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The Ultimate Guide to Multifamily Investing

Many investors who want to enter the multifamily rental market are curious about which markets to invest in. But choosing the right market is just one important factor among many in a successful multifamily investment. The most important factors when buying a multifamily property are:

  1. Knowing how to identify the best investment opportunities. 
  2. Finding a great property management partner, especially if you’re investing in markets out-of-state. 
  3. Understanding key market numbers like Cap rate, Total market share, Vacancy rate, YoY revenue change, and more will impact your buying decision/investment in the long term.

In this guide, you’ll learn what makes a great multifamily investment opportunity and the keys to choosing a great property management company. Also, we’ve rounded up a list of the top multifamily markets today to boost your return on investment even further. 

Part 1: How to find a value-add opportunity

This is the first and most important ingredient to getting a return on your multifamily rental (MFR) investment and the piece that differentiates MFRs from other types of real estate investments. 

With single-family rentals, investors typically hold onto one property for an extended period of time because the value of the investment comes from collecting the monthly rent. 

For MFRs, on the other hand, you want to find opportunities that will generate value over a period of time and sell. Think of multifamily investing similarly to the stock market: you purchase a property, hold it for a period, and then sell it when it has appreciated. 

Here’s an example: 

Let’s say you buy a 20-unit apartment that needs internal upgrades. You buy it for $1,500,000, make the upgrades, and sell it in 3-5 years for $2,500,000. These are the opportunities you’re looking for that add value over time.

Value-add properties tend to be:

  • older properties, 
  • distressed properties that need cosmetic love, or 
  • operationally distressed properties that need efficient management. 

Where you invest matters less than the type of opportunity you invest in. Value-add opportunities exist everywhere. Think of the market like icing on the cake — markets that appreciate over time will give you a higher return, but only if they’re already a value-add opportunity. 

Suggested Listening: Value-Add Multifamily w/ Terrance Doyle

Part 2: Choosing the right property manager can make or break your investment

The next key step to a successful multifamily rental investment is choosing the right property management company to partner with. Choosing a company with offices in the market you’re investing in is imperative. Your property manager is your boots on the ground — they provide insights into the neighborhoods, schools, restaurants, and character of the place you’re investing in.

Think about it: you know a lot about the place you live. You know the best neighborhoods, the coolest parts of town, the tastiest restaurants, etc. Could someone get all that insight from a Google search or by reading Yelp reviews? Not likely — and even if they could, it would take a long time to get a local’s perspective. Given that most multifamily investors will be looking at markets outside of the one they live in, it’s in your best interest to work with a property manager who knows that location inside and out. 

A local property manager will also give you a better estimate of what your expenses are going to be. You’ll need to budget for maintenance, landscaping, and more — a local company can provide real-time data because they know how much plumbers and landscapers cost in this area. When you’re setting a budget, you want to make sure the estimates of your costs are as close to reality as possible. That’s because you’ll likely set your rental prices and make your profit calculations based on estimates at first — if your estimates end up being much higher or lower than you thought, you’ll have to make adjustments elsewhere financially. 

Overall, you’ve got to have a trusted property manager that can deliver on their promises and achieve your goals with a property. You could have a great value-add opportunity in a bustling market, but you could lose money if you have a terrible property manager and/or lack of a true operational partner.

Part 3: Choosing a top market to give you an even higher return

Remember, without a value-add opportunity and a killer property manager, you will not see the kind of return you desire on your MFR investment. The market matters less than the value-add opportunity and your property management partner, but choosing markets that will appreciate will give you an even higher return.

Below we lay out key markets we recommend investing in multifamily properties for the remainder of 2022. To compile this list, we considered several factors, such as cap rates, NOI, and CoC returns, and more qualitative reasons people are moving to these markets. 

Before diving in, let’s quickly define our terms.

What is Net Operating Income (NOI)?

Net Operating Income is a calculation that helps determine a certain investment’s profitability. After deducting essential operational expenditures, NOI determines the revenue and profitability of an investment. Here’s how to figure out the NOI:

  • Find your gross operating income 
  • Add any additional income the property makes
  • Subtract your monthly operating expenses from your gross income

 

How to calculate NOI

It’s important that when calculating NOI, you consider all the income and expenses you would gain from the investment. 

Let’s say your multifamily investment property nets you $11,000 monthly rent. You can add any additional income from having a coin laundry onsite. If your monthly expenses come out to around $4,000, you would be left with a $7,000 net operating income monthly. Per year, your income would be $84,000. 

What are CAP rates?

Another key factor investors consider when buying real estate is the CAP Rate. CAP Rate is the return you should be generating if paying for the property in cash. Here’s how to figure out the cap rate:

  • Find your gross income
  • Subtract your monthly operating expenses from your gross income
  • Divide this figure by the cost of your property

How to calculate CAP Rate

 

Take, for example, a multifamily property that will cost you $1,500,000. Depending on your market research, you determine that you could rent it for $11,000 monthly. If your monthly expenses come to around $4,000, you are left with $7,000 net operating income, or $84,000 annually. Take that annual figure and divide it by $1,500,000 to get 0.056 or 5.6%.

