are websites such as Rentometer.comZillow, and Realtor.com that let you analyze rental rates based on the size and location of your property. If you’re looking to remain conservative, you can use the 50 percent rule. As the name suggests, you should estimate your operating expenses to be 50 percent of the gross income. So, if a rental property makes $40,000 per year in gross rents, you should assume $20,000 would go towards expenses. This does not include the mortgage payment.

multifamily property financing

The benefits of multifamily investing

Some benefits you can expect when investing in a multifamily property and which will make your investment worthwhile include:

  • Greater cash flow: Unlike single-family properties, which generate one source of monthly income, multifamily properties draw rents from multiple units.
  • Less risk: When investing in single-family rentals, income is lost when the home is vacant. However, because multifamily properties have numerous units, you can offset the loss of income from one vacant unit with the income from others.
  • Taxes: You can make more income by renting to multiple tenants while only paying taxes on one building. You can also write off some of your home maintenance as a business expense and prorate part of your mortgage interest payments.
  • Scalability: With multifamily investments, the multiple units involved count as multiple properties instead of a single-family home representing one property. It’s a great step towards growing your real estate investment portfolio and possibly venturing into mixed-use and/or larger apartment properties.

The challenges of multifamily investments

Despite all the benefits of investing in multifamily properties, there are some downsides, which include the following:

  • Multiple units = higher cost: Multifamily investment properties usually cost more upfront. You also need to factor in the maintenance costs of multiple units.
  • Being a landlord: Finding and managing tenants is a time commitment. If you live near your tenants, you may get knocks on your door throughout the day with maintenance-related questions. And you’ll need to feel comfortable screening and negotiating lease terms with your tenants.
  • Selling the property: It can be more complicated to sell a multifamily property that has tenants because you’ll have to coordinate showings and appraisals.

multifamily investment

Setting yourself up for success

On top of the considerations we’ve outlined, does the property allow for a healthy return on your investment—in terms of both time and capital—or is it a deal that’s too good to be true? Performing your own due diligence is critical to determining which properties will allow you to extract the most value. Additionally, knowing when to say no to a deal is just as important as knowing which projects are worth it.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

It goes without saying that the global toll of the COVID-19 pandemic has been substantial. Like many other industries, the real estate lending sector has also been impacted. However, the market is still functioning, and investors still have access to financing. But how that funding is accessed, as well as the terms and structures of loan packages, have changed slightly to reflect the new environment. In this article, we’ll explain what investors should be aware of and how construction lending can evolve as the nation recovers from the pandemic.

hard money lending

Americans on the move: How some multifamily and single-family markets have changed

The pandemic has allowed many residents living in high tax and cost-of-living areas to move to locations that are less-densely populated and have cheaper costs of living. John Burns Real Estate Consulting found in a recent survey that 59 percent of new single-family rental tenants are relocating from urban locations, with 41 percent of new tenants moving from other suburban locations. Only 32 percent of new single-family tenants moved from apartments, meaning single-family homes are not enticing apartment renters to transition to detached houses or townhomes in large numbers. Instead, renters are benefiting from what they likely perceive to be more livable locations.

The 2020 U.S. Moving Migration Patterns Report from North American Moving Services shows Illinois, New York, California, New Jersey, and Maryland to be the top five states that people left. The most popular states for in-migration were Idaho, Arizona, South Carolina, Tennessee, and North Carolina.

Idaho led with inbound movers in 2020, as 70 percent of its population was moving in and 30 percent moving out, followed by Arizona with 64 percent inbound and 36 percent outbound. Tennessee and South Carolina both had 63 percent moving in and 37 percent moving out, while North Carolina had 61 percent inbound and 39 percent outbound.

Rounding out the top eight states for inbound movers were Florida, Texas, and Utah. Phoenix, Houston, Dallas, Atlanta, and Denver were the cities with the most inbound movers.

Suburban locations will play vital roles in the success of single-family rentals moving forward, including build-for-rent (BFR) communities, which are typically groups of single-family homes that benefit from the professional management and amenities of a full community. BFR communities are usually located near hospitals, military bases, and job centers with great walkability.

