HNWIs Prefer Investing In Apartments

TruePoint Capital

The merits of investing in commercial real estate are undisputed, but there’s one particular segment high-net-worth-investors (HNWIs) are flocking to, and that’s multifamily.

According to recent research based on a survey of readers of WMRE and, HNWIs favor multifamily over every other commercial real estate segment. The annual survey polls financial advisors and commercial real estate professionals to get their perspectives on HNWI and accredited investor strategies related to commercial real estate.

It’s no surprise that smart investors are flocking to multifamily. It’s basic economics of supply and demand. Invest in something with consistent and high demand where supply is lacking, and you have a recipe for reliable and consistent returns backed by a hard asset. And that’s exactly the state of the current multifamily market.

“The fact that multifamily has remained a top pick for investors is really not a surprise because here in the U.S., we’re still over 1 million homes behind in meeting the current consumer demand for affordable places to live, and that has been the case for about 20 years,” said Travis Watts, director of investor education at Ashcroft Capital, a real estate investment firm specializing in value-add multifamily properties.

Investors understand the basic supply and demand story for housing and the fundamental reality that everyone needs a place to live. Currently, the U.S. has one of the biggest affordability gaps between renting and owning. According to Yardi Matrix, national rents are hovering around $1,700 per month compared to average mortgage costs, with rates on a 30-year fixed loan at about 6.5% at about $2,500 per month.

The gap between supply and demand for multifamily has been widening since the Great Recession, and there doesn’t seem to be any end in sight. That’s why HNWIs favor multifamily. No other segment offers the long-term stability and prospects of stable, reliable returns than multifamily.

The resilience of multifamily is a big selling point for HNWIs. HNWIs love stability and predictability to map their wealth goals, and multifamily is the ideal segment for generating consistent cash flow and growth insulated from volatility. Multifamily’s resilience was on full display during the pandemic, where it weathered the 2020 recession better than most property sectors – only industrial held up better – and market deterioration was far less than in previous recessions.

Besides its resiliency, HNWIs flock to multifamily for a variety of other advantages, including:

Passive Income. Passive cash flow allows HNWIs to take their hands off the wheel and do what they enjoy. It frees them of the pressure of working 9-5, and when income is reinvested, returns are compounded to accelerate wealth.

Tax Benefits. Tax benefits are often overlooked by investors focused on chasing gains in the stock market. HNWIs relish the tax benefits of multifamily investments that allow them to keep more of what they make. Passive multifamily investments structured as partnerships offer multiple tax benefits, including deductions, depreciation, long-term capital gains treatment, and avoidance of self-employment taxes that most other investments cannot offer.

Long-Term Windows. The illiquidity of multifamily assets allows an investment to mature and grow without outside distractions and market volatility. This noncorrelation to the broader market insulates these assets from recessions and downturns.

Growth. Assets that appreciate over time – especially ones with unlimited demand like multifamily that keep pace with or outpace inflation – add another source of returns that, when paired with cash flow, is ideal for compounding wealth. The intrinsic value of multifamily – derived from its productivity and not from what the herd thinks it’s worth – is why it appreciates in value over time at a rate faster than inflation.

Leverage. With multifamily investments, there is another opportunity to compound returns through the leverage of bank financing. Investment capital can be leveraged through financing to acquire more or more valuable properties than without financing. Instead of putting 100% of your capital into a single property, that capital can be used as a down payment for 4-5 properties – generating multiple income streams instead of just one. Investors can benefit from bank leverage whether investing directly or passively.

Value-Add Opportunities. Multifamily is conducive to value-adding for enhancing returns. Investors can force the appreciation of a multifamily asset through strategic value-adds such as renovations and improvements to management efficiencies.

It’s no surprise that HNWIs favor multifamily. It exhibits all the ideal investing fundamentals smart investors look for in an asset that can generate above-market returns at reduced risk.

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