Why Invest in Multifamily Real Estate?
Real estate is a popular investment vehicle right now, and according to research, the real estate investment market is expected to increase at a 10.7% compound annual growth rate between 2022 and 2031.
But there’s more than one approach to real estate investing. While many first-time investors flock to single-family rental properties because of the low barrier to entry, other real estate investment strategies require less effort and hold the potential for greater returns. A great example would be investing in multifamily real estate through syndications.
Real estate syndications allow investors to pool their money together to purchase commercial properties that individual investors have minimal zero access to. For example, an individual might be able to purchase a $400,000 single-family home, but a $40 million multifamily asset would be highly unattainable.
But investing in multifamily properties offers a number of benefits that single-family homes do not. And, through multifamily syndications, investors interested in passive income are able to participate in these cash-flow-producing assets. Here’s a look at 6 benefits of investing in multifamily syndications.
The Potential for High Returns: There’s potential for much higher returns when you choose multifamily properties over other investment types. These higher returns are by no means guaranteed, however a National Multifamily Housing Council study found that multifamily investments delivered the highest average returns when looking at 7-year holding periods between 1987 and 2016. On average, multifamily properties beat out industrial, office, hotel and retail investments.
Persistent Demand: There’s always demand for multifamily housing. The U.S. population is growing with each passing year, and the rate of home ownership has fallen since its peak in the early 2000s. It’s no coincidence that the number of renter-occupied housing units in the U.S. has steadily increased since the peak of home ownership in 2004. Multifamily demand is poised for ongoing increases as the single-family market falters, both single-family rentals and purchases. In December, according to a Yardi report, the average asking rent in the U.S. for a single-family home fell $8 — a sign of waning demand. Single-family housing starts dropped almost 20% year-over-year in September 2022, and building permits fell 17% — a sign that future construction projects will be limited. The lack of new single-family construction could mean less supply in future years, making multifamily housing a natural choice for individuals and families. The bottom line is: There’s always demand for multifamily housing in the United States. In addition to that ongoing demand, dynamics in the single-family market indicate that multifamily housing is entering a boom period.
Recession Resiliency: Multifamily properties are also more resistant to recession for several reasons, including:
Housing is a basic human necessity.
Affordable housing is more important in a recession environment.
Single-family home ownership has become more expensive since the start of the pandemic.
Capital Preservation: Investing in multifamily real estate allows for greater capital preservation. When multifamily properties sit at 90% or higher occupancy rates, investors may enjoy access to low-risk financing at attractive terms. The reason for this is that multifamily default rates are traditionally much lower than single-family default rates.
Possibility of Lower Tax Obligations: Depreciation may allow investors in multifamily housing to lower their yearly tax obligation. Make sure to consult an accounting and tax professional before investing in multifamily real estate with the expectation of tax benefits, but know that depreciation is commonly used by multifamily investors to access tax benefits that might not otherwise be accessible. Keep in mind that depreciation benefits will completely phase out by 2027, so time is of the essence to take advantage of this tax strategy.
Passive Participation: Perhaps the greatest benefit of investing in multifamily real estate through a syndication is passive participation. When you purchase and rent out a single-family home, you are an active participant - regardless of whether you’ve hired a management company to handle the day-to-day. Investing passively in a multifamily property through a syndication requires no lift on the part of the investor. You invest your capital into the deal as a limited partner, and the general partners take on all active roles. Simple. After contributing capital, you collect potential cash flow distributions, and you enjoy a prospectively larger return when the asset is sold. Always keep in mind, investing in real estate, while capable of producing attractive returns, entails a high degree of risk, including illiquidity of the investment and loss of principal. Make sure to consult with your financial advisor to determine whether real estate investing is the right investment vehicle for you.
Learn More About Investing in Multifamily Syndications
We’ve created a course called “Blueprint” that takes you on a journey through the world of real estate investing. This free course educates new, potential investors on goal-setting, alternative investment strategies, and an introduction to passive real estate syndications and how to take advantage of this growing investment strategy. At the end of this free, 7-part course, you’ll be equipped with the information needed to make confident decisions that will help you attain financial freedom — the ultimate goal that produces the greatest return, which is the gift of time.