Multifamily Housing: Trends and Loans

Multifamily housing has a long history in the US. From city tenements to today’s luxury apartments, the country has experienced many trends. These changes offer an important lesson to investors that buildings which fail to stay current with changing trends do not survive.
After learning about these multifamily housing trends, if you want to purchase your multifamily property or learn how partnerships and syndications finance multifamily assets, read on.

The First Apartments

What would become American apartment buildings first came from the Paris flats occupied by the wealthy and eccentric in 1800s France. Before that, Americans lived in tenements, or the fortunate wealthy lived in townhouses and row homes. The Stuyvesant Apartments, built in the 1860s in New York City, became the first middle-class building to house multiple families in separate quarters. The 5-story building only had 16 units and the advertised luxuries of private toilets and running water.

Affordable Housing

While apartment living is practically a rite of passage for young adults today, it was a bizarre concept in the 1860s. Building owners recruited well-known people like George Custer’s widow, Elizabeth Custer, as flagship occupants to introduce society to this novel idea.

New York City’s population doubled each decade in the 1800s, making multifamily housing necessary. Late in the century, builders realized the demand for respectable, middle-class housing for those who could not afford their own homes, especially in dense cities where real estate was at a premium. Multifamily housing was the solution.

Pre-War Apartments

Apartments built before World War II stand out from their current counterpoints, not just for lack of air conditioning. This era demonstrates how multifamily housing trends can vary from generation to generation.

Affordable Beauty

Surviving pre-war apartments feature high-quality construction and unique designs, even among units within the same building. 9-foot ceilings were the minimum default height, and solid walls provided audio privacy from neighbors. Units also had unique built-in features, from moldings to metalwork.

These types of details stem from cheap labor costs and expensive building materials. Builders worked with lasting materials and sprinkled extra effort on top in inexpensive labor and craftworks, creating unique, beautiful buildings.

Post-War Multifamily Housing

We associate the post-war years with a boom in suburban family life due to the GI Bill’s provision for zero-down payments and low-interest home mortgages to returned soldiers.

Affordable Luxury

Residents experienced exceptionally affordable multifamily housing as developers built single-family homes and multifamily properties at an unprecedented rate. Those new apartments advertised the same luxuries as today’s apartments: air conditioning, pools, and walkable locations near everything a resident could want.

Most post-war properties were 3-5 story walk-ups, but luxury buildings offered elevators. There was no Americans with Disabilities Act at the time to accord access to everyone or laws prohibiting discrimination based on race or family status.

Post-war multifamily housing exemplifies the housing trickle-down effect, when housing originally intended for the wealthy becomes affordable housing in the future. Many buildings built in the 1950s are now reserved for the elderly, low-income, or those otherwise in need of subsidized housing.

Rise of the Modern Apartment: The 1990s

The modern multifamily property materialized in the 1990s. For the first time, garages, swimming pools, country club atmospheres, and internet connections became de rigueur for apartment living.

During the 1990s, the average apartment dweller age rose, and the industry saw more people choose to live in apartments rather than being forced. Much as today, the amenities became a selling point that lured and retained occupants as apartments provided a standard of living that the average person couldn’t recreate in a single-family home.

These trends still exist today. In the 2010s, the number of renters surpassed the number of homeowners in over 20 cities. Today’s renters continue to skew older, with major increases in the number of retirement-age people selecting multifamily housing. Despite the 2008 recession and the COVID-19 pandemic, apartment rents grow, and vacancy remains low. Since the early 2000s, rent has grown at a pace that outstripped the average income increase. To see the 2021’s multifamily market trends, see here.

Multifamily Loan Types

Now that we’ve covered how multifamily housing started, you probably want to know what kinds of loans are available for this investment type.

Many potential investors are hindered by the idea of financing their first investment property, and it’s no wonder. The 30-year fixed-rate mortgage is so popular that it is a cultural touchstone in American life. Anything straying from that model can be daunting when considering entering the multifamily market.

There are just as many similarities as differences between multifamily and single-family properties, but the concept is the same with both. The borrower pays a small portion of their own money, and a lender provides the rest.

Multifamily borrowers will soon see many differences in the logistics of the buying and borrowing process. Lenders may require information on occupancy and leases if you want them to consider rent income for qualification and expect a more thorough due diligence process than buying a personal property.

Remember that multifamily properties fall across the spectrum from duplexes to high-rise, luxury buildings, and less expensive properties are typically easier to finance.

Conventional Loans

Conventional loans through banks, credit unions, and mortgage lenders are a user-friendly way to fund properties conforming to Freddie Mac’s and Freddie Mae’s underwriting standards. They may be fixed or an adjustable-rate and have one of several term lengths.

Conventional loans provide an experience and product most similar to the traditional single-family property mortgage, and with those similarities also come the downsides of traditional loans. They are often unsuitable for larger or more expensive properties. In 2021, the maximum conventional loan amount was only $548,250, but borrowers in high-cost areas could pursue larger loans. Additionally, newly formed corporations may struggle to meet the credit and credit history requirements.

Federal Housing Administration Loans

A popular multifamily alternative to the conventional loan is loans insured by the Federal Housing Administration (FHA). The FHA does not fund the loans; instead, traditional lenders make the loans with the assurance that the FHÅ will pay a certain percentage should the borrower default on the loan.

For investors, FHA-insured loans are an excellent opportunity to get something similar to the traditional residential mortgage. FHA loans are characterized by full amortization, long terms, and low-interest rates. However, they also come with fees and ongoing reporting requirements.

For FHA-backed loans of properties with four or fewer units, the borrower must live in the property as their primary residence.

Fannie Mae and Freddie Mac Loans

Fannie Mae and Freddie Mac loans comprise a large portion of the multifamily mortgage market and are a popular starting point for new investors’ research.

Fannie Mae and Freddie Mac operate via a Congressional Charter, often called agency loans. Like the FHA, Freddie Mac and Fannie Mae do not make the loans; instead, borrowers must apply through approved lenders. After closing, Freddie Mac or Fannie Mae buys the loan.

The agencies offer a variety of loan lengths and payment terms, including interest-only loans that are perfect for properties the borrower intends to flip or refinance quickly.

Bridge Loans

Agency and FHA loans can both take longer than a conventional loan to close, so investors sometimes turn to bridge loans while waiting on the permanent loan to fund. They are also useful when the borrower hopes to demonstrate increased occupancy or rental rate and therefore needs more time to qualify for the permanent loan.

Bridge loans are temporary, so they usually have higher interest rates. Typically, these loans are only written for, at most, two years. However, they may sometimes be extended for an additional year or so.

Veterans Administration Loans

The U.S. Veterans Administration (VA) also insures residential loans for qualifying service members and their families. While most are well known for single-family loans, the VA program insures properties with up to four units.

For borrowers that qualify for a VA loan, it’s a great entry point in your real estate investment career. VA loans for small multifamily properties offer the same great benefits as for single-family homes — up to 100% financing, long terms, low-interest rates, no private mortgage insurance requirement, and no minimum credit score.

Final Thoughts

By looking at past multifamily trends, today’s investors can glean the importance of staying current with changing tenant demands and preferences. Modern buildings lack the durability and quality craftmanship that characterize older multifamily properties, so they risk stagnation and obsolescence much more rapidly than multifamily properties of the past.

When weighing financing options for a multifamily property, remember that the loans described above are only one option. Multifamily assets may also be financed through equity partners who provide capital in exchange for a share of the profits.

If you are ready to start as a multifamily property investor in a syndicate, reach out to the team at Life Bridge Capital.

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