Multifamily continues to be real estate’s most in-demand asset class, in part due to its stability and predictability for investors.
Apartment buildings have long been known for its resilience in even-changing market environments. Here is why it is so favourable among investors looking for stability in their investment portfolios.
1. Housing is in High-Demand and Will be For a Long Time (Housing is a Primary Need)
First and foremost, we are dealing with a primary need: housing. Next to food, housing and shelter will always be in demand, no matter which market you are in. An asset class positioned as a provider to a population’s primary needs will continue to see demand in nearly any economic condition.
2. Spreading Risk Across Multiply Units
Layered on top of being in an industry that meets the demand of one of human’s primary needs, each property within a multifamily portfolio has diversification built into it due to its multiple units. Multiple units means multiple customers/tenants, which reduces the dependency of the investment on one or a few tenants.
Take a 20-unit building for example. If one tenant leaves or stops paying rent, that property has a vacancy rate or rent default rate of 5%. Compare that to a single family housing investment such as duplex; your vacancy or default rate would be 50%.
The benefits of owning multiple units goes beyond reducing vacancy risk as well. Operating expenses and capital expenses are also spread out across the number of units in the portfolio.
3. The Price to Buy Housing is Increasingly Unaffordable
In most markets across Canada, housing continues to be unaffordable for many. With an increase in demand and a relatively lower supply in most major markets across the country, the price for housing has been trending upwards as affordability trends in the opposite direction. The chart below shows the increasing cost of home ownership across the country.
As the cost of home ownership trends upwards, demand for rental units increases, providing a strong economic foundation for the multifamily industry.
4. Capitalization Rates Have Shown Stability Over Time
The value of multifamily apartment buildings is determined in large part by using the capitalization rate (cap rate). For a deeper look into how cap rates are calculated and how they are used by multifamily investors, click here to view our webinar covering this topic: The Magical Multiplying Effects of NOI.
Historically, cap rates (the basis of valuation) have seen a steady decline over time. As cap rates decline, value increases. Compared to other commercial real estate asset classes, multifamily cap rates experience less volatility, making it a more stable investment choice for many.
In general, higher cap rates are indicative of higher risk; typically a sign of greater volatility. As the image below depicts, the national cap rate average for multifamily in Canada is lower than that of other asset classes. Additionally, the year-over-year and quarter-over-quarter changes in cap rates are also much smaller in comparison, further indicating multifamily’s stability in the Canadian market.
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About the Author:
Mark Baltazar, Co-Founder of Peak Multifamily Investments
With 18 years of experience in business strategy and corporate consulting on the global stage, Mark brings a wealth of business management and operational expertise to real estate investing. Winner of the Real Estate Investment Network’s Top Player Award in 2017, Mark continues to build strong momentum in growing his real estate portfolio.
His strong analytical background enables him to bring a strategic rigour to portfolio expansion and the assessment of investment opportunities.
With five years of real estate investing experience across various strategies, Mark oversees Peak’s capital raising, client acquisition, partner relations, educational content development while ensuring the company delivers on its promise of helping others build generational wealth through apartment building investing.