Why Investors Should Include Multifamily Real Estate As Part Of Their Investment Portfolio
Updated: Jul 2, 2021
Intelligent investors are always looking for ways to diversify their portfolios. It’s a strategic practice in general, because it expands the chances of a profitable investment, while minimizing the impact any one unfortunate venture can have on the total portfolio. By nature, the concept of a diversified portfolio can involve any number of different ventures. There are some that are particularly common among those who are looking to expand beyond stock market investments, however, and one is real estate. In this post, we want to look at some of the reasons why this is a valuable type of investment for everyone to consider. Clear Goals Investing without clear goals and an anticipated outcome is among the common investing mistakes to avoid in general. Without these details worked out, you might find yourself holding onto a given investment for too long, getting out of it too quickly, or otherwise winding up in a less-than-ideal situation. Investing in real estate helps you avoid these issues, because it’s a fairly defined venture. Your goal, almost every time, will be to invest in quality properties that will generate income and appreciate over time. The clarity of this goal makes it easy to determine success or failure, and thus easier to manage the investment strategically. Passive Income Another reason to consider real estate as part of a portfolio is that it’s a form of investment that builds wealth more consistently than most other asset classes. When you buy a stock, for instance, you are hoping that it will appreciate in time, and eventually earn you a return. With real estate you can begin earning passive income immediately. Rental income is a form of cash flow that enables an investor to expand his or her wealth while the investment is appreciating. Appreciation We have just mentioned the idea of appreciation, but it’s important not to forget about it while focusing on cash flow. In most cases, if a property is maintained well and there is no unforeseen economic issue affecting real estate markets, this is an investment that will appreciate over time. This means that even as cash flow represents an income stream relating to the investment, there is also a final return if and when the property (or the investor's stake in it) is sold. Very few other types of investments offer both forms of profit, and ultimately this is what also makes multifamily real estate a particularly risk-averse form of investment. Because property value appreciates, this investment preserves wealth in addition to growing it over time. Tax Advantages There are also numerous tax breaks that come from property investment. First and foremost, depreciation can play an important role in shielding real estate investors from taxes on their returns. In syndicated multifamily investment arrangements, investors often become limited partners wherein they receive cash-on-cash returns in the form of dividends, which would normally be taxable. With real estate investments, depreciation in the property can be accelerated by way of cost segregation analysis, passing the depreciation on to investors via an annual K1. This depreciation, in turn, may shield investors from some or all tax liability relating to their cash-on-cash returns. There is also potential for tax advantages with regard to generational wealth preservation. When real estate is passed on in a will, it is done on a stepped-up tax basis that can shield heirs from inheritance tax they might otherwise have to pay. In this sense, multifamily real estate investment can also be an important part of an estate plan. A Demand For Rentals One last reason that multifamily real estate should be considered in any diversified portfolio is that housing is an intrinsic human need which creates a mandatory demand. In addition, many people today particularly in younger generations, are in tune with the reasons to rent rather than buy a property increasing the demand for multifamily rentals. This does not necessarily affect every investment, but it does mean that rental markets tend to be strong. An investor with a valuable piece of property should have little trouble finding consistent rental activity, and thus a steadier cash flow and quicker return on expenses. For these reasons and more, we truly believe investors should examine the option of adding multifamily real estate to their investment portfolios. The payoffs in terms of shorter-term income and long-term wealth preservation, combined with numerous other benefits, are typically well worth it.