The Benefits of Investing in Apartments and Multifamily
Multifamily should be part of your investment portfolio
Financial advisors often recommend real estate as a savvy way to increase diversity in an investment portfolio, and that continues to ring true. Some experts are predicting an economic contraction, or a lead-up to what economists call a late-cycle phase, characterized by market fluctuations, inflation and slowed growth.
While some economic indicators, including the latest drop in the stock market point to that type of slow-down, nobody knows for sure when the next economic dip will happen. For investors, diversifying portfolios with a variety of investment vehicles offers some protection against those market changes, and real estate offers unique benefits. In particular, multifamily apartment buildings offer a number of advantages to investors, including:
A Hedge Against Economic Downturns
Multifamily fundamentals tend to withstand economic downturns better than other investment classes, which makes apartments an attractive option for investors.
According to real estate publication Bisnow:
“Cautious lending practices and conservative underwriting has kept U.S. commercial real estate debt levels below where they were prior to the Great Financial Crisis, according to a CBRE Marketflash report. CBRE Global Chief Economist Richard Barkham said this could present opportunities for investors looking for a defensive strategy when the next recession hits…”
Research firm Trepp reports that the multifamily sector fared the best among commercial real estate assets (office, retail, industrial and multifamily) in two of the last three recessions. It ranked second, behind retail, in the third.
The sector posted smaller rent declines than other property types during these downturns. In addition, it recovered more quickly than other CRE types after the Great Recession: 47 months vs. 78 months for other asset types according to Real Capital Analytics.
Finally, according to real estate publication Multifamily Executive, industry experts see advantages in multifamily investment in both high- and low-interest rate cycles. In a low-rate cycle, multifamily enjoys low financing costs. In a high-interest cycle, “apartment investors may also benefit from higher interest rates, as apartments will serve as an effective inflation hedge. Over the long term, apartment rents have tended to outpace overall inflation rates.”
Over the past several years, a significant paradigm shift happened in the housing market: home ownership declined and the number of renters in several demographic categories increased. Millennials are delaying marriage and purchasing homes later in life, and baby boomers are choosing the more carefree lifestyle renting affords when they decide to downsize.
The Trepp report cites lifestyle and amenities as one driver for this preference to rent:
“Both Millennials and Baby Boomers value the mobility, flexibility, and community afforded by renting an apartment. Even modest rental properties feature amenities, such as swimming pools and fitness centers, that are hard to give up and are even harder to come by with ownership. More than any other generation, Millennials not only place a high value on those amenities – they expect them.”
Renter households continue to post gains, while home ownership declines. According to research from Deloitte:
“In the 10 years prior to Q2 2016, for example, the number of renter-occupied housing units increased by 26.8 percent. In contrast, the number of owner-occupied units fell by 2.0 percent. As a result, the share of renter-occupied homes in total occupied homes went up by 5.8 percentage pointsduring this period to 37.1 percent.”
Home ownership has become less attainable and less attractive for many households, and experts expect demand for rentals to remain strong for years.
The shift away from ownership has resulted in more rental demand, as well as a 21.9 percent increase in rents since 2013. What’s more, median home prices have outpaced rent growth, which makes renting the more attractive option for many households – in spite of rent increases.
One of the most attractive aspects of real estate investments is the ability to generate cash flow, even if the market slows. That’s true across all real estate assets, from single-family homes to industrial buildings, but multifamily cash flow affords investors an income stream based on shorter-term leases. That difference allows multifamily managers to pivot with changes in the marketplace to meet renter needs and maximize return.
In a multifamily property vs. single-family homes, more units mean more potential income. That translates into more consistent cash flow. If you own and rent out a single-family home, you rely on one renter at a time to generate income. In a multifamily property, you can withstand a few vacancies as you search for replacement tenants because the other units continue to generate positive cash flow.
In addition, multifamily gives investors an economy of scale: You can buy more income-generating units for the same amount of investment, and any value you add to the property (new roof, landscaping, amenities, etc.) applies to all income-generating units and can support higher per-unit rent prices. In addition, maintenance costs are contained under one roof. In short, one property with multiple units results in greater income potential, more consistent cash flow and reduced risk.
Long-Term Returns in Healthy Job Markets
Thriving economic regions, especially those with diverse employers and consistent job growth, create consistent and long-term demand for rentals. As the workforce grows, and as income grows, more people move out on their own to create new households. Nearly 37 percent of current households are renters, which is the highest percentage since 1965.
In addition, multifamily properties in many suburban areas attract new renters who want a family-friendly lifestyle combined with the flexibility and affordability of apartment living. In 19 of the 20 largest markets, including Atlanta, new household formation in the suburbs exceeded that of urban centers by 50 to 100 percent in recent years (source).
New Tax Laws Impacting Housing Choice
Finally, a new factor affecting home choices comes in the form of tax changes that disincentivize home ownership. Limits on mortgage interest and property tax deductions now swing the “rent vs. buy” debate into the “rent” column for many people.
In addition, the standard deduction for married couples increased, which provides some tax relief for all households, including renters.
About PointOne Holdings
PointOne Holdings is a real estate investment firm headquartered in South Florida and Atlanta with properties located throughout the Southeastern United States and Texas. The firm owns and manages a diversified portfolio of residential and commercial assets valued in excess of $730 million. PointOne Holdings’ core principles are founded on precise investment selection, thorough due diligence, creative deal structuring, strong financial management and proactive and responsive communication. PointOne Holdings’ principals are seasoned professionals with over 40 years of combined experience who have collectively conducted over $1.9 billion in real estate transactions. For more information visit www.pointoneholdings.com
PointOne Holdings is a vehicle for investors to directly own income-producing real estate and benefit from all the advantages of ownership without the burden or risk of hands-on management. The firm’s targeted acquisition strategy, focused asset management style and attention to detail result in cumulative investor returns targeted at 12 to 15 percent annually. Returns are composed of annual operating cash flow including quarterly distributions, plus proceeds from the sale or refinance of assets. Along with the quarterly distributions, PointOne Holdings provides sophisticated reports and statements to its investors, including financial and operating information. PointOne Holdings’ principals invest in all its deals and are directly involved on a day-to-day basis, executing the firm’s vision with a methodical, entrepreneurial, and owner/operator approach.