6 Benefits of Multifamily Investing
From tax breaks to appreciation to steady cash flow, the benefits of investing in multifamily are innumerable. As COVID-19 cases decline and the vaccine rollout continues, 2021 is proving to bring a promising return to some degree of ‘normalcy,’ offering countless opportunities to benefit from multifamily investing.
What are the Benefits of Investing in Multifamily in 2021?
Investing in multifamily can be a great way to generate income and build wealth over time. According to CBRE, multifamily investment volume will hit $148 billion this year, a 33% increase over the 2020 estimate of $111 billion. Additionally, as travel restrictions ease this year, buyers overseas will increase their spending in the U.S., rising demand for multifamily assets.
1. Favorable Mortgage Rates
It is extremely likely there will be a continuation of low-interest rates for the next few years, offering several strong opportunities for investors. According to Forbes, “a majority of the FOMC expects rates to remain where they are through 2023.” Additionally, with another flow of stimulus checks most likely hitting Americans’ bank accounts in the near future, investors will have additional income to put towards higher down payments.
2. Tax Breaks
Even the most well-made building’s mechanical systems deteriorate over time, including the plumbing, electrical, roofing, etc. The deteriorating condition of a building is referred to as ‘depreciation’ in accounting and allows property owners to expense part of their investment’s physical structure each year. This, in turn, reduces the property’s net operating income and overall tax liability. The higher the depreciation, the larger the tax benefit. In addition to depreciation, owners can also deduct maintenance and upgrades they put into their properties, offering additional tax incentives.
3. Less Volatile than Retail, Hotel, and Offices
Pandemic or no pandemic, people will always need a place to live. For that reason, multifamily proved to be a stronger investment and less volatile than retail, hotel, and office space in 2020. The road to recovery for those asset classes may take a bit longer than anticipated, with many individuals fearful of staying in hotels or working in office buildings. Hotels are being converted into multifamily buildings in some parts of the country that allow zoning conversions, offering even more options for investors.
4. The Option to Participate in a 1031 Exchange
Many individuals are hesitant to invest in real estate because of the tax liability a property presents when it’s sold. However, to avoid a hefty tax bill, investors can defer capital gains taxes on a building’s profit by reinvesting the proceeds into another property (or group of properties). The property or group of properties must be “like-kind,” meaning it is cash flowing asset held for productive use in a business or investment. In other words, a multifamily asset can’t be sold to purchase a single-family home the investor plans to live in – it must be exchanged for another income-producing property. There is no limit to the number of 1031 exchanges an investor can do, meaning investors can grow their income without a tax burden over the long term.
5. Recurring Revenue
Investing in multifamily offers an instant real estate portfolio, as investors receive distributions after the rent is collected on the property each month. Investors can then use the cash flow from that asset and reinvest it into other properties. Having additional cash on hand can help safeguard from loss, providing more cushion and capital to expand into other assets.
6. Opportunity to Adjust for Inflation
Multifamily housing often offers leases on a 1 or 2-year basis, allowing operators an opportunity to adjust for inflation and market demand. Other commercial assets such as offices and retail
space often operates on 10 or 20-year leases, offering less opportunity to adjust tenant rent. Additionally, the Federal Reserve has continued to adopt a monetary policy that keeps interest rates low and pours new cash into the system.
Is it Wise to Invest in Multifamily During a Pandemic?
In short, there is no better time to invest in real estate than in 2021. For starters, there is great anticipation surrounding the COVID-19 vaccine, with many projecting the majority of Americans will be vaccinated by the Summer and Fall of this year. Some companies may return to work in offices by the middle and end of this year, prompting those who live in cities to move closer to their workplace to avoid commuting on the bus or train. This shift from remote work to being in an office provides opportunities for investors to capitalize on investing in multifamily assets. Additionally, college students will return to in-person classes in the Fall, making student housing another lucrative investment opportunity. Even at the height of the pandemic, student housing remained 90.3% occupied as students sought the independence of living on their own, even if that meant taking classes virtually from their campus dorm room. With the return to in-person classes and most college students most likely being vaccinated by the Fall, the demand for student housing will be extremely high.
How to Invest Wisely in the Post-Pandemic World
COVID-19 certainly taught us quite a bit about how to keep our communities healthy and safe over the long term. When seeking to invest in multifamily, be mindful of looking for certain safety features that are already installed or consider installing those after purchasing the investment. For example, consider installing virus-resistant copper and easy-to-clean materials and surfaces such as semigloss paint and quartz/manufactured stone countertops as well as water purification systems and ventilation systems that improve air quality. Many operators are also removing carpet from the apartments so floors can be sanitized between tenants. Other examples include adding occupancy tracking to high traffic areas such as lounges and rooftops in condo buildings and college dormitories.
Key Takeaways about Investing in Multifamily
With countless individuals spending more time at home than ever before, many are seeking to upgrade their homes to larger rental spaces that include home offices, room to workout, outdoor space, and more. The demand for larger living spaces offers investors increased opportunities to benefit from the many advantages that come from multifamily investing.
Additionally, as a wave of students renew their leases at college dormitories on campuses across the nation, 2021 proves to be the ideal opportunity for investors to see strong returns on student housing. If you are an accredited investor seeking new investment, schedule a time to speak with us about partnering on our next deal.