While shiny new apartment buildings are always attractive to buyers, don’t discount seasoned properties as part of a real estate investment portfolio. Older properties can offer tremendous opportunities for impressive returns on investment and rent increases.
CBRE Research found that apartment buildings constructed before 2010 experienced an average annual rent growth of 4.6%, compared to just 3.4% for those built within the past 13 years. Older Class C properties are a great investment opportunity to capture outsized rent growth. Let’s look further at these diamonds in the rough.
Multifamily Rent Growth: Older Apartments vs New
When it comes to rent growth on older apartments, we only need to do basic math to see the benefits. Older apartment buildings have lower average rents, giving them more room for growth, especially in high-demand markets. This means that their potential for significant rent growth is much higher than newer properties, which are unlikely to see the same growth rate.
What Makes Older Apartments Attractive for Buyers
New multifamily properties are attractive to both renters and as an investment. New apartment buildings can have better pest control, modern and reliable utilities, onsite parking, and high-end amenities. However, older properties usually have unique architectural details and character that newer properties simply can’t match. These features can be very appealing to tenants.
Attractive features on an older building can include intricate baseboards and flooring and other unique qualities such as cast iron, concrete and masonry details. Historic apartment buildings that have doors made of solid wood are more soundproof than todays. These buildings also are part of an established community surrounded by shops, transportation, and local parks.
Lower Acquisition Costs for Investors
Investors will find that older properties usually have lower acquisition costs, meaning investors can significantly reduce their initial investment. The initial costs are lower since older Class C apartments generally have much more deferred maintenance.
Physical Capital Needs Assessment
Having a Physical Capital Needs Assessment (PCNA) report will provide the amount of capital improvements that are needed immediately and in the future. HUD requires that 223(f) properties get a PCNA every ten years. A PCNA report will detail the remaining useful life of the building’s main components and the amounts needed to replace items such as roofs, siding, appliances, cabinets, flooring, exterior, windows, kitchens, and bathroom units, as well as HVAC systems and other property components.
Benefits of Legacy Multifamily Apartments
Older apartment buildings also tend to be legacy properties. Legacy properties are those that have been around for decades and have built a reputation within the local community. Buildings can be over 100 years old and have a rich history, like the Majestic in New York, or “newer” like Marina City in Chicago.
Older properties usually have much more character, charm, and a unique history. All of which can attract tenants looking for something that a new building can’t offer. Legacy properties can benefit significantly from their historic reputation, resulting in stable occupancy rates, even during a downturn in the economy. Additional benefits for legacy apartment buildings include:
- Older properties also tend to be in established areas, which can lead to higher occupancy rates and more stable cash flow.
- Class C properties tend to be easier to lease, are affordable, and are in demand.
- It is easier to lease Class C properties with cheaper rents than Class A properties with much higher rents and a lower percentage of the workforce that can afford them.
The Future of Rent Growth for Multifamily Apartments
Investing in an older property may not be everyone’s first choice, but don’t discount these properties. They have much to offer and can provide an excellent opportunity for more significant rent growth. With more room for growth, lower acquisition costs, and unique architectural details and history, older properties are a great alternative for investors looking for a great cash flow opportunity.
For more information on how you can get started in investing in legacy multifamily apartments for 2024 and beyond, contact LSG today. Our team can walk you through the pros and cons of older properties and discuss other options to help you navigate multifamily investments.