How private money lenders have navigated the lending market

Private money lenders have approached the recovering market in new and different ways. Some pressed pause on transactions initially to focus on their current portfolios, while others continued to fund new projects. Those that continued to lend may have made adjustments to their loan guidelines. These changes could have included:

  • Reduced loan-to-value (LTV) ratios; the industry average LTV ratio was around 70% before the pandemic and has now dropped to approximately 65%
  • Removal of at-risk property types from deal pipelines, such as retail and hospitality
  • Addition of more resilient property types to deal pipelines, such as residential and multifamily
  • Requiring or increasing interest reserves
  • Working with more experienced borrowers with higher levels of liquidity

There is also a group of lenders that are choosing not to make any adjustments to how they structure their financing packages. They’ve continued with business as usual, enduring the delays and adjusting for possible new market risks.

How traditional lenders navigated the lending market

Mortgage financing availability was firmly tightened at the onset of the pandemic and at one point reached its lowest level since December 2014. This tightening was driven by most lenders removing their products’ availability to borrowers with low credit scores and high LTV ratios. In addition to the adjustments to LTVs, maximum loan amounts have decreased across the industry.

Lenders like government-sponsored enterprises Fannie Mae and Freddie Mac have cut their lending volumes and made their underwriting more conservative. Importantly, they have instituted reserve requirements that require borrowers to put money in escrow for 9 to 12 months to cover future payments. In the past, they have financed up to 80 percent of a purchase price without reserves. This generally allowed real estate investors to acquire an asset with as little as 20 percent down.

Conclusion

Unlike traditional lenders who have strict regulations, private money lenders are nimble and can quickly pivot to meet changing market demands and unique circumstances. This has been more apparent throughout the pandemic, an event that has forced many lenders to adjust to an unexpected environment and which may result in some mitigation measures continuing into the near future.

With the speed and guidance of experienced and trusted lenders, commercial real estate developers and investors can continue to move forward and succeed, even in the midst of a market downturn.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

Five policies from the Biden administration that could affect the multifamily housing industry

Five policies from the Biden administration that could affect the multifamily housing industry

Although the 2020 election felt more like an election week than an election day, ultimately Joe Biden emerged as the new President of the United States. As the smoke has cleared on the election itself, attention has turned to President Biden’s administration. As private equity lenders, we are naturally examining what the new administration will mean for the real estate development market. Specifically, what will the new administration’s policies mean to a housing market that has shown strength despite an economy that has been heavily impacted by the pandemic?

real estate investment market report on the multifamily housing industry

Capital Gains Tax Increases

Many owners of multifamily property face capital gains taxes when they sell their buildings. Currently, the maximum capital gains tax rate for assets held over one year is 20 percent. For taxpayers earning over $1 million, President Biden would like to increase this rate to 39.6 percent. In addition, he has proposed taxing unrealized capital gains at death and eliminating step-ups in basis, which adjust the value of an asset for tax purposes upon its inheritance. The details on how this proposal would work are as of yet unspecified.

 Elimination of Like-Kind Exchanges

President Biden has also mentioned eliminating like-kind exchanges, which allow investors to exchange their properties for other comparable properties without recognizing the tax implications of gains or losses. Such exchanges play a role in the multifamily housing sector by encouraging investors to remain vested in real estate while allowing them to shift resources to properties that better fit their portfolios or change geographic locations.

 Expansion of Affordable Housing 

President Biden has said he will invest $640 billion over 10 years to provide affordable, safe, and energy-efficient housing near schools and jobs. The idea is to reduce the strain of commuting in order to promote employment retention, create better jobs for Americans, and improve school performance. $100 billion of that amount would be for an “Affordable Housing Fund” used to provide incentives to develop or rehabilitate low-cost, energy-efficient housing where there are supply shortages.

According to his plan, “These funds will be directed toward communities that are suffering from an affordability crisis and are willing to implement new zoning laws that encourage more affordable housing.”

Though well-intentioned, this policy, unfortunately, may not do enough to offset the increasingly prohibitive costs of construction in some of the cities most in need of affordable housing.

That said, President Biden also plans to provide tax incentives for the construction of more affordable housing in communities that need it most. This includes expanding the Low-Income Housing Tax Credit (LIHTC), a provision intended to incentivize the construction or rehabilitation of affordable housing.

The President has also promised to help more Americans achieve homeownership by providing a down payment tax credit of $15,000. The credit would be available to homebuyers immediately. This additional financial flexibility could also help spur more activity in the national housing market. Moreover, the new administration has raised the possibility of additional discounts for educators and first responders.

If passed, in addition to being beneficial for those in dire need of housing, this initiative could mean good news for real estate investors, as it may increase activity in lower price tiers.

