The Most Common Multifamily Investing Strategies
Multifamily investment strategies vary almost as much as the properties themselves. However, one can look at the breadth of strategies out there and place them in a few general categories.
The multifamily market has almost always been, and more than likely will always continue to be prime investing material. That said, there are many ways to turn a profit from multifamily investing. While there are literally hundreds of different approaches and ideologies behind investment strategies, almost all of them can be nested within one of the following core strategies:
Buy and hold (short-term): In the world of multifamily real estate, “short-term” and “long-term” can be generalized terms. But it wouldn’t be too far off to say that properties being held for less than 5-years (with no significant value-add renovations) could be considered short-term buy and hold properties. Investors often try to scoop these off the market at a discount and resell them later for a substantial profit (if they’re smart-- and lucky). Many commercial mortgages offer 5-year terms, including bank, CMBS, and Fannie Mae or Freddie Mac, and, if a borrower wants to pay off a loan earlier, they’ll simply face prepayment penalties.
Buy and hold (long-term): Like “short-term,” “long-term” can have a variety of definitions, depending on who you ask. However, most properties that are being held longer than 5-10 years could be considered long-term holds. Of course, on the extreme end, some people plan to hold on to a property for 20-30 years or more, and may even wish to leave some of it in a trust for their children to inherit. Both can be amazing ways to generate wealth, but each requires a somewhat different strategy. When it comes to financing properties for long-term holds, borrowers may want to consider a HUD multifamily loan like the 223(f), which offers fully-amortizing loan terms up to 35 years. Life companies also offer fully-amortizing loans (usually up to 25 years), though they only accept Class A assets and often cap LTVs in the 60s. Of course, one can simply keep refinancing, but this can get expensive over time.
Value-add/Rehab/Vacant: Value-add properties are often those in which an investor finds a property (typically an older one or one missing one or more key features), and makes upgrades in order to increase asking rent and therefore, total revenue. Value-add may also come from lowering operational expenses or even repurposing a property altogether (think an extended-stay motel to a market-rate apartment complex). The end value can be in the form of increased net operating income, cap rate compression, or any number of items that ultimately lead to a short-term increase in value.
Fix and flip: Those who can successfully 'fix and flip' a multifamily property (purchase an aged or distressed property, fix it, and resell it for a higher price) can often reap significant financial rewards. In fact, you could say that fix and flip is just another variant of value-add. And, while the term does tend to be more associated with single-family homes, it’s still bandied around in the multifamily space.
New construction/development: It’s no secret that developers generally take on the highest risk and receive the greatest rewards. They often take a project from a piece of raw land to a finished property, securing financing, hiring architects and engineers, and contracting with a construction company (though some vertically-integrated development/construction firms build projects themselves). Investing at this stage can, however, reap worthwhile returns, so long as investors are willing to stomach the wait. A few construction-centric loan products exist to help ease the burdens of the lease-up period, and no-interest options keep costs as low as possible.