During the late 1970’s and early 80’s, there was a slew of multifamily small-balance (5 – 49 unit) developments being built. In the last 20 years, construction in this specific market sector decreased substantially as single-family and large 50+ unit building construction increased.
Today, this small-balance inventory is in drastic need of value-added renovation. A good 85% of this small-balance multifamily stock was constructed before 1990. This stock accounts for 21% of all of the nation’s housing stock and for 54% of all rental stock…more than all the large (50+ unit) multifamily developments, single-family residences and mobile home rentals combined.
Investors are finding outdated properties, taking out bridge loans, completing updates and getting properties fully leased. How? Innovative financing options now emerging that complement the still growing fix and flip market.
In counties where rent is not outpaced by rising home prices, ie. “second-tier” markets, rental growth looks like this, according to ATTOM Data Solutions:
- properties with 100+ units – +9%
- properties with 11 – 100 units – +20%
- properties with 6 – 10 units – +21%
- properties with 3 – 5 units – +19%
- properties with 1 – 2 units – +12%
- all single-family rental units – +13%
Clearly, there are opportunities available here for real estate investors and lenders willing to adapt to this rising trend.
One such “adaptive” financing option is through the New Opportunity Zones section of the Tax Cuts and Jobs Act legislation. The purpose of New Opportunity Zones was to direct resources to low-income communities designated as Qualified Opportunity Zones by using tax incentives or “compelling capital gains tax benefits” that may be attractive to multifamily and single family rental investors.
How does a low-income community become a Qualified Opportunity Zone? The state in which that community lives must nominate that community via that state’s governor’s office to the Secretary of the US Treasury. The Treasury Secretary, in turn, has the authority to certify that nominated low-income community as an Opportunity Zone.
Investors do not have to live in the community or state of the Opportunity Zone; they must only invest in that Qualified Opportunity Zone and keep their investments in place for a specified period of time.
Ideally, all parties involved benefit from this kind of innovative financing…communities via renovated developments and job growth, residents via renovated, affordable housing and jobs, and investors via rental growth and capital gains tax benefits.
