Investing in Apartment Development, Explained
What it is, why investors consider it, and what it asks of them in return.
Most people know what it means to own a rental property. Fewer know what it means to invest in building one. This is a plain-language guide to how multifamily development works, why investors look at it, and the tradeoffs that come with it.
What multifamily development is
In commercial real estate, multifamily usually means apartment buildings with five or more units.
Development means building new: starting with land and ending with a leased, operating building.
A project typically moves through four stages:
Entitlement. Securing city approvals to build. In San Diego, this alone can take years.
Construction. Building the project, usually funded partly by a construction loan.
Lease-up. Renting units for the first time.
Stabilization. Occupancy settles at a normal level (typically 95%) and the property runs on its rent.
Once a property is stabilized, the owner can keep it, refinance it, or sell it.
Who does what
The sponsor (also called the general partner) finds the site, designs the project, arranges financing, oversees construction, and operates the building. Investors (limited partners) contribute equity but don’t run the project. Their liability is generally limited to what they invest.
A construction loan typically covers the rest of the cost. The mix of loan and investor money is called the capital stack.
Investors in a development project are generally paid from three sources: cash flow from rents after stabilization, proceeds from a refinance, and proceeds from a sale. The offering documents set the order and split. None of these are guaranteed.
Why investors consider it
It’s tangible. The investment is land and a building. You can visit it, insure it, and see how it’s run.
The housing need is real. San Diego has rezoned for more than 100,000 additional homes, but high costs and long approvals limit how many get built (CoStar, October 2026). New supply that does get built tends to find renters over time.
Rents can adjust. Most apartment leases run about a year, so rents can reset as leases turn over. Over time, that can help income keep pace with inflation. Rents can also fall: San Diego asking rents dipped in 2025 for the first time in 15 years.
Depreciation. The IRS lets owners deduct the cost of a residential building (not the land) over 27.5 years. On an $11,000,000 building, that’s about $400,000 a year in deductions. Depreciation is a paper expense: it lowers taxable income without any cash leaving the property.
Two tools can speed this up:
Cost segregation: an engineering study that separates shorter-lived parts of a building (appliances, flooring, site work) so they can be depreciated faster.
Bonus depreciation: lets some of those parts be deducted in the first year. Congress has changed these rules several times.
Investors in a partnership see their share of depreciation on the K-1 tax form they receive each year.
The benefits come with conditions:
Passive activity rules can limit whether these losses offset your other income.
When the property sells, depreciation taken earlier can be taxed through depreciation recapture.
Every investor’s situation is different. Talk to your tax advisor.
Building creates value, when it works. The goal of development is a finished building worth more than it cost to build. That isn’t automatic. CoStar notes some newer San Diego buildings have sold for less than they cost to build.
What it asks in return
Time. Development capital is usually committed for several years, with no easy way to sell your stake early.
Development risk. Costs can rise and schedules can slip. In San Diego, soft costs (permits, fees, design, financing) can exceed half of a project’s total cost.
Lease-up risk. New buildings don’t always fill on schedule. Some San Diego buildings that opened in 2024 are still struggling to get occupancy above the mid 80s.
Values move both ways. CoStar’s estimated market value per apartment unit fell about 11% across San Diego from 2021 to 2025, and about 9% in National City. Real estate is a long-term asset, and the timing of a sale matters.
The sponsor matters. In development, results depend heavily on the team doing the work.
Questions worth asking any sponsor
How have past projects performed against their original business plans, including the ones that missed?
Who builds the project, and who manages it once it’s open?
How often will you report to investors, and what will those reports include?
Does the sponsor invest its own money alongside investors?
What happens if costs run over or lease-up takes longer than planned?
We ask ourselves these questions on every project we build. If you’re new to this, we hope this guide gives you a clearer place to start.
Sources: CoStar Group, San Diego market and National City/South Central submarket reports, data as of October 12, 2026. Depreciation schedule: IRS Publication 527.
Disclaimer: This material is for educational and informational purposes only and should not be relied on as investment, tax or legal advice. Consult your own tax advisor about your situation. Past performance is not indicative of future results. This is not an offer to sell or a solicitation of an offer to buy any security.
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