Why Multifamily Real Estate Deserves a Place in Your Investment Portfolio

There are several benefits to investing in real estate, and even more that are specific to multifamily. And while a diversified and carefully crafted investment portfolio is overwhelmingly favored, multifamily real estate can be a great addition to any portfolio.

It’s a versatile asset class that provides current income and appreciation while also having low correlation to other asset classes such as stocks and bonds. In short, it allows you to grow your wealth, create a stream of passive income, and potentially lower the volatility/risk of your investment portfolio.

The purpose of this article is to discuss some of the benefits of investing in real estate and then explore those that are specific to multifamily. As my preferred investment of choice, I believe that multifamily real estate should be included in every investment portfolio, and by understanding the benefits outlined below you can assess whether it’s an ideal investment for yours. 

 

Why Invest in Real Estate?

Tangible Assets

Unlike stocks and bonds, which are intangible and fluctuate with market conditions, real estate is a tangible asset offering security and stability. Its value is linked to the land and the structures built upon it. Land retains value due to its finite nature and increasing demand, and buildings can be repurposed, adapting to market changes.

 

Income And Appreciation

Real Estate offers current income through the rental revenue provided by the tenants, and after covering the property’s operational expenses and debt service, the remaining profits can be distributed in the form of passive income. The larger your real estate portfolio, the more income you can generate for yourself, and while you can grow your portfolio by means of reinvestment, your portfolio also can grow without it. This can be accomplished organically through market appreciation, or by making physical and operational improvements to the property, which increase the overall value.

 

Asset Class Diversification

Stocks and bonds are a great means of generating and preserving wealth, but adding real estate into your investment portfolio can provide these same benefits while also offering an additional layer of diversification, reducing the risk of your portfolio. Real estate has a relatively low correlation with stocks and bonds, which can also help provide stability during market fluctuations.

 

Tax Benefits

Similar to the benefits of other investments, profits from real estate may qualify as capital gains, lowering your overall tax burden. Unlike other investments, real estate also offers additional tax advantages through deductions like depreciation of the physical assets, mortgage interest, and property taxes. Receiving tax benefits is perhaps one of the strongest advantages investing in real estate has over the other asset classes.

 

Why Invest in Multifamily?

Organic Demand

One of the reasons why I’m so passionate about multifamily real estate is because it fulfills an essential need. People will always need a place to live, and by investing in these communities you’re providing them with this essential need for housing. The demand is organic and it won’t easily be phased out by some new technology or a better product, which means your investment will hold and retain value.

 

Tenant Diversification

While real estate provides you with risk diversification from other asset classes, multifamily properties offer an additional layer of risk protection through tenant diversification. By comparison, office, retail, or industrial properties typically have less tenants than multifamily properties do. Having a larger tenant base allows you to weather storms when tenants run into credit issues or when they leave and can’t easily be replaced. When a tenant leaves a retail plaza with five total tenants the occupancy drops 20%, by comparison a 200-unit multifamily property would have to lose 40 tenants at once to have the same impact on occupancy, a highly unlikely scenario.

 

Long-Term Stability

Multifamily properties provide long-term stability and consistent income over time. Tenants are locked into 12-month leases which provides predictability in future cash flows. There’s also no replacement for well-maintained properties in desirable locations, especially because there is a finite supply of land, and residents prefer to live near established communities.

 

Hedge Against Inflation

Rental income from multifamily properties tends to increase with inflation, providing a natural hedge against rising prices. As living expenses rise, owners can adjust rental rates accordingly, preserving a property’s income-generating potential.

 

Conclusion

Determining whether multifamily real estate is an ideal investment for your portfolio is the first step, but you’ll also want to understand how to invest in these properties, the strategies that are available to you, and the risk/return profile of each. Each of these topics is discussed within our other articles on this site, but overall, whether you’re seeking capital appreciation, income generation, or wealth preservation, investing in this asset class can help you achieve those goals.

If you’d like to learn more about how you can make your first multifamily investment, please fill out our contact form and one of our team members will reach out to you for an introductory call.