Episode Summary:
In this episode of Real Investor Radio, Craig Fuhr and Jack BeVier discuss the emerging trends in real estate for 2026, focusing on the small multifamily sector. They explore the current market dynamics, underwriting challenges, and common mistakes investors make, particularly regarding expense ratios. The conversation also delves into the risks associated with developing properties in transitional neighborhoods and the importance of effective project management. Additionally, they share insights on financing strategies for large-scale projects and lessons learned from their multifamily investments.
Episode 108 Overview
At present, small multifamily assets attract growing investor interest. According to recent industry reports, supply has declined sharply. As a result, vacancies should tighten and rent growth should strengthen in 2026 and 2027.
Accordingly, investors are revisiting small multifamily underwriting with renewed focus. Compared to recent years, cap rates now make more sense. In some cases, borrowing costs even fall below going-in cap rates.
All things considered, this shift creates a compelling buying window.
Why Investors Misjudge Small Multifamily Deals
At first, many investors underestimate operating expenses. Brokers often present aggressive pro formas. However, those assumptions rarely hold up.
As Jack BeVier explains, expense ratios vary primarily by rent level. For example, lower-rent units almost always carry higher expense ratios. In contrast, higher-rent units absorb fixed costs more efficiently.
Therefore, small multifamily underwriting must start with realistic expense assumptions. Otherwise, projected returns quickly fall apart.
Expense Ratios: A Critical Underwriting Reality
Generally, properties renting below $1,000 per unit struggle to operate below a 50% expense ratio. Meanwhile, mid-range rents may support ratios closer to 40%.
As rent levels rise, expense ratios may compress further. However, they never disappear. After all, maintenance costs stay constant regardless of rent.
In short, ignoring expense realities leads to underwriting failure.
Tenant Risk and Workforce Housing Dynamics
Another key point involves tenant risk. Workforce housing offers upside, but it also introduces volatility. Tenants with thinner margins face income disruptions more often.
Consequently, vacancies and collections can deteriorate quickly. Once issues arise, they often spread fast.
Therefore, underwriting must account for both operational strain and tenant stability.
Development Risk in Small Multifamily Projects
The discussion then shifts to large value-add and redevelopment projects. These deals involve long timelines, complex permitting, and high execution risk.
In light of this, Dominion prioritizes conservative rent assumptions. Rather than chasing luxury rents, the team targets affordable, durable demand.
As a result, leasing risk stays low, even when construction risk remains high.
Lessons for Investors Scaling Up
Finally, the episode offers guidance for investors moving from single-family to small multifamily. The transition requires stronger project management and tighter timelines.
Moreover, first-time operators often pay a “learning tax.” Accordingly, investors should price conservatively and demand wide margins.
In conclusion, successful small multifamily underwriting depends on discipline, realism, and patience. Those who respect the risks position themselves for long-term success.
