When it comes to multifamily properties, bet on Las Vegas

by Kimberly Greene26 Aug 2019

Multifamily housing units could be the answer for some families that are unable to find a single-family home that fits their needs. Most multifamily properties are purchased as non-owner occupied investment properties, although adventurous or savvy homebuyers are taking advantage of the income potential that multifamily units present.

Small, multi-unit houses consisting of everything from duplexes, triplexes, fourplexes, townhouses, rowhouses, and beyond, make up a third of the family rental market, according to data from the U.S. Census Bureau. The rest of the rental stock in the U.S. is primarily single-unit detached dwellings, with single-unit attached rentals only 12% of the market.

While 2- to 4-unit properties are typically associated with metropolitan areas that have highly dense populations, they’re also found in the suburbs and small towns. The market share varies widely, however, depending on their geographic region. Of the 10 major metropolitan areas featured in the CoreLogic Case-Shiller Composite-10 Home Price Index, 2- to 4-unit rental housing properties in Boston and New York make up 36.1% and 25.9%, respectively, of the overall rental market. Within the single family rental housing market, however, market share is significantly higher. In Boston, that figure jumps to 72.1%, and in New York, it’s 71.2%.

Whether multifamily units are purchased as owner-occupied units with income potential or strictly as investment units, geography is an important factor in determining whether or not the multifamily investment is a good idea. It turns out that the locations with the higher market share of 2- to 4-unit properties aren’t necessarily the locations with the highest total gross return on the investment.

Las Vegas comes out on top of the 10 metro areas, with a highest total gross return, which is the annual rental income divided by the property’s market value. Higher-cost cities such as San Francisco, San Diego, Los Angeles and New York, have total gross returns below the national average, which is 11.1%. In Las Vegas, it’s 20.7%. The city with the second highest total gross return is Denver, with a rate of 11.4%.

In a recent webcast, Metrostudy economists discussed the state of housing in Las Vegas, which is a very strong market overall due to  its affordability, net migration patterns, and job growth. This particularly true for the attached home market.

“The attached market now makes up 14% of the total of annual starts activity, and it’s gone up substantially compared to what it was just two years ago, when it made up just 4% of the total market. So there was a 30% year over year increase in starts on the attached side, and a whopping almost 130% jump in annual closings just from one year ago. That is the way that affordable product is being delivered now in the Las Vegas market,” said Ryan Brault, regional director.

A Zillow analysis of the 50 top markets in the U.S. released earlier this summer showed that rents are growing in just about every market, while home values are experiencing slower growth than in years past. Even though rents are still growing in higher cost cities, that growth isn’t as marked as those areas where rents are more moderately priced.