 Tax Credits for Sustainable Energy Technology 

The Biden Administration is also likely to expand the Solar Investment Tax Credit (ITC), a tax credit for solar energy systems installed on residential and commercial properties. Individually, the residential and commercial tax credits in the program each equate to 26 percent of overall investments in solar-enabled properties. The ITC then decreases according to the following schedule:

  • 26 percent for projects that begin construction in 2021 and 2022;
  • 22 percent for projects that begin construction in 2023; and
  • For projects beginning construction after 2023, the residential credit drops to zero, and the commercial credit drops to a permanent 10 percent.

Eligibility for the tax credit is based on “commence construction” standards. The IRS has set guidelines that explain the requirements taxpayers must meet to claim the credit.

how can sustainable energy impact multifamily housing

The Removal of the SALT Cap

In 2017, Congress passed the Tax Cuts and Jobs Act, which put a $10,000 cap on the itemized tax deduction for state and local taxes paid. Previously there was no limit. The new administration has discussed removing the cap and reverting to the previous policy of unlimited deductions. Since tax rates vary by state and municipality, removing the state and local tax (SALT) cap would mostly benefit those living in higher-tax areas. Moreover, it could incentivize those who have migrated away from these high-cost areas during the pandemic to move back. According to ABC News, “The locales with the highest average SALT deduction, which would all see the greatest benefit, are – in order – New York, Connecticut, New Jersey, California, Washington, D.C., Massachusetts, Illinois, Maryland, Rhode Island, and Vermont.”

On the flip side, the Tax Foundation notes that if the new administration repeals the SALT cap, the Federal Government could lose $673 billion in revenue over the next ten years.

Whether or not these policies come to fruition, they present both opportunities and issues for the ever-evolving housing market in the U.S.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

Co-Living: What Is It and Will It Survive COVID-19?

Co-Living: What Is It and Will It Survive COVID-19?

A housing option that was once utilized primarily by college students is becoming more popular among young professionals across the globe. With rent prices rocketing in many primary-market cities like New York, San Francisco, Seattle, Washington D.C., and Chicago, urban life is out of reach for many, unless they pool their living resources in a co-living situation. This trend can be a good opportunity for investors as well as a great way for young people to live in urban centers. But will it survive the pandemic?

What is co-living?

Co-living isn’t what it used to be – it’s evolved from a few friends sharing a home to strangers sharing fully-furnished apartments. Landlords have found that by fully furnishing apartments and renting them out by the room, renters have the opportunity to have a nicer home (and better amenities) without breaking the bank.

In this new take on co-living, residents get a private bedroom in a fully furnished home but share common areas like cooking and living spaces. Co-living became popular in major cities as a form of affordable housing for students, young workers, digital nomads and city newcomers. Residents are attracted to this way of living due to the affordability, flexibility, included amenities, and sense of community.

Co-living was first popular in cities such as New York and London. Over the past few years, it’s now spread to other areas including San Francisco, Los Angeles, Chicago, Seattle, and Washington D.C. It may soon be coming to a city near you.

Why did co-living become so popular?

The increase in co-living springs from high costs of living in major cities, but also from the sense of community and belonging that is inherent in this form of living—qualities that are important to millennials. As you would expect, this trend has been most popular with younger generations, especially digital nomads who want to travel often and don’t want to worry about the upkeep of a home. This is the ultimate free lifestyle.

Benefits of co-living for investors

One reason co-living has become a popular choice for investors is the hope for higher rates of return on their properties. Real estate investors get higher net rent premiums, net operating income, and occupancy rates.

Higher rent premiums
Co-living floor plans hold nearly twice the number of bedrooms as traditional apartments, resulting in residents occupying less square footage in areas where space is at a premium and property values are high. According to JLL research, “co-living assets can capture a more than 30% net rent premium.”

Higher net operating income
By increasing the density in units and renting by the bedroom, property managers can secure higher rents per square foot, resulting in higher net operating income

Higher occupancy rates
Another reason why investors have been attracted to this trend are the high occupancy rates. As previously mentioned, multiple factors contribute to these higher rates, including the lifestyle’s affordability, flexibility, and better amenities. Even when there are vacancies in co-living spaces it’s still possible for the unit to produce anywhere from 30-50% higher than normal rent for a similar, single-occupancy unit.

Reduce the risk of sub-letting
In areas where rent is high many tenants sneak in a roommate without making the landlord aware. Co-living spaces all but eliminate this common risk of sub-letting since tenants don’t need to fill open bedrooms. Instead, the property manager or landlord can vet applicants.

What are the disadvantages of co-living for investors?

