•Why it is a safe, reliable investment with a lot less volatility then the stock market.
7 Reasons to Investing in the Multifamily Market…
Multifamily is always a good investment and there are many outstanding reasons to invest in multifamily market NOW.
Here is a list of 7 reasons to invest in the multifamily market but the #1 reason is the reason we all should invest NOW is this economy.
1. Apartments Hedge against Inflation -Apartments are real estate and can be classified as a “real asset”. This means that if the dollar continues its 100 year trend of falling in value over time, apartments will retain their value (increase in dollar terms).
Also, rental rates tend to move up with inflation, because apartment leases usually carry a term of one year or less, you have the ability to more quickly adjust and capture rising rents.
Predictions and trends point to we are heading to inflation “
2. Housing is an Enduring Universal Need- EVERYONE needs a place to sleep at night, and because most people prefer walls and a roof, housing will always be a basic need for everyone.
With tighter home mortgage lending standards, and weaker job markets there are fewer people able to qualify to purchase a home of their own. The result is more people are renting: Another factor growing the renter population is the size and lifestyle of the generation known as the Millennials.
There are nearly 80 million of these children of the baby boomers, and they’re starting life with student debt, little savings and little desire to buy a home. They saw many of their parents lose equity, and in some cases, lose homes during the crash. They’re in no hurry to buy and are happy to rent. Millennial’s are expected to outnumber Baby Boomers for the first time in 2019.
3. Cash Flow Creates Equity (Forcing Appreciation) - Value is a product of income. The more income, the more value. So even though investors may bid more for the same income (causing the ROI or cap rate to fall, just like bonds), there’s far less pure speculation... This is one of the most important distinctions between houses and apartments. It’s also one of the most important concepts to understand as an apartment investor. Single family valuation is based on competing properties of similar size, age, and quality construction that have been sold recently in the same submarket. While a house may be bid up by a homeowner to a price far in excess of what rents will support, that can almost never happen with an apartment. Apartment investors and lenders are VERY fixated on positive cash flow.
Even more exciting is that an increase of income can lead to a substantial increase in equity (value).
For example, if you own a 50 unit apartment building and you increase the income (without incurring any additional expense) by $20 per unit, you have created an extra $1000 per month. At a 10% cap rate, you have created an additional $120,000 in value. A small movement to income can have a large impact to value.
4- Apartments Can Help You Hedge against Market Fluctuations - Multifamily has historically been the least volatile of commercial real estate asset classes.
Since residential dwelling is an essential function of the built environment, multifamily will be less impacted by fluctuations or structural shifts in the economy.
This holds true empirically: over the past few decades multifamily has exhibited less volatility – as expressed by standard deviation from mean return – of any major commercial real estate asset class, while yielding the best risk-adjusted return.
5- Apartments are Tax Efficient- Depreciation expense is one of the few gifts the government gives us. It’s essentially a non-cash expense apartment owners use to shelter their income and reduce their tax bill
6- Apartments are Operationally Efficient-All businesses look for economies of scale. When you can set up standards and systems, and spread expenses across a larger revenue base, you can create additional profit margin. Apartments have scalability.
Let’s look at some examples:
Apartments allow you to finance more units with one loan. So while apartment loan costs are more than a typical house loan, you only need one to finance even hundreds of units.
The same can be said for the time it takes to find, negotiate and close the transaction. Building a portfolio of 20 single-family houses is a lot more work than simply buying a single 20 unit apartment building.
Once you own and are operating the property, you only have one tax bill, one insurance policy, one roof, etc., to deal with.
Of course, later if you decide to sell or refinance, you will only have one transaction to get through. If you’re doing a 1031 tax deferred exchange, it’s much easier with a multi-family building versus the nearly impossible task of executing multiple concurrent single family transactions.
Lastly, when it comes to professional property management, many apartments will be large enough to justify (or in some cases require) a full-time on-site manager and maintenance staff. This means your property and your tenants will be getting more and better attention than is practical with a collection of single-family homes.
7- Private Real Estate Has Low Correlation to Other Asset Classes- The goal of every portfolio is to create the highest total return with the least amount of volatility. Many investors are comfortable with a mix of stocks and bonds in their investment portfolios — until the markets’ ups and downs start making them nervous. Private real estate can help investors temper the volatility in their portfolios because it’s immune to the daily shocks of trading
Private real estate values don’t move much on a daily basis but rather appreciate slowly over time, which is why private investments are less volatile than their public counterparts. Public markets offer liquidity, but that comes at the expense of volatility and private investments offer investors low volatility, but with that comes illiquidity.
The chart below illustrates how private real estate has provided superior total annualized returns over 20 years in comparison to stocks, bonds and even public REITs, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) property index (NPI), which looks at the returns of private institutional grade commercial properties.
Total Annualized Returns Average Annual Yields by Asset Class
(01/01/2000 – 12/31/2019)