With the prospect of a looming financial downturn, I encounter investors daily who want to diversify their portfolios with investment options that will protect them against market fluctuations.
I have spent 10 years overseeing a diversified portfolio of multifamily assets, administrating the acquisition, operation and development of thousands of residential units and more than one million square feet of commercial properties throughout the Southeast region. Given this role, people frequently ask me about the best investment options for future long-term returns. My answer is simple and consistent: Based on my experience, multifamily apartment rentals are best suited to withstand a future downturn.
Overall, experts regard real estate as a great investment vehicle because it is a hard asset that is visible, tangible and performs well in an inflationary environment. Its ability to generate cash flow makes real estate an attractive option for many investors. When you combine that cash flow with depreciation tax benefits and the property’s value increase over time, in my opinion, you have a perfect investment vehicle. In addition, real estate offers passive investors an asset that doesn’t require a substantial time investment.
However, some property classes offer more value than others. Multifamily properties, in particular, offer a variety of added benefits.
First, multifamily operators are more agile because property income streams are based on multiple shorter-term leases. Multifamily operators can adapt to meet renter demands and changes in the marketplace, which results in increased investor returns.
Next, the demand for apartment units has remained robust over the past five years. Since the 2007 recession, we have seen a shift in homebuying trends, with more millennials, Gen Xers and even baby boomers favoring renting over purchasing homes. Nearly 37% of current households are renters, which is the highest percentage since 1965. In my view, there are no signs that this trend will change anytime soon.
Younger generations prefer to spend their cash on experiences rather than buying and managing homes. They favor the flexibility afforded by renting to freely change jobs or move to different cities. Furthermore, as loan requirements have stiffened, it has become harder for younger generations and individuals with low credit and high debt to secure mortgages. Steep down payment requirements make buying even more difficult.
Many baby boomers, on the other hand, are selling their homes and moving closer to urban cores. They want pedestrian-friendly communities with all their lifestyle needs a few steps away. In their new multifamily communities, they are finding extraordinary amenities they didn’t have in their homes, such as top-of-the-line fitness centers with the latest exercise equipment, resort-style pools with outdoor grilling areas and cabanas, beautiful resident clubhouses with co-working spaces and more.
Suburban apartment properties also attract many new renters due to a variety of factors, including a family-friendly lifestyle, proximity and accessibility to major roads, great schools and retail options. In addition, suburban neighborhoods often offer a level of flexibility and affordability not found in urban cores.
In comparison to retail, office or industrial assets, apartments have the added benefit of a diversified tenant base. That means investors don’t have to rely on one or two large tenants, but on a few hundred. So, losing one tenant won’t detrimentally affect the return or cash flow of the property, thus reducing its risk during a recession.
It’s my belief that a savvy investment strategy begins with finding the right location that boasts robust population growth, high barriers to entry and high-end demographics. Additionally, investors should look at macro- and micro-economic trends for income and dependable job growth.
As part of a complete portfolio, investors should seek rentals that appeal to families and baby boomers who have sold their homes and want a more fluid lifestyle. Look for assets close to top-ranked public schools, easily accessible to retail, in proximity to leading business corridors and with high-volume, drive-by traffic within their respective metropolitan statistical areas (MSAs).
I offer the following advice to first-time multifamily investors:
1. Identify a market, and subscribe to the mailing list of every major multifamily broker who services that market. Every investor needs to look at as many deals as possible.
2. Contact the brokers in that market, and get introductions to their capital markets team to understand the best financing options. It’s important to also understand what lenders are looking for regarding both a specific deal and a sponsor group.
3. Line up your equity. As a best practice, speak with as many investors as possible to understand what their return expectations for real estate deals are.
4. Research the top management companies in the submarket you have identified, and understand their services and fees.
In my years at PointOne Holdings, our multifamily investments have resulted in an average of 8% cash-on-cash yearly returns and more than 18% internal rate of return (IRR). While nothing is 100% recession-proof, in my opinion, multifamily investments are best suited to weather a potential storm.