When most new real estate investors think about buying an investment property, they go right to thinking single-family homes. However, there's another option: In addition to buying, wholesaling, or flipping single family homes as investment properties, there is also the real estate sector of multifamily commercial real estate, like apartment buildings and complexes.
Commercial multifamily is used to describe residential properties with more than five units. Anything 4 units and below is considered residential multifamily.
In residential real estate, the profit centers that I talk about in the blog (What are the profit centers of real estate?), cash flow, tax savings, appreciation, equity build, hedging against inflation, and leverag all exist. But what separates commercial real estate from residential is how property is valued. Value is based more off the performance of the property than its market comparables. A property’s performance is determined by the Net Operating Income (NOI) which is the gross potential revenue minus the total operating expenses without taking into account the debt service. You can have two 100 unit apartment complexes in the same neighborhood, but if one building is generating more revenue or has lower expenses, that property will have a significantly higher value. This makes the risk of a commercial multifamily investment more in the control of the property manager and operator. See my blog on ways to increase value on an apartment building.
There are quite a few different subtypes within the multifamily commercial real estate genre, such as:
Garden style apartments: Typically found in the suburbs, garden apartments are usually walk-ups and two to four stories high.
Mid-rise apartments: Mid-rise apartments have five to nine stories.
High-rise apartments: High-rise apartments have over 10 stories.
In addition, multifamily commercial property is also divided up into separate asset classes. As an investor, you'll have the following asset classes to choose from:
Class A: Class A properties are essentially luxury buildings. They offer high-end amenities like pools and fitness centers. These properties garner the highest rents, but they also require the biggest investment.
Class B: Meanwhile, Class B properties still offer a good amount of value in terms of quality, location, and function, but they may not have as many amenities.
Class C: Class C properties are still functional but generally outdated. These properties offer the most affordable rents.
Finally, other sectors include office buildings, retail spaces, and industrial properties, but our firm is focused on one subsector of commercial real estate at this time - multifamily.
