If you’re looking to invest in residential real estate, is it better to buy single-family or multifamily housing? This is one of the first questions you need to answer as a real estate investor, and the debate over whether to invest in houses or apartments is as old as the hills they’re built on.
Deciding Between Investing in Houses or Apartments
Some topics that would spark differing opinions are:
- Investing in houses is simpler to finance and requires less start-up cash, but you can expect a greater return per unit on apartments.
- More units in a multifamily community mean less dependence on individual tenants and on maintaining a high occupancy rate.
- Outside property management is usually cheaper per unit for apartments than houses.
- Houses tend to be easier to sell than apartment complexes, but they appreciate more slowly in many areas and their prices fluctuate more.
- Investing in multifamily housing often requires greater expertise, as there are many more variables and risks that are not immediately obvious.
Sound Real Estate Investing Means Sticking to the Facts
There are also some preconceptions about each type of property that have the potential to bias investment decisions. You have probably heard these ideas many times before. But should you base your investment decisions on them? Let’s take a closer look at some of the common ones.
Rental Houses Attract Better Tenants: False
One preconception in favor of investing in single-family homes is the idea that houses attract “better” tenants. What does “better” mean? For many investors, a good tenant is someone who is capable of paying their rent and pays consistently on time, takes good care of the rental property, and rents for the long-term. Some may believe that apartments tend to attract lower-income tenants who are only there for a short time, so they care less about the upkeep of the unit they live in.
If you look at the type of apartments built in recent years, though, you’ll notice a trend. Seventy-five percent of the apartments built in 2015 were in the luxury segment, and part of that is because the number of “lifestyle” renters—people who live in apartments because they choose to, even though they could afford to buy—is rapidly increasing. This goes against many of the preconceptions about apartment tenants.
Millennials Are Long-Term Apartment Renters: Somewhat true
There is a long-held, popular belief that millennials prefer to rent rather than buy, and many prefer to rent smaller units in cities rather than larger units or houses in the suburbs. This has largely been true.
According to researchers, since 2012, the lifestyle demands of millennials have driven an increase in newly developed one-bedroom units. Much of this can be attributed to young adults in their 20s holding off on marriage and children, increasing demand for smaller long-term rental units. Many also prefer to rent in urban areas where they can be close to work and amenities, and rental fees for larger units or houses in cities is often out of reach for many young professionals.
These trends will likely remain for the apartment market in the near future. Two-thirds of millennials are under 31, and 22% of them are under 25. Inevitably, most of these 20-somethings will get married, have kids, and require more living space.
At this point, many millennials will buy a house. Their renting and home-buying habits are not so different from the previous generation. Now, they live in rental housing for six years, up from five in 1980, and they buy their first houses at the age of 31, up from 30.6.
But millennials face some obstacles that their parents didn’t—namely, considerable amounts of student loan debt and tougher requirements to receive home loans. These factors have whittled away at the percentage of first-time home buyers on the market from 40% to 32%. For those who aren’t able to buy a house, apartments will likely remain a top choice due to higher expenses for rental houses and larger units.
These facts imply that, while the needs of some millennials may change, many will continue to rent apartments, whether it is a preference for them or not.
Retirees Are Moving Into Apartments in Droves: True
Lastly, there is a strong wave of retirees moving from houses to apartments and there is no sign of that trend slowing down.
Retirees account for a significant part of the population growth in the rapidly expanding cities of the South, and they are significant drivers of the apartment market. For example, one recent survey showed that in Charlotte, which has one of the most vibrant apartment markets in the country, people over the age of 65 are expected to make up around 25% of the city’s market for new units at least through 2030.
Your Real Estate Investment Strategy in Today’s Market
In short, we believe that the multi-family investment market should remain strong for the foreseeable future and investments in multi-family can have advantages over investments in single-family.
Apartment construction is at a 20-year high in 2017 and is still in danger of not meeting demand in the medium term. The multifamily housing market is stable and even booming in many places, while there is increasing speculation about bubbles in the single-family housing market.
Given its health and stability, the apartment market is often seen as a solid investment choice. However, it is also the more complex investment arena, and local expertise is essential.
CWS Capital Partners has more than 35 years of experience investing in and managing multifamily properties in many of the most active markets in the country. We offer a range of services in investment, acquisitions, property management, and in 1031 exchanges. Contact us today to find out how we can help you meet your investment goals.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.