Multifamily real estate is one of the largest global investment asset classes, and its speedy recovery post COVID-19 is attracting even more investor capital. Here are five things for first-time multifamily real estate investors should know before adding the asset class to their portfolio.
Multifamily real estate investing has long been recognized for its economic value. The asset class is outperforming other sectors and is expected to remain unchallenged as the leading property sector in the U.S., CRBE reports. Investor optimism is strong, with 60 percent of investors expecting to increase their acquisitions of commercial real estate, per the same report. For those considering an investment in multifamily real estate, here are five things to know before diving in.
Long-term wealth building
Multifamily real estate investing may not be the right investment for someone looking to make fast cash, but it is a great choice for a sustainable, long-term investment. Demand for multifamily properties is high and is expected to continue climbing for years to come. This is due in part to rising home prices and migration to second-tier cities during the pandemic.
Bloomberg reports that buying a house will take an extra year of savings. Now, a typical American will have to save for 8 years to make a down payment. Multifamily units are usually less expensive than a single-family rental and therefore are the preferred option for Americans saving for a down payment. As the share of first-time homebuyers declines, demand for rental properties continues to increase.
Supply is unable to keep up with demand. It is projected that the U.S. will need 4.6 million new apartments by 2030. According to Forbes, if new multifamily development continues at its current pace, we will only be able to meet about 70% of demand.
Market events and crises
Multifamily real estate is one of the best alternative investments in an economic crisis. It is among the first to bounce back after a recession and has inherent characteristics that make the asset class perform well when equity markets trend down. Most people do not want to move in an economic downturn, making multifamily real estate a less reactive investment. Thus, it is likely to outperform stocks and bonds in a recession.
In an inflationary economic climate, real assets like real estate are often viewed as a safe haven for investors. Multifamily real estate is uniquely suited to perform during inflationary periods. The high turnover rate and year-long (or shorter) leases offer more opportunities to increase rent compared to commercial real estate, which typically has multi-year leases. The upward trend of property values and decreasing loan-to-value of any mortgage debt also make real estate a sound investment in times of high inflation.
Choosing the right method
Multifamily real estate offers a variety of ways to invest. An important distinction is active versus passive investments. Active real estate investing is when the investor is closely involved with every aspect of owning and operating the asset, which can require time and effort similar to a full-time job. Passive real estate investing, on the contrary, is a form of investing in which an investor places capital into a real estate venture that the investor does not have any direct responsibility for managing, while enjoying similar benefits to owning the asset, including earning passive income, tax benefits, and asset appreciation.
Diverse locations and assets mitigate risk
Multifamily property funds like Lucern Multifamily Value Fund I, L.P. can help investors diversify their portfolios.Allocating assets to a fund that includes properties thoroughly vetted based on price, class, location, and the potential to add value through renovation help investors reduce risk.
If one acquisition in the fund doesn’t perform as well as expected, investors still have several other properties to rely upon, including those that are overperforming. Plus, fund investors are invested in properties across several markets rather than the single geographic location in which the investor lives. Choosing to invest in a geographically diverse fund also helps mitigate risk.
Partners with the credentials to perform
Successful multifamily real estate investing is no easy feat. It takes a team of professionals to navigate the real estate market. Investors want to be confident that the fund managers they choose can source deals, have strong underwriting capabilities, can negotiate favorable financing terms, operate the asset efficiently, generate returns and formulate an exit strategy. Industry relationships are also important. Investors should look for well-connected fund managers that can leverage their network to generate superior risk-adjusted returns.
In summary, multifamily real estate investing is a large industry with the potential for outsized returns. irst-time investors should ensure that the asset class aligns with their goals for long-term wealth and lifestyle. A private equity real estate fund can be leveraged to add assets that are uncorrelated to public equity markets,
If you’re ready to get started with multifamily real estate investing, Lucern Capital Partners can help.
Lucern Capital Partners is a real estate investment firm that targets value-add multifamily and mixed-use assets along the U.S. East Coast with a focus on the Carolinas. With over 55-years of combined real estate experience, the Lucern Capital Partners team has successfully transacted on over $2.5 billion of debt and equity real estate transactions during their careers. They bring that knowledge to accredited investors to provide income-generating investments in institutional-quality multifamily and mixed-use assets through fund vehicles and standalone transactions.