I’ve always been interested in real estate, but honestly when I started out, the first thing that came to mind was fixing and flipping single family homes. I used to watch fix and flip shows and it looked like a lot of fun and also a lot of work. I started my real estate career buying single family homes and renting them out for cash flow, but managing these can be either a lot of work or costly using a management company. As a software engineer who has built scalable systems, I too wanted to scale my real estate investments.
After doing a lot of research, reading books, and listening to podcasts I came across multifamily. I had always thought that this type of asset was only accessible to big investment firms or to the very wealthy. I found out that not only could I invest in apartments but they are also one of the best investments out there.
Multifamily properties (apartments) have extremely high demand, allow for completely passive income, are low risk, have real estate tax benefits, and allow you to hedge against inflation. Let’s look at some of the data and reasons why that is.
High demand
When looking at the demographics of renters, I found that millennials have been renting longer than previous generations. Factors include high student loan debt getting in the way of saving a down payment, waiting longer to get married than previous generations (which correlates with buying your first home), and the desire for flexibility to move [2]. Millennials have also become the largest population segment in the U.S at over 75 million.
Millennials are renting more than previous generations at the same time in their lives.
| Generation | Owner-occupied | Rental Property |
| Early Boomers in 1981 | 35% | 61% |
| Late Boomers in 1990 | 29% | 67% |
| Gen Xers in 2000 | 34% | 62% |
| Millennials in 2016 | 22% | 74% |
Source [1]
In conjunction with Millennials staying as renters as they age, Baby Boomers are starting to cash out of their owner-occupied properties and turn into renters. Baby boomers rent because they want to downsize and prefer the ease and amenities that apartment communities have to offer.
Since 1989, demand has outpaced supply of apartments for every year except three [4]. Occupancy of apartments has hit near record levels of 95.8% nationwide and rents continue to increase [3]. Ultimately, people will continue to value renting as it can offer both flexibility and affordability.
Passive Income
Investing in real estate can create steady and consistent cash flow for investors unlike stocks and bonds. The income generated from tenants paying their monthly rent is used to pay for expenses, with the leftover distributed to investors as income. When investing in apartments, the expenses are lower on a per-unit basis as compared to single family rentals. In larger multifamily investments (100+ units), you see even greater economies of scale. Investing in larger apartment communities is accessible to more people than you may think because of real estate syndication, where a group of individuals invest together. In a syndication, there is the opportunity to be completely passive and the work of managing the asset is in the hands of the operator.
Low Risk
Reducing your risk is one of the most important things to consider when investing your money. Multifamily real estate is a physical asset that can be rented, sold, or refinanced depending on the market conditions. A tenant moving out represents a much smaller dip in occupancy in large multifamily as compared to smaller unit buildings meaning turnover minimally affects income.
Residential real estate is an investment in one of the basic human needs–shelter, we will always need a roof over our head whether the economy is going up or down.
Tax benefits
Real estate investing is known to have great tax benefits. Most people understand what that looks like for a primary residence in the form of mortgage tax benefits, but you can also receive amazing tax benefits from investing in multifamily through a syndication or buying multifamily outright.
Depreciation of the asset can be used to offset the cash flow gains while you own the asset. At the end of the investment period when the property is sold, you can pay long term capital gains or you can do what is called a 1031-Exchange. A 1031-Exchange allows you to defer the taxes as you get out of one real estate investment and into another. Some people defer the taxes on the gains indefinitely. Additionally, depreciation of one asset can be used against appreciation on another asset so long as they are both passive investments.
Definitely consult your tax advisor to make sure you’re following the tax code, but there are large tax benefits to real estate and especially passively investing in multifamily assets.
Inflation hedge
The annual inflation rate is 2% according to the federal reserve. This means that money in the future is worth less than money now. Leaving cash under your mattress inherently means that you’re losing money. Similarly, putting money in savings accounts at tiny interest rates is also losing you money.
A real estate investment of a year ago actually pays you in today’s dollars. This is true of all real estate, but the awesome thing about multifamily is that the value is tied to the income generated. This means you get cash flow in today’s dollars and the value of the underlying asset retains real value and is also priced at today’s dollars. Usually, the value of a property grows with or faster than inflation.
Multifamily real estate investing really resonates with my engineering mind. I love the economies of scale and the low risk of the asset class. Any real estate investment or investment in general needs to fit into your plan. That is always something to keep in mind. If you want to learn more about investing in multifamily real estate, schedule a call with me!