From the vast number of options ranging from office, retail, storage, and residential, which one should you choose to focus on? I believe multifamily is and will continue to be the best asset class to invest in over the next 20 years. Multifamily, or large apartment buildings ideally made up of over 100 units, proved itself less risky than single family homes by faring much better through the 2008 financial crisis. Single family homes on the whole are subjected to higher leverage and lenders are far more willing to lend on a single family home than multifamily. Multifamily prices are more stable because lenders only provide debt to experienced investors and operators of real estate as they see owning 100+ unit buildings as a business. Another reason why multifamily survived 2008 with just a few scratches is the fact that it is a cash flowing asset and investors do not rely on appreciation and leverage to make profits.
Homes in some parts of the US lost over 70% of their value, forcing homeowners and investors alike to sell at massive losses or have their assets taken by the bank. In contrast, multifamily investors saw marginal declines in the rents they were collecting and some regions even experienced rent premiums due to many people moving from single family homes to apartments, driving up demand. Additionally, multifamily investors were not as concerned with plummeting asset values because the value of an apartment building is directly tied to how much money the building produces rather than market sentiment, quality of neighborhood, and school district. Lastly, multifamily investors were not overleveraged in 2008 and had no problem continuing to pay their mortgages through the rents they collected, saving them from turning their assets over to the bank.
There are plenty of other factors explaining why multifamily has a lower risk profile over single family homes but I will move on to describing multifamily’s future growth. The demand for multifamily housing will continue to grow at favorable rates over the next 20 years. Consistently higher demand will allow for continual rent increases, which in turn will raise asset prices. So what is causing demand growth? Millennials are a huge demographic and makeup 56% of current renters. This generation marks a few changes in the way Americans live which future generations are most likely to follow. Millennials are categorized by their preference to live in large, 24-hour cities, putting off marriage and having children until later in life, and preferring to rent an apartment rather than buying a home. All of these characteristics raise the demand for multifamily housing.
Another macroeconomic key to the growth of multifamily is the fact that home prices continue to increase while incomes remain stagnant. The income to home value gap will continue to expand, leaving people no choice but to turn to renting. The average renter makes less than $50,000 per year, thus the most lucrative and risk-adjusted investment would be in class B, affordable multifamily with rents in the $1,000 to $2,000 range. Lastly, another huge advantage of class B and C multifamily is the fact that this type of product can never be built anymore because developers can only afford to build luxury class A real estate in order to get a return on their investment. Furthermore, the returns are even greater when an investor is able to acquire class B and C assets below replacement cost. This means that the supply of affordable multifamily housing is going to languish while demand continues to flourish! Wow – just writing all of this has me excited. Good luck to anyone choosing to embark on any path of happiness and financial freedom, especially in real estate. Please reach out to me if I can be of service to you.