Minimize risk. Maximize return.
That’s the goal of virtually every investor. But how do you achieve it?
You need more than a balanced portfolio. You need the right strategy and asset management. This will fully protect you during downturns.
If you wish to build long-term wealth, you may want to go beyond just stocks and bonds too. Stocks have lost 33% in value on average during recessions, which means they may not offer the best protection for preserving capital. In today’s ever-changing market, you need carefully-managed assets and a smart strategy so that you can withstand external headwinds and produce solid, consistent returns. The good news is that there are alternative investment vehicles that can do this for you.
Enter multi-family housing, a unique investment opportunity that can help you grow and maintain wealth. Multi-family real estate investments have provided an average annual total return of 9.75% from 1992–2018, according to CBRE research. This makes the asset class the best-performing commercial real estate investment.
But multi-family properties offer more than high returns. They can serve as a core part of a portfolio that builds and protects long-term wealth. That’s because multi-family investments provide the best balance of performance, stability, security, and cash-flow.
Why multi-family investments beat other real estate investments
Multi-family investment properties offer the best of both worlds: the potential for high returns and minimal risk, if purchased at a good price and with professional management
Among all real estate investment options, multi-family properties have the highest ROI. And they have the second-lowest volatility.
When it comes to real estate investment, multi-family properties offer the best combination of high yields and low risk. With disciplined buying, conservative use of debt, and diversification of assets, you can achieve consistent quality returns.
Additionally, demographic and lifestyle trends make multi-family homes more attractive:
- Baby Boomers are downsizing.
- More people value mobility and flexibility.
- Millennials have lower homeownership rates.
- Rentership is on the rise in most areas of the country.
Simply put, strong demand for multi-family housing exists. As the population continues to grow, demand will naturally increase. Even when a recession comes, multi-family real estate investment offers protection that other commercial real estate can’t.
For example, when a recession hits, hotel and retail businesses slow, affecting yields. More businesses close, hurting office real estate investments. And industrial real estate goes through a slowdown.
Conversely, multi-family homes continue to see strong demand. Because during a market correction, people look for lower rents.
Moreover, workforce housing (aka Class B housing) has an advantageous position in the market. Since the 2008-09 recession, most new construction has been for Class A housing. This has left a supply shortage in the non-luxury rental market. If a recession comes, and people have to downsize, workforce housing will see a boost in demand in the USA.
Multi-family real estate investments vs. the stock market
For the passive investor, a diversified stock portfolio may make sense. But remember investors have more ways to generate high, stable returns.
Consider this: multi-family investment returns have been similar to the average annualized total return of the S&P 500 for the past 90 years (around 9.8%). So, where’s the advantage?
Well, for starters, stock market volatility far exceeds that of multi-family properties:
- According to CBRE, the standard deviation of multi-family returns is 7.75%
- According to Seeking Alpha research, the standard deviation of S&P returns is 19.7%.
This means bad timing in the stock market could result in huge hits to your savings. While you can certainly achieve great returns in the stock market, it may not be suitable for preserving and maintaining wealth over the long run.
For instance, if you plan to rely on investment returns to fund your lifestyle, stocks could generate great returns. But what happens when you need to cash out some stocks and a market correction has cut 20% off the value of your portfolio? That puts you in a bad position.
“When the next market correction occurs, we believe multi-family property rental rates will remain stable and occupancy will remain high. This investment can still perform well in a recessionary environment,” says Don Wenner, President of DLP Capital Partners, a private investment group designed to produce consistent, high-yield returns.
Second, with the exception of dividend stocks, stocks don’t offer the cash flow that multi-family properties do. For example, the DLP Preferred Returns Equity Fund offers targeted annual returns of 12%. Very few stocks pay out that much in dividends (and the ones that do come with much more risk and volatility).
Third, multi-family investments offer the tax shelter of depreciation. Investors can reduce their taxable income through rental property depreciation. This enables owners to deduct the cost of buying and improving the multi-family property. Instead of taking a large deduction at once, investors can spread the depreciation deduction across the useful life of the property. That equates to less taxes each year.
In comparison to stocks, multi-family investments offer the biggest bang and buffer for your investment buck. For anyone who seeks high returns, consistent cash flow, and tax advantages—without the volatility, multi-family housing merits consideration.
Finding the best multi-family real estate investment opportunities
In terms of type of housing, workforce housing offers the best opportunity to generate high returns.
After all, the average rent price over the last 10 years has increased 54% nationwide, while the average income for the bottom 70% of Americans has only increased 4%. This means non-luxury rentals should have high demand.
“Bottom income earners—those most likely to rent—haven’t seen wages rise that much. They have a need for affordable housing, but everything being built is luxury. This is why Class B has tremendous demand,” states Wenner.
Construction of non-luxury properties has fallen drastically, according to Harvard’s State of the Nation’s Housing Report. With a shortfall of Class B properties (aka non-luxury rentals), investors have an opportunity to fill the gap and achieve higher returns for meeting that demand.
In terms of location, multi-family properties in non-coastal areas and smaller markets provide the best return on investment for a variety of reasons, including:
- More affordability: Secondary and tertiary markets offer work opportunities at a fraction of the price. Rising rent costs have driven many renters away from first-tier cities.
- Convenient locations: Multi-family housing near good schools, stores, highways, public transit, and entertainment enjoy high occupancy rates.
Protection during market downturns: Multi-family housing in secondary markets shield you from the worst of a housing recession. A recent analysis from Redfin shows large coastal housing markets will get hit hardest during a downturn (see image below).
This is why investment groups like DLP Capital Partners like Class B multi-family housing in the secondary southeast markets. Not only do local economies remain strong, but also populations continue to rise. Moreover, less competition exists in the real estate investment market. This ensures you can get great value and ultimately higher yields.
“Even when we go through a recession, Class B housing will hold up well. It’s luxury housing that may get hit. Many living in high-end units will move to workforce housing to save money,” adds Wenner.
Put the best real estate investment in your portfolio
Multi-family investment properties give you the opportunity to hedge against volatility and generate high returns. Any investor focused on building long-term wealth should consider multi-family housing.
For some, this sort of investment may be more hands-on. You could put cash directly into properties and oversee them.
For others, the multi-family investment process may be more passive. This requires much less physical work and time. The fund does the heavy lifting and you simply take the profits.
If you’d like to learn more about passive real estate investment options, consider funds like the DLP Preferred Returns Equity Fund (PREF). The equity offering is designed to generate 12% annual net returns to investors, while offering liquidity and quarterly distributions.
Any portfolio can benefit from the potential for consistent, high returns. That’s why it’s not so much a matter of whether you should invest in multi-family real estate. It’s a matter of when and how you decide to.