Despite 22 year record high national vacancy rate of 7.8%, the multi-family sector has performed well compared to other asset classes. Several multifamily properties have recently traded at 6.5% cap rates, demonstrating investor confidence in this market sector. I am bullish on the multifamily sector for several reasons.
The U.S. homeownership rate has clearly peaked, decreasing to 67.8% in 2008 from 68.1% in 2007. When the government mortgage spending spree (FHA) slows down, underwriting standards are going to become more stringent. Future loans will probably either require a larger down payment or higher mortgage insurance, making the purchase of a home more difficult. American’s credit has been hurt by the economic downturn; a foreclosure lasts for 7 years on a person’s credit score and makes it difficult for them to get another mortgage. Lastly, folk’s attitudes have changed; I’ve heard several of my classmates at Cornell quip that “renting is the new American dream”. Taken together, these make a strong case for investing in multifamily housing.
So why are vacancy rates currently at record highs? I think that there is a lag effect while transitioning from homeowner to renter. People whom have walked away from their homes are typically in a tough financial position and may not be able to post the security deposit, or have the credit to immediately rent an apartment. Many of the people making this transition have chosen to move in with friends and family until some of the uncertainty about the future plays itself out, rather than commit to a lease. Also, with unemployment hovering around 10%, many renters are switching from renting to living with friends and family. When you don’t have a job it’s hard to pay the rent. As the economy recovers and U.S. homeownership rates continue to decline, there will be an increase in demand for apartments.
Now is a good time to invest in multifamily housing, especially considering the Fannie-Mae loan programs. There are several programs right now, but the bread and butter loan is the Standard DUS Mortgage, suitable for single asset properties with more than 5 units. There are no minimum or maximum loan amounts, terms range from 5-30 years, provide up to a 30 year amortization schedule, a fixed or variable rate, and allow an 80% LTV with a 1.25 DSCR. Additionally, the loan DSCR ratios can be calculated against a 5% vacancy and collection loss.
I know of a 110 unit garden apartment complex that was recently quoted a 5.7% 10 year fixed rate loan with a 30 year amortization. With the likelihood of steep increases in inflation and interest rates approaching certainty, having a 10 year loan fixed at 5.7% may turn out to be a huge asset. In addition to the Standard DUS loan, there are loans specifically oriented toward affordable housing, senior housing and student housing investments. Try getting a loan with terms like this for an office building!
Richard Weidel, a graduate student at the Cornell University Program in Real Estate, can be reached at email@example.com