Multi-family investors are not only able to seek higher annual rates of return, but are also able to take advantage of numerous other benefits as compared to those who invest in traditional stocks. While investing in the stock market has the potential to generate returns, unpredictability and volatility create a lot of uncertainty in the marketplace. However, multi-family has a proven track record being the complete opposite -- in addition to the cash flow it provides. Here is why multi-family is a compelling investment vehicle that provides higher risk-adjusted returns compared to the stock market.
Stock investments are highly susceptible to ever changing market conditions and overall market volatility, with no true "control" over your investment outcome. Typically, it is a hands-off approach where an investor buys shares in a company with the speculation of achieving a desired rate of return. While this investment goal could potentially be obtained, a high level of unpredictability of returns exists, due to a range of emotional factors and current events—which at times lack correlation to the core value of the stock. This emotionally-based behavior often diminishes the value of the stock and deviates from the core fundamentals of the company or your decision to invest in the market.
Investments in multifamily real estate, on the other hand, are valued based on their net operating income which does not go up and down with every news headline. The valuation is obtained by an analysis that is backed by empirical data. Some data sources include sales comparables, rent comparables and expense comparables—all of which align with the asset. A data-driven investment creates a higher level of certainty on outcome projections and clarity on how they can be achieved. In a recent study performed by the National Council of Real Estate Investment Fiduciaries (NCREIF), the chart below shows the measurement of real estate performance as a reflection of "up" and "down" years across an 80-year period from 1934 to 2013. This demonstrates that real estate historically has more "up" years and fewer "down" years than stocks and bonds.
The stock market allows investors to make capital investments insofar as they may purchase stocks at face value. In multi-family real estate, however, that same capital investment can be favorably leveraged by buying property with fixed rate financing to acquire a higher valued asset. For example: A $25,000 investment in the stock market will purchase stock at face value of $25,000. In real estate, a $25,000 investment can be a 25% down-payment on a $100,000 property, through the use of bank financing, thus giving investors access to a larger portfolio.
The IRS does not allow depreciation on stock investments. Multi-family real estate, allows investors to depreciate their property across 27.5 years with an ability to accelerate the depreciation schedule through cost segregation. When selling stocks, you pay 100% of the capital gains, whether you held it long-term or short-term. Tax on those gains is are a fixed percentage for long-term and it’s based on your ordinary income for short-term. With multi-family real estate, you pay very little tax, if any. It's also possible to use a 1031 exchange to roll over your capital gains into another property of equal or greater value and defer all of your capital gains tax.Tr
Investments in stock products like ETFs and mutual funds often carry fees as high as 2.5% which are not always included in traditional return projections. Multi-family real estate also comes with fees such as acquisition fees, asset management fees, and property management fees, however, all of these fees are factored in before the calculation of return projections.
While diversification is key to all investment strategies, it is my belief that real estate should be the foundational strength of all investment portfolios. Specifically, multi-family real estate provides a hedge against risk -- in addition to its innate track record of stability in valuation, and predictability through cash flow.
Author: Yannik Cudjoe-Virgil
Yannik formed Merlynn Acquisitions in 2017. He has experience in portfolio asset management, real estate investing, investment analysis and financial modeling.
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