Multifamily real estate is one of the most valuable and secure investments you can make. Many people around the world invest in multifamily for a number of different reasons, including the stability in values, rental income, and returns. This article will explore some of these benefits and why multifamily may be right for your financial portfolio.
1. Cash Flow, Appreciation, and Tax Advantages
Multifamily may be one of the best investment opportunities there is, especially if you make investment decisions by using the
Sharpe ratio. It offers a steady cash flow, as well as long-term appreciation. Additionally, multifamily real estate can serve as a solid source of passive income for investors who are not looking to take part in other types of investments. Real estate is increasingly becoming attractive for higher-income earners due to the high yields and tax advantages that come with investing in multifamily real estate.
2. Diverse Nature
Real estate, specifically multifamily, attracts many people because of its diverse nature. Real estate can be considered one of the safest investments, and within real estate, multifamily even more so. You can still get a solid return on your investment, even if the market dips in value over time. In the event of a crash, multifamily real estate is not as likely to lose value as quickly as stock markets are. One big reason for this is the way that multifamily assets are valued. Multifamily is looked at as a business operation, not just as a rental asset like residential rentals. For example, the income of the property is what drives the value, not the comparable sales alone. Of course, comparable sales can help determine the price of the asset, but again it is not the only method, therefore giving multifamily assets more stability during a real estate crash.
3. Well Diversified
Multifamily real estate is also a good investment because it is well-diversified. Diversification is a cornerstone of prudent investing. If you spread your wealth out to several different assets, you will be in better shape should one of them take a downturn in value, or experience any other negative economic indicator, such as increased vacancy or bad debt. Real estate also tends to hold up well when stock markets experience problems and is not subject to as much volatility. During times of inflation, we see more investors attempting to acquire tangible assets.
4. Ancillary Services
You can also make money with real estate by providing ancillary services to residents who occupy the property. If you own an apartment complex, you can charge various amenity fees to collect against the expenses of operating the property. As an example, landscaping and pool service can be billed back to the tenant as an “amenity fee”. Other ways to boost the income of the property and increase value would be to charge for things like pet rent, parking, washer dryer rentals, etc. Adding multiple streams of income will help you grow your wealth much faster than just earning money from your real estate investments alone. It is also a great way to potentially reduce your tax liability. By boosting the income of the property, you are essentially forcing appreciation onto the asset, thereby increasing its value.
You can purchase multifamily real estate with leverage (loans) at low-interest rates which allows for scale and will amplify your levered returns on your equity. Coupling this effort with a cost segregation study will allow you to really maximize your tax savings in addition to the leverage of the asset. The IRS allows you to deduct interest paid on loans used to purchase an investment property and accelerate depreciation as well resulting in a lower tax burden.
While there are many benefits to investing in real estate, multifamily continues to be one of the strongest asset classes within the sector. Investors are looking to get well-diversified, less volatile returns should always look to have some portfolio allocation toward multifamily assets.
Veena Jetti is the founding partner of Vive Funds, a unique commercial real estate firm that specializes in curating conservative opportunities for investors.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.