Multifamily Investing VS. Alternative Investing Options Part 1

The differences may seem small at first, but savvy investors always have a preference.

While there’s surely an intrinsic benefit that comes from investing in the multifamily sector, strong financial returns are the reason that most people invest. In that respect, you might be asking: Why invest in multifamily? Why not just buy stocks and bonds? Or perhaps invest in single-family homes or an office building? Well, the truth is that multifamily investing isn’t for everyone, but it is a fantastic option for many people. In this series, we’ll compare multifamily investing to placing funds in several other popular types of investments, including other types of commercial real estate, single-family homes (and multifamily with less than 5 units), REITs, stocks and bonds, and private equity.

Multifamily vs. Other Types Of Commercial Real Estate 

First off, it should be stated that multifamily is the largest sector in commercial real estate, and, in general, has the most stable demand. Nearly half of all commercial real estate funding goes to multifamily investments. In essence, while businesses may see increased or decreased needs based on economic and market factors, people will always need somewhere to live. Keep in mind that some of the most popular types of non-multifamily commercial real estate include the major sectors of industrial, office, and retail properties, as well as smaller niche sectors, such as hotels, parking garages, and even marinas. 

Multifamily vs. Industrial 

In today’s commercial real estate market, industrial is second only to multifamily when it comes to popularity and performance. Industrial real estate has both benefits and drawbacks when compared to multifamily. First, it should be noted that far fewer lending options are available for industrial properties when compared to multifamily ones; for instance, Fannie Mae and Freddie Mac multifamily loans, as well as HUD/FHA multifamily loans are not available for industrial properties. Industrial tenants tend to lease properties for far longer periods (5-10 years+) than multifamily tenants (most apartments operate on one-year leases). This is usually great during the first few years of a lease, as there is zero turnover or new leasing costs. However, things can turn more stressful as a lease nears its expiration date, as the cost of a single vacancy in an industrial property far outweighs the cost of a vacancy for a multifamily property. Leasing aside, industrial properties generally cost far less to manage; unless a large industrial tenant wants some form of tenant improvement as a condition for signing the lease, most tenants would simply prefer you to stay out of their hair. Plus, since many industrial tenants sign net, double net, or triple net leases, they will often take care of a large portion of the tax and maintenance costs. While industrial real estate does have a lot of benefits, it can be more difficult to invest in it (compared to multifamily), particularly if you don’t have a lot of upfront capital. Part of this may be due to the fact that there are simply fewer syndicators as well as fewer networks of investors operating in the industrial sector as compared to multifamily.

Multifamily vs. Office 

The office sector is usually the third-largest commercial real estate sector after the multifamily and industrial sectors. In contrast to multifamily real estate, office real estate is often less time-intensive, though it’s significantly riskier. When compared with multifamily tenants, office tenants (like industrial ones) are comparatively much larger, so one vacancy can still hurt overall rental income far more than it would for a multifamily property. 

When compared to industrial investments, office property investments are somewhat riskier, though they can be quite profitable. Though office tenants still generally sign 5-10+ year leases, they can be far more mercurial than industrial clients. It’s relatively easy for office-based companies to decide to move offices, hire virtual employees or downsize, while it’s somewhat harder for an industrial company to do so. Plus, the office industry has recently been shaken up by shared workspaces like WeWork, which could be making it far less palatable for a company to sign a traditional 5-year lease on office space. No similar market disruptions have occurred in the multifamily space.