Alternate Investments as a Wealth Building Strategy
Why Multifamily Assets Should be a Major Contender
By Jennifer Stoops
With our current economy being ever changing and uncertain, people have been looking now more than ever at diversifying their retirement, personal and wealth building investment portfolios. The days of relying on a 401K, Roth IRA, stocks and bonds as your retirement portfolio are no more. While these conventional options for building wealth are still beneficial, market trends are creating an environment that is causing more people to look into alternative investments to broaden their investment and wealth building strategies.
So, what are alternative investments and why are they becoming more and more prevalent as a part of a wealth building strategy? Alternative investments are financial assets that do not fall into conventional asset categories like stocks, bonds and cash. These types of investments can create compelling opportunities for investors to diversify their portfolio, dampen the impact of market volatility and help to achieve long term financial objectives, even during times of market uncertainty.
The Benefits of Alternatives
There are some significant benefits to investing in alternatives because they behave differently than traditional equity and bond investments. Adding alternatives to an investment portfolio can help in three major aspects: they can lower volatility, broaden diversification, and enhance returns.
Alternative investing can lower volatility because they rely less on broad market trends and more on the strength of each specific investment. Therefore, adding alternatives can reduce the overall risk of the portfolio. With low correlation to traditional asset classes, alternatives can be a beneficial way to also broaden and diversify your portfolio. Alternatives can improve the risk and return of a portfolio and enhance total return through access to a broader macrocosm of investments and strategies.
Some examples of alternative investments are private equity, hedge funds, venture capital and real estate, just to name a few. Single family residential assets (SFR) have historically been the “go-to” for real estate investments as a part of portfolio diversification. However, multi-family investing has quickly become a major contender.
Why Invest in Multifamily Properties
There are plenty of reasons to invest in multifamily properties, which are often apartment complexes of four units or more. Some of the primary benefits of investing in multifamily assets include a reliable cash flow, less risk than other real estate assets, easier access to financing, growing your portfolio takes a lot less time, better cash flows allows for a greater opportunity to hire a professional management company, the creation of passive income, higher potential for appreciation and a higher demand.
Investing in multifamily properties can result in a reliable monthly cash flow that an investor can rely on from rental payments. Even as a unit becomes vacant, an investor can still rely on cash flow from other tenants. A vacancy in multifamily is less risky because it continues to generate cash from other occupied units.
Financing for multifamily assets is also easier to obtain. Despite multifamily assets being more expensive than its single-family counterpart, securing a loan for multifamily real estate is surprisingly easier than it is for securing financing for single family assets. You’ll also be securing a single loan for multiple units which is more cost effective.
Lenders are prone to considering the properties ability to make money rather than a decision based on one buyer’s credit. Because multifamily properties generate strong, steady cash flow, most lenders consider these a lower risk investment.
Acquiring multifamily assets is a much faster strategy to build your investment portfolio. By procuring multifamily properties, you will save time, energy, and money, not to mention you will build a significant, income generating real estate portfolio. For many investors, buying multifamily assets is a launchpad to building their own real estate empire.
Multifamily investing makes scaling relatively easy. Scalability, shared services and features, multiple units in one location, all add up to reduced expenses.
With the extra cash flow, multifamily properties are ideal for hiring professional property management to maintain and protect your assets. And who isn’t interested in creating passive income? Investing in multifamily properties is a great way to create and generate passive income and with the extra cash flow, this would allow for some cash to be put towards your next multifamily asset on the journey to building wealth through a real estate portfolio.
There is a much higher ability to create forced appreciation. Forced appreciation occurs when an investor proactively increases cash flow and property value with property improvements such as common area improvements and updates, curb appeal improvements, updating individual units, adding and improving amenities and adding security features.
Lastly, demand is high. Multifamily properties are in high demand and this sector is forecasted to grow. What is driving demand? Baby Boomers preparing for or having already retired and looking to be closer to family and with less hassle of maintaining a property, people relocating for jobs, empty nesters looking to downsize and millennials not quite ready to buy
a home. These trends will likely continue, therefore continuing to create demand for multifamily properties.
Hot Multifamily Markets
Yardi Matrix recently released its 2023 winter outlook which projects rent growth in 2023 will hit 3.1% at the national level. That is a more than 50% drop from the 6.4% reported in 2022. This year will be one that is considerably more normal, but that still means a great year for the industry.
The factors driving multifamily rent growth in 2023 include a strong economy, low unemployment, and a growing population. Further, the availability of financing options such as fixed-rate loans can help investors take advantage of the current market conditions.
Everybody has their own positions and speculations on which markets will be the hottest for multifamily in 2023. Based on the rent growth projections provided by Yardi Matrix, here are three markets every real estate investor should be conducting their own due diligence on. I am not including the usual suspects like New York City and Dallas.
San Jose, CA
According to Yardi, San Jose’s projected rent growth in 2023 is 4.9%. Currently, there are about 4,000 units which will be completed this year, rental demand crept up at the end of 2022, and the renter fundamentals are likely to remain strong throughout 2023.
San Jose is typically one of the most expensive markets to rent in. One would expect it to soften a bit more than the average metro as the economy contracts, especially after a recent wave of tech layoffs. While Yardi disagrees with that assumption, and believes fundamentals are strong, other forecasters site the concern of the low percentage of loans that originated in the first nine months of last year, at about 5 percent in San Jose. That possibly means a higher percentage of loans are likely to need to be refinanced soon and at much higher interest rates.
Tampa, FL
Tampa’s projected rent growth in 2023 is 3.7%. The rent growth is similar to Miami but at a much lower price point. At the end of 2022, rents in Tampa were averaging around $1,800.
In Tampa, supply has not caught up with demand due to an increase in population. From 2016 to 2021, Tampa Bay’s population surged by 5.6%. The current metro area population of Tampa in 2023 is 2,977,000, a 1.09% increase from 2022. A report from real estate company Redfin found that Tampa was in the list of top places people were moving to, even though many of those areas on the list also have the highest inflation rates in the country.
While there are around 8,700 units slated to be delivered this year, that number only accounts for about 3.6% of stock. It simply is not enough to meet the rising demand.
Charlotte, NC
Charlotte’s projected rent growth in 2023 is 3.6% and its apartment inventory is slated to expand by 5.7% this year.
Charlotte is a hot market for basically any real estate investment opportunity. Just like San Jose, the “Queen City” is fundamentally strong. A notable submarket in Charlotte is the University City area, which is home to the University of North Carolina at Charlotte. College enrollment in the area is up significantly and thus there is growing demand for more and more student housing and multifamily properties.
Key Takeaways and Conclusion
What are some key takeaways as to why you should consider alternative investing, specifically multifamily investing? First, owning real estate in general whether single family or multifamily can be a smart way to diversify your investment portfolio and generate steady income. Second, a multifamily property can multiply your income with only incremental added cost. Lastly, multifamily rentals are typically easier to finance, returns compound more quickly and they tend to benefit from economies of scale.
In closing, alternative investing is a great opportunity to diversify your portfolio and build wealth. Single family and multifamily property investing is a powerful way to build a property portfolio. Additionally, it is also a way to invest with purpose, giving you the opportunity to help ensure that local communities have a housing supply that is affordable, well maintained, well located and safe.
This strategy of investing is a great, relatively low risk option to begin the diversification of your investment portfolio and continue to build your wealth (and your empire).
