Why 1-4 Unit Rental Properties Are a Great Investment Right Now!

Over the last five years, the real estate market has weathered a series of unprecedented shocks, precipitated by global economic uncertainties, public health crises and changing consumer preferences. The COVID-19 pandemic, in particular, served as a catalyst for one of the most significant disruptions, impacting how and where people choose to live and work. This period saw a surge in demand for residential properties, as remote work became the norm, leading to a pronounced shift away from densely populated urban centers to suburban and rural areas. COVID-19 and the remote work trend also impacted the commercial market as demand for office space declined as did traffic at most retail storefronts. At the same time there were supply chain interruptions and commodity building materials skyrocketed as did residential property prices. More recently, the market has experienced fluctuations in mortgage rates further impacting both the residential and commercial sectors. Lastly, increased insurance premiums and property taxes are also putting pressure on real estate investment cash-flows. The current environment suggests that 1-4 unit residential rentals may be better investments today than larger multifamily or commercial properties.

Investing in commercial office space is currently viewed with caution due to several converging factors that challenge its attractiveness. The global shift towards remote work, significantly accelerated by the COVID-19 pandemic, has led to a reevaluation of the necessity for traditional office environments. Companies across various sectors have adopted flexible work policies, resulting in decreased demand for physical office spaces. Moreover, the uncertainty regarding future work patterns and the potential for a sustained preference for remote or hybrid models continues to cast a shadow over the long-term prospects of commercial office investments. The decline in retail shopping, accelerated by the shift towards online commerce, has reduced the appeal of many commercial real estate investments. Retail spaces, in particular, have faced significant challenges, including higher vacancy rates and uncertain futures.

Various expense increases are also putting pressure on all income generating real estate investments. Property value increases due to inflation and the high rate of appreciation of the last few years have significantly increased property taxes. In addition, the unpredictable weather patterns, notably in states like Texas and Florida, have caused a significant rise in insurance premiums. Extreme weather events have resulted in extensive property damage, leading to a surge in insurance claims. Insurers, facing increased payouts, are compelled to raise premiums to mitigate financial risks.

Lastly, high interest rates have made financing much more expensive, especially for commercial properties whose financing tend to have higher interest rates as well as shorter amortization periods. This trend is leading investors to seek properties that require less initial capital outlay and offer more manageable financing options. Smaller residential properties, such as single-family homes and duplexes up to 4-plexes, often meet these criteria. These investments typically come with lower purchase prices compared to large multifamily or commercial properties, but more importantly, 1-4 unit properties will have access to conventional 30yr fixed rate mortgages. Investors with good credit and who can qualify using Fannie Mae guidelines will have access to loans within 1pt of the cheapest available money, similar to what you might get for purchasing your personal home. Even non-conventional options such as DSCR and Bank Statement loans will generally be less expensive for 1-4 unit properties than what you can expect from commercial loans.

In this environment, investors are wary of committing to assets that may not only struggle to generate stable returns but also face challenges in maintaining or increasing their value over time.

These factors combine to make 1-4 unit residential rentals an attractive investment option in today's market. They currently offer a number of specific advantages over most commercial or larger residential multi-family properties:

• 1. Lower capital needs
• 2. Lowest available interest rates
• 3. High rental demand driven by both recent home value appreciation and higher interest rates
• 4. No negative impact from remote work or decreasing retail traffic