Investors can be wary of investing in co-living properties due to higher turnover rates, non-standard lease terms, and the expenses related to turning traditional apartments into co-living spaces. Some may find it a challenge to create and organize the events that support the best communal living experiences, as well.

COVID-19 and co-living spaces

Industry analysts remain optimistic about the co-living sector. A lot of co-living companies and complexes are in highly populated cities, and near major universities. Gregg Christiansen, president of co-living company Ollie, stated in a Fox Business interview that “Most of this demand came from students that didn’t have the opportunity to go home to their families or another location to go to when the campuses closed. It gave accessibility and a seamless transition for a lot of people that were displaced when college campuses closed.”

Co-living spaces have created an alternative to studio apartments, which are typically 30 percent to 40 percent more expensive. In fact, the social atmosphere that residents enjoy in co-living environments help bring a sense of normalcy while many are by themselves at home.

It may seem counterintuitive to quarantine orders to be sharing spaces with others – yet many co-living companies have found ways to ensure safety for their tenants. In addition to these new safety measures, they have also employed new methods to entice renters throughout the pandemic. One called Starcity, for example, has been offering concessions for housekeeping, access to online workouts, and rent discounts.

The future of co-living spaces in commercial real estate

While co-living hasn’t quite disrupted the multifamily sector, it could be a trend that steadily increases in popularity. Reza Merchant, founder of UK-based co-living company The Collective, told Forbes “The pandemic is going to be good for community. People are appreciating the value of connection more than ever and will look for it in the way that they choose to live in the future.”

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

Multifamily Guide: How to attract Generation Z renters

Each generation has its own quirks. Gen Z is no different and appears to be more practical than others. While we’ve seen that some generations are happy to rent forever, Generation Z sees it as a stepping stone. In fact, 97 percent of them want to buy a home someday. Now, most of them won’t leave their parents’ home and immediately buy a house. This means you still have a chance to reach them. With this in mind, let’s cover how multifamily operators can reach Gen Z where they are spending most of their time – online.

Social media marketing

Gen Z is more reluctant to use traditional social media channels such as Facebook. Instead, try reaching out to them via a partnership with influencers and creating a strong presence on channels like Instagram, Snapchat, YouTube, and TikTok. Influencer marketing is a useful way to spread the word to younger renters. Consider setting up a referral program to your residents in exchange for promoting your community.

Online video content

It’s official. Gen Z spends the least amount of time watching TV. They spend most of their time watching online videos, so consider sharing video tours of your property. To help keep their attention, be sure the content is concise, engaging, digestible, and shareable.

Mobile-friendly website

Generation Z spends an average of 26 hours per week on their mobile phones and uses laptops rather than desktops. They also grew up with Google and Siri in their back pockets, so they expect fast and easy interactions. Forget about emailing or calling, they want to ask a question and have an immediate answer. Multifamily websites are no exception, property managers will want to make sure that their website is optimized for mobile and accessible on the go, from any device.

You might ask yourself; how do I fill this need of instant gratification? Try adding chatbots. Chatbots are programmed to interact with users. They get to know a user by asking a series of questions and are then able to provide the user with answers. For example, a chatbot could ask a user where they want to live, how much they want to spend, and what amenities they want. Then based on those preferences, respond with information. Chatbots could also help with managing maintenance requests. A renter can interact with the chatbot making them aware of a broken A/C unit and schedule the maintenance. Allow Gen Z renters and other potential renters to interact in the way they want.

How to appeal to Gen Z renters

Keep it simple, mobile, and digital. Make everything accessible online– basic communication, rental applications, community news, virtual tours – all these can and should be managed online.

Create a highly rated online reputation

Be authentic. This generation is keeping up with what you’re posting to social media and what is said about your community online. Stay consistent and realistic with all your posts and responses to online reviews. If you receive a bad review, it’s not the end of the world, just be sure to respond immediately. For Gen Z, seeing the negative reviews might provide balance and will allow you to show how you deal with conflict in your community.

Pricing

As natural researchers, Gen Zers know where to look for the best deal and answers. Property managers must keep units priced appropriately to capture this group. If you have your apartments listed above market value, they won’t be attracted to your community.

Gen Z is a largely untapped market waiting to be recognized. If your real estate business is proactively seeking to tap into this market and improve resident engagement, implementing the technologies and content strategies that appeal to this generation should be a large part of your strategy. If companies manage to incorporate lively video posts and conversation-starting events into their marketing routines, they will increase their odds of winning over this generation.

 

Related article:  The growing impact of Gen Z on the Multifamily Housing Industry

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.