The Washington DC multi-family market has been saturated with investment for the last 12 years. At this point, most MF product never makes it to the public marketplace, instead these assets are channeled through off-market offerings that large commercial brokerages corner and display to their network of investors. If the MF product does make it to the public marketplace via Co-Star, the MLS, Zillow, etc. they are often purchased rapidly in an intense and escalating bidding process. To date, investors are still accumulating MF product at negative returns, making it nearly impossible for an investor on the sidelines to reasonably deploy capital.
At some point, this type of investment will end and the MF marketplace will correct itself but until that time, investors on the sideline with capital are not able to access the Washington DC market and receive desired yields. It leaves many fund managers and start-up investors seeking other markets surrounding DC that may overtime expose them to greater risk.
It is my belief that investors will start turning to Single Family Homes with rentable basements in Washington DC. To legally rent a Single-Family home as two units, the homeowner must have a Certificate of Occupancy. Many do not due to the cumbersome and costly process to obtain one through the DCRA and end up renting basements illegally. That being said, in the right local markets, acquiring this asset type and legalizing the basement rental through companies that know how to navigate the process can prove immensely profitable.
Consider a $900,000 Single Family Home on Capitol Hill that has a 3 bedroom/2 bath main level and a 1 bedroom/1 bath basement (admittedly these are hard to find but are much more readily available then any MF product to the public). Without a C of O an investor is forced to rent this as one 4 bedroom/3 bath home and will likely depending on product type and specific location receive rental income of $4500/mth. If an investor comes in and acquires, completes a round of capital improvements and legalizes the home as a 2-family rental then it is likely the home generates $5500/mth in rental income with upside.
Assuming a 20% down payment and factoring in all other expenses including estimated repairs the investor goes from making $0 cash on cash return annually to a 6% return. The $180,000 down will earn $12,000 a year and you will have the added benefits of increasing rents, equity build-out and more. The downside, you need to find these assets in bulk to leverage the same volume of debt that you would for 1 MF asset.
Explore, a Nomadic Real Estate company owned by Ben and Joe Rieling specializes in sourcing and identifying this type of asset for investors. Please contact us if interested in learning more by visiting explore.nomadicrealestate.com or emailing us directly at firstname.lastname@example.org