ABCs of Multi-Family Property Investment


Multi-family real estate is a hot commodity these days. From institutional investors to the first time buyers, multi-family housing is considered a smart investment. Why?

For starters, the multi-family real estate market has not seen the same downturn as the other real estate market. Apartment housing has been in high demand over the past few years since many home owners have faced foreclosure and cannot afford single family housing. Additionally, multi-family housing offers an income annuity.

According to, a marketing research company, the average rent for a 1 bedroom apartment in the United States is $800 per month. Certainly, rent varies by market size (rural and urban) and by quality, but selecting an investment property in a desirable area or high-need community will create an income stream for years to come.

When investing in multi-family real estate, it is important to recognize that not all properties are created equal. Doing your homework to understand the general state of the property and surrounding area is an important step to fully vet your investment requirements. Assessing a building includes items such as current and potential net operating income, repairs needed, structure, location, size, amenities, general condition, security, aesthetics, neighborhood trend, etc.

The good news is that the industry has created the following grading standards when classifying apartment buildings. They are Class A, B C or D.

Class A buildings are typically new, larger apartment buildings in prime locations. They are usually less than 10 years old and include a number of desired amenities like in-unit washer/dryers, pools, gyms, and the latest technology. These properties are usually targeted by Institutional investors and while they generate less immediate cash flow they have a greater long-term appreciation potential.

Class B buildings are older, typically 10-20 years in age. While they are more outdated, they are generally located in good areas with some of the basic amenities noted above. Class B properties are often owned by large investment groups.

Class C are older properties built within the last 21-30 years. They are usually located in working class areas and attract primarily blue-collar workers and even some subsidized tenants. While these properties may be in declining, less desirable areas, they are not necessarily in dangerous communities. The apartment units in Class C buildings are considerably smaller than those in higher graded properties and boast fewer amenities. However, the demand for affordable housing in low-income neighborhoods creates a higher occupancy rate for a Class C property. As a result, the cash flow is positive while the appreciation value may be lower over the long term.

Class D buildings are often considered deteriorating because these properties are older, and located in declining (sometimes less safe) areas. Class D buildings are usually in poor condition which means they have outdated features, and are in need of maintenance to attract tenants. As a result, the vacancy rate is often higher. This requires more hands-on management to oversee the property. All these conditions will negatively impact free cash flow available to the investor.

As an investor, finding the ideal location can sometimes be more of an art than a science. Yes, there is a structured approach to identify properties for sale. You can attend public auctions; work with commercial brokers/bankers; subscribe to real estate trade magazines and network with other industry experts to identify your next purchase. For Class A and B, these traditional approaches are most common.

However, there are many properties (Class C and D) which are not marketed aggressively. These properties are under the radar. They are not marketed aggressively for sale often because the owners are inexperienced or lack motivation to sell. It could be family owned or a group of investors that are at odds on how to sustain the property long term.

This is where personal tenacity and creativity can make the difference. Network with local building managers, drive around the community and communicate your investment desires. The “grapevine” can be a tremendous source for sharing information.

Once you have identified a location that appeals to you and your investment style don’t be afraid to approach the owner. It certainly can’t hurt to test the waters. And while that location may or may not be readily available for purchase, you may find that the owner is aware of other locations in the area that are equally as desirable and within your reach.

In closing, finding the right investment property is the first step to a whole new adventure. Whether you are an institutional investor seeking Class A or B properties or an independent investor seeking the high reward/high risk of Class C and D properties, there is no shortage of options for you to consider. Keep in mind that picking what you want is the easy part. Actually raising capital and structuring a deal is often the biggest hurdle for investors. With bank loans more stringent and credit requirements tighter than ever, “showing the money” can be a quick end to your investment dreams.

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Memphis Buy And Hold is¬†specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 8 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More……


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