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, such as the 2020 Coronavirus crisis. 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. In addition to big drops in value, it can get hard to predict and prepare for stock market downturns. For instance, in March 2020, when the COVID-19 pandemic shut down businesses across the country, the stock market experienced the quickest 30%+ pullback in history. But back in January 2020, experts were predicting the stock market to continue to rise and saying that a recession wouldn’t happen. Too many investors got blindsided and lost a good deal of their wealth. Such hits are tough to take. Given the potential for such sharp, sudden declines, stocks 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. “As the COVID-19 pandemic began in the U.S., it became clear hospitality and retail businesses would get crushed. As more businesses closed, office real estate investments would suffer too. And, naturally, industrial real estate gets affected,” describes Don Wenner, President of DLP Capital Partners, a private investment group designed to produce consistent, high-yield returns. “Conversely, multi-family homes continue to see strong demand. Because during a market correction like the one in early 2020, people look for lower rents,” adds Wenner. Recessions, such as the one caused by the Coronavirus pandemic in 2020, cause increased unemployment and less demand for office, hotel, and retail spaces. However, people still need a place to live. More notably, people need an affordable place to live. That’s why affordable multi-family investments offer the best protection in downturns. 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. Therefore, as a downturn like the COVID-19 recession takes its toll, people choose to downsize. And workforce housing sees 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. Sure, 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. For instance, in March 2020, as a result of the Coronavirus outbreak, the Dow Jones suffered the third-largest and sixth-largest one-day drops in history in the span of three trading days. What happens if you were planning to liquidate some of those investments? It’s difficult to endure such massive losses in such a short time.
“As the Coronavirus pandemic has begun driving the U.S. into recession, we believe multi-family investments like our DLP Housing Fund will remain stable and the returns will vastly outperform the public markets,” says Wenner. “There are many reasons why multi-family investments are positioned to perform well in a recessionary environment. First, occupancy will remain high, which means continued cash flow. Second, opportunities exist to buy properties at lower prices, lower leverage, and great interest rates. With the right discipline, strategy, and execution, you can still achieve good returns” states Wenner. Note how Wenner makes a point about cash flow. Cash flow is crucial during any period and especially in environments like the Coronavirus-induced recession. With the exception of dividend stocks, stocks don’t offer the cash flow that multi-family properties do. For example, the DLP Housing Fund offers monthly distributions of 6% annualized net Preferred Returns to investors; this is even before DLP gets paid its management fee. Very few stocks pay out that much in dividends (and the ones that do come with much more risk and volatility). In addition, excess distributable cash above the Preferred Return is distributed annually achieving net Targeted Return of 12%+. You also can’t forget that 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 by 54% nationwide, while the average income for the bottom 70% of Americans has only increased by 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).
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 Housing Fund. The equity offering has annual Targeted Returns of 12% net to investors, while offering monthly distributions. “We’re incredibly disciplined at DLP and positioned well to capitalize on the volatility and distress the market sometimes faces, like with the Coronavirus outbreak. Other operators aren’t as prepared as we are, and we’ll be able to buy multi-family assets at lower prices because of that,” believes Wenner. “Our Housing Fund is also highly diversified in terms of geography, tenant base, and types of investments. The fund consists of equity investments and debt funding. This diversification protects our investors during times of crisis. We’ll continue to do our comprehensive analysis and due diligence. We’re extremely confident we can avoid losses, continue to provide monthly returns, and achieve very strong yields to our investors even in this unprecedented environment,” attests Wenner. To conclude, remember this: Any portfolio can benefit from the potential for consistent, high returns. And every portfolio needs an investment that can weather the storms such as the one COVID-19 has brought. 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.