Depending on what your CAP Rate turns out to be, you can decide if it meets your investment criteria. For example, a CAP Rate of 5.6% may be excellent if you can find quality tenants in an area forecasting economic growth. However, that same CAP Rate might not be good enough if your property is older and in a less-than-desirable location.

What are cash-on-cash returns (CoCs)?

A cash-on-cash return measures an investor’s annual return on an investment property to the amount of mortgage paid during the same year. Think of it as cash earned based on cash invested. 

To calculate cash-on-cash returns:

  • Add gross scheduled rent and other income
  • Subtract vacancies, operating expenses, and annual mortgage payments
  • Divide that number (known as the annual pre-tax cash flow) by the total amount of cash invested

 

How to calculate cash-on-cash

For example, if your total cash flow was $10,000 and you invested $100,000, you’d have a 10% cash-on-cash return. 

Top Multifamily Markets for 2022 (and beyond!)

As we mentioned, where you choose to invest is less important than choosing the right kind of opportunity and partnering with an excellent property manager. That said, choosing a growing market can help you capitalize on your investment and get an even higher return. 

Below, we’ve outlined the top markets we’re recommending to our investors for the remainder of 2022 — and beyond! 

Nashville, TN 

Cap rate: 4.3-5.8% (across all asset classes)

Total market share of multifamily units (by count): 6.8%

Vacancy rate: 4.5%

YoY revenue change: 27.8%

Median income: $37,696 per capita

Median rent: $1,985

Nashville is one of the best markets to invest in. No state income tax and low property tax attract businesses and investors of all kinds, which continue to feed the economy in the Nashville Metro Area, growing the job market and reducing unemployment. Additionally, Nashville’s large collection of schools and universities supplies a steady stream of tenants to the area, creating major rental demand in Music City.

Between a large number of higher education institutions and the influx of new and existing businesses, predictions show that the metro area of Nashville will increase by over 500,000 people in the next 20 years. With population increases and house supply decreases, this leaves the perfect environment for the property in Nashville to appreciate — which is exactly what we’re seeing. Expect the value of current and existing homes to climb in the long term. 

With great jobs and healthcare, amazing restaurants, live music, pro sports, and festivals, it’s no wonder more, and more people (particularly renters) are moving to this area. If the city isn’t your speed, you can access rural and lake living just 20 minutes from downtown. Plus, Tennessee borders eight states — which means there are so many places people can drive to in just a few hours. 

Dive deeper: Nashville Market Insights

Denver, CO

Cap rate: 3.8-5.5% (across all asset classes)

Total market share of multifamily units (by count): 6.87%

Vacancy rate: 4.8%

YoY revenue change: 20.1%

Median income: $43,770 per capita

Median rent: $1,640

Denver has everything a renter looks for — diverse job opportunities, great weather, pro sports, amazing restaurants, plentiful outdoor activities, and even live music. Young professionals and renters choose the area for its great job market (more large businesses are coming to Denver every year, from Amazon to Google, bringing thousands of jobs with them), stunning scenery, and excellent quality of living. 

With the supply of homes in Denver decreasing and the average days on market shrinking, the Denver market is more competitive than others on this list. However, with the rising rent prices and home appreciation rates, we are still bullish on Denver — overall, it’s a great city for investors to purchase rental properties.

Dive deeper: Denver Market Insights

Jackson, MS

Cap rate: 3.8-5.5% (across all asset classes)

Vacancy rate: 8.1%

YoY revenue change: 19.3%

Median income: $21,906 per capita

Median rent: $1,136

Jackson is known as “The City With Soul” for good reason. Jackson’s soul is best represented in its food, music, and culture, and more people flock to Jackson to experience this soul in their own lives. Over the last ten years, Jackson has seen more population growth than any region in Mississippi, partly due to new jobs and industries being created here.

According to Zillow, home values have been rising in Jackson, MS, for over a year and have increased dramatically over the last five years. The rise in home values is a great indicator of continued growth in this city. We bet you will continue to see home values rise, making Jackson a friendly cash-flow market and long-term, buy-and-hold play for investors.

What’s more, there are 10 colleges and universities within 50 miles of Jackson, MS. The largest of which, Jackson State, enrolls over 10,000 students yearly. The high population of students continues to drive demand for rental properties in Jackson, making it a golden opportunity for rental investment in an affordable market.

Dive deeper: Jackson Market Insights

Huntsville, AL 

Cap rate: 3.8-5.5% (across all asset classes)

Vacancy rate: 6.1%

YoY revenue change: 24.7%

Median income: $56,758 per capita

Average rent: $1,105

The Huntsville real estate market has grown significantly over the last several years and has proven to be a lucrative locale for savvy investors. A shrinking supply of houses and increased jobs have led to a higher demand for housing. This makes Huntsville an excellent investment market in rental properties, where investors can command competitive rents. Rent rates in Huntsville have grown by 15.2% in the last year alone, and economic forecasts predict rates will continue to rise in the coming years.

