A common request from investors we work with is that they only want to pursue multifamily properties with the highest return. However, that’s not always a straightforward target.
It’s important to start by defining what “return” actually means. There isn’t just one way to make money in real estate. In fact, there are several. Depending on what you care about most, your opinion of the highest return can look very different.
In multifamily investing, returns generally come from four areas: cash flow, appreciation, principal paydown, and taxes. Because tax benefits vary widely from person to person, we’re going to leave that part out for now and focus on the other three.
Cash Flow
If your definition of return is cash flow, then the multifamily properties with the highest return tend to be those that are inexpensive relative to the rent they collect.
These properties are often older buildings. They may be located in less desirable areas or in certain sections of larger cities. Because purchase prices are lower, the rent-to-price ratio can be strong, which leads to higher cash flow.
However, this higher cash flow comes with tradeoffs. Older buildings may have maintenance issues that aren’t immediately obvious. Before buying, it’s important to evaluate major building components like the roof, plumbing, and mechanical systems.
Tenant profile is another consideration. Cheaper rents usually mean a different tenant profile and mix compared to newer, Class A buildings. That doesn’t make these properties bad investments, but it does mean management expectations should be realistic.
When cash flow is your primary goal for return, B and C class multifamily properties are often where investors see the strongest returns.
Appreciation
If appreciation is what you care about most, you’ll usually want to search for properties in areas people currently want to live in and will continue to want to live in.
Market trends play a big role here. Over time, there has been a noticeable shift toward warmer climates, especially in the southern United States and or tropical island destinations. Job growth and population growth are also key drivers of appreciation.
Unlike cash flow, appreciation is less about the individual property and more about the broader market. Strong employment opportunities and growing populations tend to push values higher across entire regions.
As an asset class, single-family homes often appreciate faster than multifamily buildings, unless rents are actively being increased. For multifamily investors, appreciation usually comes from a combination of market demographics and rent growth.
Principal Paydown
The third way investors generate returns is through principal paydown, and this is heavily influenced by your financing type.
If you walk into a bank and take out a standard commercial loan for an apartment building, you’ll likely have an amortization period of twenty to twenty-five years. Compared to a thirty-year mortgage, this means the loan balance is reduced more aggressively over time.
Shorter amortization periods may reduce cash flow slightly, but they accelerate equity growth. For investors whose long-term goal is to own properties free and clear, this can be a powerful advantage.
Interest-only loans, on the other hand, do not contribute to principal paydown. While they may improve short-term cash flow, they don’t help you build equity through debt reduction.
When evaluating which multifamily properties have the highest return, it’s important to think about how your loan structure aligns with your end goal. If building a portfolio of paid-off properties is the objective, faster principal paydown can be a meaningful part of your return.
Final Thoughts
Multifamily properties with the highest return look different depending on whether you prioritize cash flow, appreciation, or principal paydown. Understanding how each of these components works allows you to invest with intention instead of chasing a vague target.
Many investors we work with appreciate the clarity we can provide around how different multifamily strategies align with their unique priorities. If you are considering a multifamily investment in Pennsylvania or Maryland, contact us to discuss how to identify opportunities that work best for you.
