When your friend at a cocktail party brings up real estate investing, he’s probably referring to a single rental property or two. But, when it comes to generating significant wealth from real estate investments, it pays to think much bigger. For a number of strategic reasons, you should expand the scope of your investment strategy to include multi-family real estate as a desirable investment.
Multi-family real estate investing that includes apartments and high-rises provide an extremely effective hedge against stock market volatility, low rates on savings accounts, inverted yield curves and other obstacles you encounter when you invest money to make money.
We’ve all heard people say that their main source of wealth has been their real estate investments. This could be a personal residence, a few rental properties, or more serious investments in apartment buildings and high rises. What you don’t hear a lot is their strategy for investing, leveraging, and investing again. Unless they are writing a book, no one wants to share the secret of their success. Who wants more competition?
So, read on to find out what makes multi-family real estate investing, apartment buildings and high-rise investing in particular, an impressive way to build and preserve substantial net worth.
#1) Multi-Family Real Estate Is Historically A Low-Volatility Investment
Compared to investing in the stock market and other types of securities, owning multi-family real estate is a lower-volatility way to produce more consistent returns. After all, if your investment has 200 apartments, you have spread your risk over 200 units.
Compared to other types of real estate investments, multi-family generates the lowest volatility for the entire real estate asset class.
It is not difficult to figure out why this is true. If the economy experiences a serious recession, what is more important to people? Buying a new car or keeping a roof over their head?
Food and shelter are two basic necessities. A place to live is more basic than a place to shop. People will sacrifice a lot to avoid being homeless, in particular if they have children. This is why apartments and other multi-tenant forms of real estate are the least likely to track declines in the stock market. People may lose wealth and even their homes, but their recourse is always to rent an apartment.
And if real estate does eventually track a recession, multi-family investments tend to lag recessions and periods of economic decline. This means that this asset class could lag declines in other economic indicators by six months or more. This gives real estate investors time to plan their next move. How about a free month or two of rent?
#2) Predictable Lease Turnovers Work To Your Advantage
One of the major obstacles for more reliable wealth creation occurs if you are investing in single-unit real estate and the tenant leaves. Let’s paint a quick picture to illustrate the differences between a single-unit and an apartment or high-rise approach to investing in regard to turnover.
We’ll assume that a friend bought a single-family residence and rented it to a person who responded to an ad on the Internet. At the same time, you decided to invest in a multi-family apartment with 40 units. A year later, you run into your friend again and compare notes on your two approaches. The differences can be amazing.
Here’s how the two of you have fared in the past year, and two major benefits you’ve enjoyed that your friend missed out on:
- Diversified Tenancy. Your friend’s tenant in his single-unit rental has been sub-par: consistently late on rent, constant complaints about maintenance, etc. The experience was not bad enough to justify an eviction, but he is still stuck with an unpleasant situation. You, on the other hand, have enjoyed the diversification of 40 tenants, with shorter and more predictable lease cycles. Diversifying your tenants provides you with peace of mind, added protection against bad tenants, and a more reliable income stream.
- Low Vacancy Exposure. If your friend’s tenant leaves, 100% of his rental income stops and he may be faced with improvements before he can re-rent his property. All things being equal, each of your tenants represents 2.5% of your rental income. So, a vacancy or two is not the end of the world.
#3) Multi-Family Units Offer A More Effective Hedge Against Inflation
Today more than ever, you need to consider the erosive impact of inflation on the purchasing power of money. This is why the stock market reacts so negatively when there is even a hint of inflation. Costs go up while profitability and purchasing power go down. One of the best hedges against inflation is an investment in a multi-family property that increases rental rates during periods of inflation.
You’re probably asking yourself, if single-family units and multi-family units are both real estate asset classes, how can one be a more effective inflation hedge than the other? Fair question. Here’s how it works.
If you’ve gone down the single-unit approach to real estate investing, your rental income is dependent on what one tenant is willing to pay. If a period of heavy inflation hits, your real estate investment returns will take a direct hit in proportion to inflation rates, since your single-tenant approach gives you no flexibility to raise your rental rates during the current lease.
However, as we mentioned earlier, apartments and high-rises give you a broad cross-section of different tenants, whose leases will lapse at different times. This gives you the opportunity to raise your rental rates in lockstep with inflation rates if necessary.
Since you control rental rates, multi-family real estate is by far one of the best asset classes around when it comes to inflation protection. And this is more important today than ever, as the increasing complexities of our global economy make inflation a more likely economic event.
Conclusion
Anyone can invest in real estate, if they have some basic financial knowledge, some working capital, and some reserves for a rainy day.
However, if you are an accredited investor and you want to leverage your capital you can invest with experts who do all of the heavy lifting for you. They do the work and you reap the economic benefits.
In this case it pays to do your homework to make sure you select a real estate expert that puts your financial interests ahead of his own. We strongly suggest selecting an expert who knows the ins and outs of investing in multi-family residences.