Garden Style Multifamily
Hi everyone, hoping to seek some insight on Garden Style Multifamily - what’s the craze on it at the moment and why do investors believe they can build to high single digit YoC’s? Am I missing something here; what are the tailwinds as I thought it was virtually impossible to pencil 8-9% YoC in gateway markets. Why is it an attractive sector? Could someone also explain the rent stabilised / rent control element of garden style? How does this differ to normal multifamily investing.
Hey there! You've got some great questions about Garden Style Multifamily. Let's dive in!
First off, the appeal of Garden Style Multifamily is multi-faceted. It's not just about the potential for high single digit Year on Cash (YoC) returns. It's also about the opportunities and stability that this type of investment can offer.
There are simply more multifamily properties than any other property class (besides single family residential), which means there are more players, more transactions, more growth and career opportunities. Plus, multifamily is generally considered lower risk than other commercial asset classes. People always need a place to live, right? So, from a macro perspective, multifamily has always been less volatile than other major asset classes.
As for the rent stabilized/rent control element, it's a bit of a different beast. Rent stabilization and rent control are regulations that limit the amount and frequency of rent increases. In a rent-stabilized unit, for example, the rent can only be increased by a certain percentage each year. This can provide a steady, predictable income stream, but it can also limit your potential for profit.
Now, why is Garden Style Multifamily an attractive sector? Well, it's all about the potential for appreciation. Income producing Real Estate Investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.
I hope this helps! Remember, every investment comes with its own set of risks and rewards. It's all about finding the balance that works for you. Happy investing!
Sources: For those of you in multi-family, What is Your ADDITIONAL Reason to invest in Multi-Family?
Garden apartments are “normal multi family investing” and have been wildly successful simply for cost reasons. You typically build them further out in the burbs so land is cheaper, you’re not building a parking deck and the construction type is cheaper so hard costs are also lower, and in general you can still achieve rents that are just shy of more in-town product. Think about it this way - most residents don’t give a shit about if they live in Type 3 construction or if they park in a deck or not. They just want their unit to look nice inside. I couldn’t even tell you what a wrap deal costs in my city right now. There’s zero point in building one, which is amusing since wrap & high rise is what we did for years. No one is getting 8-9 yields that I know of, but 7 is achievable. Rent stabilization & rent control have nothing inherently to do with garden deals, but garden deals can be rent stabilized.
Adding to this, if you’re buying existing product, it’s far more predictable/less expensive generally on both operating expenses and capital expenditures. No sophisticated mechanicals such as elevators, usually no complex HVAC, plumbing, or fire/life safety items, etc. Biggest expense is the roof (predictable useful life in each MSA), and then usually only have other major items like siding, window, plumbing, or sprinkler replacements or things like stair/balcony rebuilds on older assets. That last point is why institutional LP capital is now looking at 90s and newer product instead of 80s and newer, and most I talk to want 2000 and newer. Allows an asset manager’s time, and your capital, to be spent on offense.
Also, not seeing 8-9% cap rates anywhere. Seeing some 7% cash on cash plays or deals that stabilize at 7%+ untrended yield on cost, but those are the ones getting snapped up. Most deals right now are getting to 6.5%
Thanks guys. What are reasonable rental growth and exit cap rate assumptions for a 5 year hold for garden style multifamily on the West Coast, would love to hear where the market is sitting right now. Also what are the reasonable debt terms you’re seeing in the market?
Exit cap and rent growth are really broad questions, but nationally we are most frequently underwriting 6% exit caps on 5 year holds. Lower if it’s a core deal or maybe core plus deal in a good MSA, higher if it’s a smaller MSA or older product. Keep in mind there’s not a ton of deals happening right now so who knows if underwriting like this will get you the W. We certainly aren’t.
Rent growth will vary by submarket. We have some LPs plugging in 3% across the board, some going 0% in years 1 and/or 2 and then jacking up after that. I think underwritten rent growth should have a more nuanced approach that depends on the deal itself but that’s another conversation. Either way, rent growth will always have a little bit of both art and science to it.
Debt will depend on your strategy, and if you are going agency, if you or your partner are large borrowers that get some spread reductions. Can also buy down fixed rates with the agencies. But you’ll likely see fixed debt in mid to high 5s or 6s right now. Treasuries came down in the past week so if that shoots back up to where we were pre Thanksgiving you’re firmly 6+. Floating at max leverage only makes sense right now if you buy an expensive rate cap to artificially fix the rate or if you are really into S&M
How are you underwriting a 6% exit cap if financing is generally 6%? My shop is struggling with this. Hard to justify if the next buyer will most likely have negative leverage. Would love to hear your thoughts as there is no right answer.
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