1 - Demand
It’s quite simple—people need a place to live. Housing is a necessity, which means even in times of crisis, or when money is tight, having a roof over your head is a priority. According to Statistica, in Q3 of 2020, during the height of the Covid-19 pandemic, the average US office vacancy rate was at a staggering 15.5% (and well above 20% in many urban cores, including San Francisco), trailed closely by retail and some industrial real estate markets. Whereas, multifamily real estate rose slightly, to a vacancy rate of 7.9% and has since returned to its average below 5%, right around the historic average. While the future of office and retail real estate remains uncertain, the demand for multifamily housing will remain high and constant, especially in a high interest rate environment.
2 - Cash Flow
In the case of traditional investments such as stocks, returns are only realized once the asset is sold. On the other hand, when invested in multifamily real estate, stable and predictable monthly cash flow is generated through rental income paid by tenants. This source of passive income adds another dimension to multifamily real estate that investors miss out on when they use traditional investments. In addition to cash flow, once the property is sold, the investor’s initial investment is returned as a share of the new, appreciated value of the property at the time of sale.
3 - Hedge Against Inflation
At a time when inflation is reaching record highs, it is imperative to make sure that your capital is increasing at a higher rate. Even when inflation is at its historic average rate of 3.8% (Bureau of Labor Statistics), the growth of your capital needs to be outpacing it if your intent is to make money on your investments. Investing in multifamily real estate is one of the premier ways to hedge against inflation. With fixed-rate mortgages but increasing rental rates, your spread in cash flow increases over time. And when you add the overall appreciation of a property, multifamily real estate stands tall to the predation of inflation.
4 - Tax Benefits
Investing in multifamily real estate offers significant tax advantages. The monthly distributions that investors receive are considered a return of capital. This means that since investors usually don't make capital gains during the holding period, all of the monthly cash distributions are essentially a return of the initial investment and are therefore not taxable. Then, at time of sale, when the investor generally does realize capital gains, they have the option to execute a 1031 exchange to further defer taxes. This process allows investors to reinvest the capital they received at time of sale into another property. By doing so, investors can defer paying the capital gains tax on the property that was just sold.
Multifamily real estate has proven time and time again to be a lucrative and resilient investment. It has many advantages to traditional investments and should not be overlooked when building your investment portfolio.