There has been a lot of buzz about multifamily properties recently between agents urging owners to sell while the market is ripe and investment firms promoting them as the best option for more sophisticated investors.
Is this a great time to invest in multifamily housing, are income based apartments the best option, and what are the real pros and cons?
How do Income Based Apartments Work?
Income based apartments – also known as rent subsidized apartments – are regular properties, designated by landlords as low income or affordable housing for which tenants can take advantage of public housing subsidies.
This U.S. Department of Housing and Urban Development (HUD) program, called The Housing Choice Voucher Program (HCV) and formerly known as Section 8, provides housing vouchers to low income families, the disabled and elderly. This enables these individuals and families to select their own housing and pay as little as 30 percent of their adjusted monthly income while the federal government picks up the tab for the rest.
If you already own single-family homes, townhomes or apartment buildings, you may also be able to rent them to HCV tenants.
The Pros and Cons of Operating Rent Subsidized Apartments
Clearly one of the biggest advantages of choosing to rent your investment properties as income based apartments is that you receive payment directly from the government every month like clockwork. No more having to worry about tenants paying or throwing off your cash flow when they are late.
Some may question the quality of tenants which qualify for HUD assistance and view low income renters as bad renters. This certainly isn’t always the case. Of course there are bad apples among every renter pool, but should these tenants be found involved with drugs or any crimes, they can instantly lose their rent subsidized apartments and any future housing assistance.
So why isn’t every investor renting their properties in this way? Daniel Kattan, founder of Property Investment Advisors in Miami, who specializes in assisting real estate investors with property management and leasing their properties as HCV rentals, points out that obtaining property approval is the biggest obstacle. In a recent interview he said, “While Section 8 is one of the best ways for investors to rent their properties right now, it does require inspections and ensuring that properties are up to standard. Unfortunately, those without the experience and right guidance can find this a very frustrating challenge.” On the upside, that means those who have the patience and care about maintaining their properties have access to long waiting lists of interested tenants.
How do Multifamily Properties Stack up in the Current Market?
Like all other forms of real estate today there are many discounts to be found on multifamily buildings in foreclosure. This, combined with attractive mortgage rates, makes leveraging these properties incredibly attractive. The added advantage of these properties is the ease of earned appreciation through improvements that can be used to raise the value during both good times and bad, creating a security blanket and safe haven for those concerned about preserving the ability to resell in the future.
More experienced investors also recognize that apartment buildings offer easier management as well as lower cost per door, thus producing a higher return on investment.
However, while there has been a lot of hype about multifamily in investment circles with various groups raising private capital to invest through various vehicles, could it be becoming too popular?
Brecht Palombo of DistressedPro.com commenting on a year-end bank report on distressed assets said, “The nation’s banks have managed to reduce the overall burden of troubled multifamily loans and REO by more than 28 percent over the last 12 months. This doesn’t change the fact that nearly 1,000 banks have multifamily loans in some stage of default. Savvy investors who know their local market and dig into the real statistics and data themselves have a real opportunity given that rents are increasing and these assets need to be sold.”
What are Your Other Investment Options?
With more than 2 million foreclosures expected this year, and areas like South Florida seeing triple digit spikes in lender possessions in the wake of the recent mortgage settlement, there may be masses of single-family REOs out there. While these can also be rented through the government’s housing assistance programs and may be within easier reach of individual real estate investors, they also mean a lot more management for those trying to build up sizable portfolios and cash flow levels.
Taking a peek into the raw data directly from banks on their distressed assets reveals a large percentage of commercial REOs and a potential sweet spot among construction REOs, which made up over 40 percent of all bank-owned properties at the beginning of the year. However, if you plan to go down this road, you had better be flush with liquid cash and be prepared to do extensive due diligence.
Three Pillars of Rent Subsidized Apartment Investing
If multifamily buildings and income based apartments stand out as the best investment for you, there are three critical factors which will help ensure your success and the best returns.
1. Tenant Screening
Don’t rush to rent to the first renters who come along. Be meticulous in your screening. The better job you do the less turnover you will see. Conduct extensive background checks and even consider visiting them at their current homes to see how well they keep them.
2. Become a HCV Pro
The better you know the system the easier you can navigate it. If you don’t have room for this in your schedule, hire a property manager who knows these programs inside and out and can handle all of the paperwork for you.
3. Thorough Research
Learn to put on your blinders and block out the hype and distractions in the news, and dig into the real stats while keeping an eye on trends and macroeconomic factors. Income based apartments can be a great investment; just don’t make the mistake of over paying or investing in a declining area.