The Benefits of Investing in Multifamily for High Net Worth Individuals
By Alan Englander, Senior Vice President of Business Development
Anyone who knows me knows how much I love my job. Whether it’s playing golf or going to dinner or attending a baseball game with them, I get tremendous joy out of being with clients and prospective clients. My gift for gab is certainly no secret, and I take such pleasure in really getting to know investors, learning their life stories and sharing mine.
But as I much as I absolutely treasure these personal connections, what makes me truly passionate about my job is my strong belief in the value of multifamily investments for high net worth individuals.
There are, of course, numerous ways to invest in real estate. Investors can purchase rental homes or commercial properties and manage the assets themselves. However, being an active landlord can involve a significant amount of stress, as investors often find themselves jarred out of a deep sleep in the middle of the night by phone calls about broken pipes and leaking roofs.
Publicly traded REITs, real estate-specific ETFs and real estate-focused mutual funds have become popular investments over the years, but these vehicles can be subject to market volatility.
For high net worth individuals, investing in private real estate funds that purchase investment-grade properties such as large apartment communities, big retail centers or sizable office complexes is a sensible way to incorporate the benefits of real estate into their portfolios.
And private funds that focus on multifamily investments can prove especially appealing. Below are some of the reasons why.
- Considerably less stress. With a private real estate fund, a professional property management company – and not the investors – handles the hypertension-producing hassles of managing an asset while investors get to enjoy the income-producing benefits of the property.
- Less volatility. Private real estate funds may not provide the liquidity of REITs, real estate-specific ETFs and mutual funds, but they are also much less volatile. While certain economic news can send the overall stock market as well the value of publicly traded real estate investment vehicles tumbling, private funds – whose performance is tied strictly to the underlying hard assets – are more immune to the whims of the market.
- A hedge against inflation. Furthermore, because their value is based solely on physical assets that can increase in value over time, private real estate funds provide a great hedge against inflation. Multifamily investments can serve as a particularly strong hedge because apartment leases are typically only 12 months, giving operators the leeway to consistently grow rents and thus increase a property’s value. The longer-term leases found in the retail, office and industrial sectors don’t afford property managers this same ability.
- Strong returns. Private funds that invest in institutional-grade real estate can deliver superior risk-adjusted returns. REITs provided total returns of 9.67 percent over the 20-year period that ended Dec. 31, 2016, while direct real estate investments, like those offered by private real estate funds, had total returns of 9.31 percent, according to numbers from Macrobond Financial Inc. in “Direct Real Estate’s Potential to Improve Returns and Reduce Risk for Target-Date Funds,” a report issued by TIAA in 2017.
However, direct real estate investments had a lower standard deviation, 11.37 percent vs. 19.59 percent for REITs, over the same period and a higher Sharpe ratio, 0.55 vs. 0.40 for REITs, meaning better risk-adjusted returns.
Overall, private real estate funds can provide the combination of consistent, steady returns and lower volatility than can allow investors like high net worth individuals to sleep more soundly at night. And they can especially sleep soundly when they invest in private funds, such as those sponsored by JVM, in which the general partner’s senior managers also invest significantly. This means the general partner is as motivated as the investors to ensure that a fund’s properties perform well and deliver consistent and strong returns.
- Tax advantages. With REITs, ETFs and mutual funds, investors have to pay taxes right away on any dividends they receive from those vehicles. However, distributions from private funds are considered a return of capital and therefore are not taxable until an investor has recouped all of his or her investment. In most situations, any subsequent gains are then taxed at the long-term capital gains rate.
- Apartment sector set for continued strong demand. The multifamily market has enjoyed a great run over the past half-decade or so, and the industry appears positioned to be healthy for a long time. Owning a home is not nearly the priority for millennials and members of Generation Z that it was for earlier generations.
People in the 20s and 30s don’t want to be anchored down by a home – they crave the flexibility to move that apartment living affords them, and they often don’t want to be burdened with the expense and labor that goes into maintaining a single-family home. Plus, they saw the financial hit their parents took when the home market crashed a decade ago. Additionally, baby boomers and senior citizens are growing increasingly enamored of downsizing and enjoying the ease and amenities of apartment living.
The Midwest, which is where JVM’s entire apartment portfolio is located, is especially well positioned, as intense competition in coastal real estate markets has limited growth potential in the country’s primary cities. Tenants in affordable Midwestern markets can more easily absorb rent increases than coastal residents, allowing investors to achieve higher returns through cash flow and appreciation.
Meeting investors and potential investors is so much fun for me. Getting to know and talk with people across the country is immensely fulfilling and will always be a huge part of why I love this job. But helping people bring balance and stability to their investment portfolios is a big part of it, too.
Alan Englander is senior vice president of business development for JVM Realty Corp.