Multifamily Investing Showdown: Suburban vs. Urban Markets
Location is always essential when choosing to invest in multifamily real estate, and that means knowing whether to choose properties in suburban or urban areas. Both options have pros and cons, and knowing how to compare the two can help you make the right moves for your portfolio.
Urban Multifamily Investments
Multifamily real estate properties in urban areas have the benefit of being located close to available jobs, schools, and amenities. These markets tend to be densely populated and may have lots of options for real estate investment. Urban markets can often be considered primary markets, or those with a population of 5 million or more. The vast size of the cities, along with the job opportunities and other amenities, can make them more desirable for residents.
Pro: Rental Demand
The demand for housing in urban markets tends to be greater due to the increased population in big cities. People moving to the city for school, job opportunities, or simply a different way of life are in need of housing, and the dense makeup of these areas means they may be more likely to move to an apartment instead of buying a home. The diverse pool of potential tenants provides unique opportunities for multifamily real estate investors, who can be more discerning when selecting residents for their properties.
Pro: Rent Potential
The cost of living tends to be higher in urban communities, and that includes rents. Investors looking to charge the market rate for units in their buildings can command more per month than they might in a suburban location, which means the potential for greater cash flow in the long run. Investing in a building or complex that’s close to public transportation and within walking distance to schools and shopping centers can command even more in monthly rents, so it’s important to identify key locations within an urban area to maximize profits and cash flow for your investment.
Con: Higher Purchase Prices
One of the reasons apartments in urban areas command higher rents is the higher purchase price for properties. Investors may find multifamily properties to be more expensive than in the suburbs, and the cost increases closer to city centers. Competition between multiple potential investors in the city can also drive up the cost of real estate. This means you may spend a considerable amount more for an asset near shopping districts, train stations, and other amenities renters find desirable when looking for a new residence. HIgher purchase prices can also impact the potential for profitability with lower profit margins.
Con: City Codes and Zoning Ordinances
Cities tend to have more housing codes and zoning ordinances for landlords to abide by. For example, codes in the City of Chicago state landlords must give tenants living in an apartment for 3 years or more 120 days notice in the event of a rent increase, and tenants living in an apartment for under 3 years must be notified 60 days in advance. This creates an extra obstacle for landlords and property managers trying to maintain a property’s profitability. Zoning ordinances can cause problems when investors are ready to renovate, expand, or even tear down an existing structure to build a new development. Suburban and rural markets may not have the same challenges.
Suburban Multifamily Investments
Suburban communities are also referred to as emerging or secondary markets, depending on their population. They sit outside of the city but provide easy commuter access to urban areas. Lower costs of living and increasing housing options make suburbs attractive to those looking to escape from the dense population and expensive living conditions of the city.
Pro: Family-Friendly Environment
Renters looking to take advantage of better schools, more parks, and more of a family-friendly atmosphere can find the suburbs to be more desirable compared to the city. Quiet streets and more of a community atmosphere also tend to attract new renters, particularly those who want to get out of the city but are unable to afford the cost of homeownership. This means increased opportunities for multifamily real estate investors.
Pro: Rent Potential
While we listed rent potential as a pro for urban markets, it’s increasingly becoming a benefit for suburban markets as well. With so many people flocking to the suburbs, the divide between urban and suburban costs of living is starting to narrow. A recent report showed approximately 90% of suburban communities around Dallas-Fort Worth outpaced rent growth in the city center. Similar results were also reported in Houston, Chicago, and Nashville, just to name a few. The potential for increased cash flow in the suburbs is growing.
Con: Limited Services and Amenities
There may be plenty of reasons renters look to the suburbs for housing, but there are also some downsides. Limited public transportation options and longer commutes can be deterrents for those looking to move outside of the city center. Fewer options for restaurants, museums, and nightlife are also potential drawbacks. Suburban sprawl also limits the walkability in many areas, and those currently living in cities with plenty of shops and restaurants within walking distance might consider this a deal breaker. Additionally, some suburbs have fewer options for hospitals and healthcare.
Con: Limited Supply
Suburban communities are expanding, but supply chain issues and labor shortages leftover from the pandemic are still impacting the housing industry. Investors in some areas are finding limited options for purchasing existing properties, and development projects are taking much longer to complete in some cases. Limited supply can drive up the cost of real estate, making suburban multifamily real estate more expensive than expected.
What it Means for Investors Like You
Making strategic decisions about where to invest in real estate means doing plenty of market research. There are benefits to investing in both urban and suburban areas, so choosing the right option all comes down to the details about each individual property. Housing trends can shift over time, with people moving into and out of city centers in waves. You’ll want to keep an eye on trends and current market conditions when adding real estate to your portfolio.
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