K.I.S.S Guide: Multifamily Investments


The commercial real estate market is an estimated $4 trillion market in the United States alone composed of various asset classes: multifamily, office, hotel, industrial and retail.  Each asset class requires a different set of skills, conceptual framework and analysis tools to become a success. Becoming an expert in any one asset class is a lifelong struggle of learning and knowledge accretion. Given  the dizzying amount information out on the Internet , I wanted to give a simple overall framework for each of the major asset classes that I have used when I have analyzed investment opportunities.

I call these the KISS Guides.


I did not take the name from the band as some of you maybe thinking. I am a fairly analytical person and I have been accused of getting lost in the “trees” when I have been analyzing new investment opportunities. On more than one occasion, more experienced investment directors have advised me to KISS (Keep It Simple Stupid) especially with doing preliminary investment analysis. Hence  I am going to share my KISS guide for each of the major asset classes over the next few weeks to help provide a framework  that is useful to readers as you approach your next investment opportunity.

Multifamily or Apartment asset make up almost 25% of the $4 trillion commercial market size and are the most prevalent commercial investment asset class.

The Basics

The multifamily asset class is composed of apartment properties that are usually 5 units and greater.  To start investing into the multifamily asset class, an investor needs to work their way down the investment analysis framework/funnel. The funnel starts with the Market Analysis and works itself down to the Investment Analysis.

Market Supply-Demand Analysis

Demographic are the primary trend driver associated with growth of multifamily assets. The key indicators to keep in mind are as follows:

Growth (Demand) Indicators

  • Household Formation: In the prime rental age group of 25 to 35 years of age
  • Household Composition: You want to have more single and unmarried composition of household increase even if household formation is decreasing. This composition of household formation leads to higher increase in rental apartments/units.
  • Economic Growth: An increase in the overall economy or regional economy increases the likelihood that prime rental group (25 to 35 years of age) will take apartment with less roommates, which drives up demand for space. This can be a double edged sword as too much prosperity leads to rising income which allows employed earners to become homeowners at a greater rate.

Headwind (Supply) Indicators

  • Homeownership Rate: Homeownership is the main competition to apartment rental growth. Homeownership rate is an inverse indicator due to the “substitution effect” and is leading predictor of apartment price growth and decline.
  • Supply Growth: is driven by vacancy rates and absorption rates and given the short lead up time to build; this indicator can become a big headwind especially in non-mature markets. Keep watch of construction starts in the 5+units permit space.

Market analysis should be completed at both the regional and local level to better understand the position of an investment relative to the marco (regional analysis) and the micro (local analysis) trend and characteristics.

Investment Analysis

As you work your way through the market analysis framework and start looking at potential investments, an investor will need to define who the building is designed and built for:

  • Low Income Renters
  • Middle-Class Renters
  • Luxury Renters
  • Niche Renters: Lifestyle Renters, Senior Housing, Student Housing

The designation of the demand user group will help define if the investment is product-market fit in terms of the needs of the end user i.e. the tenant.


Assets usually have a horizontal (garden apartments) or vertical layout (high-rise, mid-rise, low rise). Typically the vertical layout costs more as the initial cost of development as well as cost of the operating the building is higher for a vertical layout asset.


Assets are typically assigned quality rating (Class A, B or C) depending on the property characteristics and local market definition of class levels.


Multifamily assets can be valued using a direct capitalization approach that is made up of the following building blocks:

  1. Gross Rent – Rent is the key assumption and is driven by local market conditions and how the subject investment fits into the local market and user demand needs.
  2. Vacancy – A projected period of time that rent will not be collected due to collection issues and/or tenant eviction issues. This number is driven by local market.
  3. Operating Exp. – Property expenses associated with operating the asset that is paid by the owner i.e. insurance, real estate taxes, water, security, garbage, heat, and cleaning
  4. ­Capital Exp. – A reserve put aside for major expenditures in apartment units i.e. refrigerators, stoves, roof, hot water heaters etc.

The building blocks can be used to calculate the net operating income (Rent-Vacancy-Operating Expenses = NOI) of the investment which is then divided by the prevailing capitalization rate in the local market to ascertain the value of the potential multifamily investment

Asset Class Summary

Multifamily as an asset class has a few defining characteristics that make it different than investing into other assets i.e. office, retail, industrial etc. The defining characteristics are as follows:

  1. Stable income streams as it provides space to  non-cyclical demand base of space users (everyone needs a place to live)
  2. Low volatility resulting from the stable nature of apartment income stream and limited risk of obsolescence
  3. Defined rollover and vacancy risk given the relative short time lease duration which is a good thing in a growing rental price market but a bad thing in a growing vacancy rate market
  4. Propensity of lending institutions to provide higher leverage (LTV) debt capital

The multifamily asset class can be a great investment class for any investor depending on what kind of player you are in the real estate game.

