Multi-Family Housing -- Due Diligence

Crowdfunding of real estate can provide investors with increased access to large commercial properties of various types. In our overview of the multi-family housing sector, we discussed how apartment complexes can be one of the least risky forms of real estate investment. Here, we discuss some of the due diligence that investors need to undertake in evaluating these multi-family opportunities.

As a general rule, the value of any income property is a function of the cash flow it generates. Sometimes investors are willing to pay very high prices (low capitalization rates) because they expect significant ongoing increases in the cash flow of a property, or because the value of the land offers a separate source of value. This is not usually true of apartment buildings; cash flow typically grows over time, but physical and functional obsolescence, and sometimes local rent control, usually cause cash flow growth expectations to remain modest.

Location. The area or community in which an apartment complex is located is of prime importance. The regional economic drivers and employment levels are important, but a more detailed study of the particular neighborhood of the property is also essential. Is the area already popular, or at least seeing an upswing in perceived appeal? Are other neighborhood demographics, like the age distribution and average household size, favorable to apartments? Local economic activity is also important. Are new jobs likely to be created nearby, or are nearby base industries on the decline? Access to transportation is also valuable