Why own apartments? Following are ten reasons to own multifamily. While real estate investing is a contact sport with numerous pitfalls the rewards can be enormous. Positive outcomes require patience, expertise, access to capital and time with equal emphasis on all of these.
Immediate income. With use of reasonable leverage immediate cash flow to investors is the draw to being in this sector. Over-leverage decreases cash flow, sometimes to the point of bringing it to zero. Price, leverage (debt levels), occupancy and rent growth are the big determinants of immediate income.
Eventual (significant) passive income. While no investment is really passive, over time as cash flow increases there is more cash. Thus, cap ex reserves are fully funded with NOI now reflecting true un-obstructed free cash flow.
Pending limited supply. The construction pipeline in Multifamily practically came to a halt in 2008. Re-booting that pipeline has a very long glide path measured in years- not months. As population continues to tick upward, any significant move in GDP, or in-migration, will placed extended pressure on supply.
Capturing rent growth. As more people become long-time renters, and as a result of less multifamily supply, the apartment industry should begin to see acceleration in rent growth. Some 24-hour cities are seeing near double-digit rent growth now.
Appreciation. Too many people believe appreciation is a function of inflation. While inflation is a component of appreciation the greatest factor increasing value is growth in NOI (Net Operating Income). Grow net operating income and see appreciation in value (no inflation required).
Depreciation. Tax benefits should be an ancillary reason for investing in the asset class. Yes, depreciation offsets current income, but it comes back around at time of sale (1031 notwithstanding).
Trade Value. While real estate requires time to trade, within the real estate asset class, multifamily has a very high level of interest and deep buyer pool. When it’s time to sell multifamily has trade value with market times ranging from 6-12 months. That’s a short porch in the commercial real estate world.
Investment diversification. Allocation theory suggests that a portfolio should have between 5% and 15% of assets in real estate (excluding your personal residence). Thus, investors should have $50,000 to $150,000 in real estate for every one million dollars in net worth. Granted, multifamily is only one type of “real estate”, but given its trade value and other attributes this asset class has merit.
Safety of capital. Real estate prices dip, go sideways and rise over time, but less so with multifamily. Preservation of capital is a cornerstone of sound investment decisions. I believe multifamily is a solid place for long-term investing.
Inflation protector. Predicting inflation is like betting on who will win the World Series before the season starts- there are just too many factors to consider. But when inflation does kick in, multifamily keeps pace.
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