Happy Investing!
Photo Credit: jesuscm

About Author

Ankit Duggal

Ankit Duggal(G+) is the Investment Director of a New Jersey Income Operating & Consulting Company . Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.


  1. Thank you so much for putting up this article. It gave me a better understanding of what I should be researching and analyzing for my future investments. I look forward to the rest of them.

    I do have a question? Were might I find the information on the markets supply and demand by state and county?

  2. Diana’s question is mine as well – I would find resources on that subject extremely helpful.

    One should point out that vacancies can be caused by simple turnover as well – tenants do leave of their own free will and not just because of collection or eviction issues.


  3. Great article concise.

    My 2 cents

    Seek a Cash on Cash return 12%+, Debt Coverage Ratio 1.6%+, and Cap 8%+ when these are met there is a good return for you and your investors.

    For great local market info go to IREM.org search for ARM certified property managers for 50 units. Ask them local market conditions, vacancy and turnover rates, expenses by category/unit, what they see them selling for per unit. Remember the property manager is usually first to find out from an owner they want to sell.

    Highest and Best Use is a great money maker. Take a conventionally rented property change it to Niche or Specialized where rents are 2-4 times more.

    • Interesting. Those are great investment guidelines/post marks and other readers should take note. You should have similar guide posts for your investment screening.

      Curiosity related question from my end: What is the leverage factor and loan constant you take into account at an 8% Cap Rate to accrete 12% cash on cash with a 1.6 DSCR. You cannot be that highlight

      In terms of reaching out to ARM certified managers, what is your pitch when you reach out to me them as the communication is cold. I know myself and other readers would find that useful.

      • RE: What is the leverage factor and loan constant you take into account at an 8% Cap Rate to accrete 12% cash on cash with a 1.6 DSCR.

        Unfortunately we never heard back from @Paul because I too was interested to hear his response. I did run some test numbers to see where you’d have to be on LTV, am and rate to be within his parameters though.

        100 units, 800/month rents, 5% vacancy, utility reimbursement and other income to more than offset the vacancy, 50% GOI for expenses. Used a seller’s 8 cap, 25% LTV and debt cover at 1.6. 4% Acquisition Costs, 1 point on the loan (both paid in cash) and no initial CapEx.

        With a 30 yr am I could go to 4..5% on the rate the property would hit the third leg of 12%+ cash on cash. In today’s lending markets getting a 4.5% rate on a 75LTV apartment loan would put you in a 5 or 7 year fixed rate loan which is shorter than we’d go given our expectations for interest rate trends (up). Note too that buying at a seller’s 8 cap with the other costs and loan point produces a buyer’s cap rate of 7.63.

        Provided the property was in a location and market we liked, and there truly was no deferred maintenance we would do this deal all day long but… we’d use a 10 or 15 year fixed rate (or 30 if we could find it) on the loan which as long as the rate stayed below 6.5% would still throw off 8% cash on cash.

        Note too that this property would generate about 150k of annual depreciation which would mean another 42k in tax savings at the 28% bracket or almost 60k at the 39.6 rate.

        If anyone would like to see the numbers on this shoot me an email giovanni at ashworthpartners dot com. Put ’12 1.6 8 deal’ in the subject line.

        Good hunting-

  4. Priscila Argaez on

    Great article Ankit. I have found how important it is to have a deep knowledge in the subject of economics when investing in multifamily buildings. Thanks for the good info!

  5. Ankit

    Sorry just receive notice of your question. We use 6.5% interest 25yr term5 yr due date 10% vacancy unless they report higher.

    PM calling explain that you are expanding your holdings and are looking for team members. They should be happy to talk with you if they are rushed ask who on their staff they would like you to work with. I have people tell me they get deals pointed to them.


    • Hi Paul,
      What LTV are you running to get a 12 CoC with a 6.5% 25 year am loan… and what’s the expense ratio?

      Do you have an example? I’d love to see it because I couldn’t go north of 4.5% rate on a 30 year am at 75LTV and keep the CoC above 12-

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