Three Ways Multifamily Real Estate Helps Offset Stock Market Volatility

By Lucern Capital Partners

During the past year, the stock market has taken investors on a wild rollercoaster ride. Numerous factors have contributed to this upheaval—including geopolitical tensions resulting from Russia’s invasion of Ukraine, rising inflation and interest rates, and government spending.

Although no single path exists to circumvent market downturns completely, smart investors have discovered safe havens that reduce exposure to market volatility. This includes multifamily real estate, which generates passive income to help investors ride out the market rollercoaster. It’s worth noting that historically, private real estate investment has experienced substantially lower volatility than public markets. For recent evidence of this dynamic, consider the public market’s reaction during COVID-19. It showed significant volatility, while the private real estate market remained relatively stable.

To better appreciate how this alternative investment plays a role in wealth preservation, let’s explore three ways multifamily real estate helps offset market volatility.

Diversification

Multifamily real estate keeps you aligned with one of the most fundamental rules of successful investing: Diversify your portfolio. Without proper diversification, investors expose themselves unnecessarily to significant risk. A well-planned diversification strategy can help you weather the stock market’s unpredictable swings, and multifamily real estate has an important role to play. Investors must consider how the characteristics of various asset classes will respond to different market environments. By providing opportunities outside of equity markets, multifamily real estate can offer rental growth and real asset appreciation that help offset losses from other investments. Also, proactively managing a multifamily asset’s tax liability by maximizing depreciation through cost segregation and deferring capital gains taxes can amplify returns and allow profits to grow tax-free over time.

Uncorrelation

Many investment vehicles follow the wild swings of the U.S. equity market, including stocks, bonds, and even REITs. That’s not the case with multifamily real estate. Typically, its value is not tethered to those market fluctuations. Major macroeconomic events have less impact on this asset class because prices are tied to leases that deliver guaranteed revenue. Serious investors appreciate the strengths that accompany multifamily properties. Because the leases are usually one year— unlike commercial real estate, which typically has multi-year leases—more opportunities exist to increase rent. As a result, multifamily real estate is well-positioned to benefit from an increase in inflation. This asset class has another inherent advantage: Regardless of what happens with the economy (or virtual workplaces), people will always need a place to live. With this in mind, investors can see favorable results by targeting properties in areas where population growth drives demand for limited supply.

Passive Income

The passive income generated by multifamily real estate provides a critical buffer against market volatility. The returns generated from this asset class can often outperform inflation. Demand for rentals increased significantly this year, driven by an undersupplied housing market, along with rising home prices and mortgage payments. We expect rental rates will continue to grow in many markets but at a slower pace, making geography an even more critical factor in asset due diligence. The ability to mark to market is always an option upon lease renewal if the market can support it. Stronger markets, coupled with wage inflation and a strong labor market, will support lease rate increases, driving NOI.

Protect Your Portfolio

When you make multifamily real estate part of your investment strategy, it helps mitigate the risks that accompany market shifts. This asset class brings diversification beyond equity markets and has less reactivity to major macroeconomic events. What’s more, the passive income provided by multifamily real estate provides returns that can outperform inflation. Multifamily real estate represents an investment that should appreciate in value over time.