Young professionals and renters are moving to this city in Alabama for its low cost of living, high quality of life, proximity to the Gulf Coast and beaches, great food, excellent healthcare, and great educational opportunities. 

With the Federal Reserve hiking interest rates back up, the number of buyers competing for the best mortgages will start decreasing. But for an investor with capital, this is the prime time to invest in a market like Huntsville, considering its low property taxes and overall affordability. 

Dive deeper: Huntsville Market Insights

Atlanta, GA

Cap rate: 4.3-5.8% (across all asset classes)

Total market share of multifamily units (by count): 6.7%

Vacancy rate: 4.5% 

YoY revenue change: 30.2%

Median income: $56,840 per capita

Median rent: $2,236

Atlanta is one of the biggest and fastest-growing cities in the country, with a phenomenal airport that is the world’s leader in daily passenger flights. Direct flights to Europe, South America, and Asia make metro Atlanta one of the most easily accessible cities to the more than 1,000 international businesses and over 50 countries that have representation in the city through consulates, trade offices, and chambers of commerce. 

In the past two decades, Atlanta has experienced incredible growth — the official city population sits at about 500,000, but the metro population is home to over 6 million. Over the next 30 years, metro Atlanta is projected to grow by 2.9 million people, according to the Atlanta Regional Commission.

The city also offers professional sports teams, an exciting music industry, and a buzzing food scene that attracts young professionals and renters in droves.

Despite the increase in unemployment and uncertainty due to COVID-19, the Atlanta market bounced back quickly through 2020. According to the Atlanta REALTORSⓇ Association, the trend continued in 2021, with a 19% increase over 2020’s average sale prices. 

Dive deeper: Atlanta Market Insights

Richmond, VA

Cap rate: 4.3-5.8% (across all asset classes)

Vacancy rate: 3.6%

YoY revenue change: 24%

Median income: $51,421 per capita

Median rent: $942

Richmond, Virginia, is one of the hottest housing markets around today. And while it can be challenging to invest in a highly competitive market, the fierce competition is a good sign: people want to move to Richmond. And it makes sense — the capital of Virginia offers proximity to the mountains and the beach, tons of breweries and restaurants, great education, and affordability (which is rare for the East Coast). 

This popular city is only growing —  at a rate of 32 people per day. In fact, its growth rate is the 16th highest on the list of metro areas greater than 1 million people. With the rise of remote work and the relative affordability of Richmond compared to Washington, D.C., the population in Richmond will probably continue to rise. Due to the constant demand for housing in Richmond, many people turn to rentals as the most affordable option. 

Dive deeper: Richmond Market Insights

St. Louis, MO 

Cap rate: 3.8-5.5% (across all asset classes)

Total market share of multifamily units (by count): 10.5%

Vacancy rate: 4.1%

YoY revenue change: 22% 

Median income: $31,930 per capita

Median rent: $780

With affordability, sports, and a great food scene, St. Louis, MO, is an attractive locale for young professionals and renters. There aren’t many cities offering diverse types of homes, architecture styles, and years of inventory for every investor. St. Louis is a great place to start if you’re looking for somewhere to build a portfolio full of variety! 

St. Louis also has some of the lowest living costs out of any large city in the U.S. The average cost of living in the city is 6% below the U.S. national average — a big factor for remote workers looking for a city vibe outside high-cost areas like New York or Los Angeles. 

For these reasons, St. Louis is perfectly poised for investors looking to rent their properties. With some of the lowest rental prices in the country, many will be eyeing St. Louis as a potential haven during trying economic times.

Dive deeper: St. Louis Market Insights

Tampa, FL

Cap rate: 3.8-5.5% (across all asset classes)

Total market share of multifamily units (by count): 14.2%

Vacancy rate: 3.8%

YoY revenue change: 34.2% 

Median income: $37,834 per capita

Median rent: $1,775

Florida is always on the list of great markets to invest in because of the popular weather, beaches, and lifestyle it offers renters. There’s also no state income tax, great airports, sports, and healthcare. 

In particular, Tampa is the second-most-popular destination for homebuyers moving from one metro area to another, largely due to its relative affordability. 

Both the city of Tampa and the Tampa-St. Petersburg-Clearwater metro area has seen significant population growth in recent years. As the population surges, those new residents will need places to live, so there’s a larger pool of potential renters. In addition, the Tampa Bay area recently saw one of the highest year-over-year rent hikes in the country, with a staggering 22.4% increase.

If you’re considering investing in rental properties in Tampa, now could be a perfect time.

Dive deeper: Tampa Market Insights

Start Your Multifamily Journey Today

At Evernest, we’re positioned to provide excellent property management services and the real-time, boots-on-the-ground resources you need to secure a consistent return on your multifamily investment. From deal sourcing to underwriting to the overall acquisition process, we have a dedicated team in each market ready to help you acquire the best possible investment opportunity.

Want to know more about partnering with Evernest in your next multifamily deal? Here are two ways to get started:

  1. Listen to this podcast episode with our Multifamily expert, Marshall Haggard.
  2. Pick the market you want to buy in, and reach out directly! From there, we’ll hop on a call to discuss the next steps. 

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