Building a portfolio strategy can be a daunting task, but add the many options for investing in real estate to the mix and you’re facing quite a few decisions to make.
In this article we’ll help you narrow things down to build a long term investment strategy and see where real estate might fit in.
Real estate is not like the stock market. For one, it’s not as simple as choosing a stock and logging into your brokerage account, but more importantly real estate requires a long-term focus rather than short term gain.
There are quite a few things to consider before jumping into the deep end of the pool of multi-family real estate such as:
- Your timeframe for investing
- The benefits of real estate investing, and how those change in the long run
- What your options are to invest in multi family real estate
At Colony Hills Capital, we specialize in helping investors build a passive income stream through real estate; imagine a sort of ‘warm blanket’ for your investment strategy. Read on to learn more about this sector and how far your dollar will go when you invest.
Is real estate a good long term investment?
The short answer is ‘yes’, though that also depends on how you invest in multi family real estate.
For the ambitious investor, buying a property may sound like the way to go. Buying properties to manage yourself carries its own benefits (and risks) with it – and has a longer timeline to pay off. Investing in an REIT or syndication (more on that later) removes the overhead and risk of managing a property while still retaining many of the benefits.
However you choose to invest, there are several benefits that accrue over the long term such as:
- Cash flow
- Passive income
- Valuation potential
- Hedge against risk
- Tax benefits
Let’s examine a few of these benefits in greater detail.
The benefits of a long term strategy for multi family real estate
There are plenty of benefits to taking a long-term approach to multifamily real estate that we saw above, let’s examine a few in greater detail.
Multifamily investments provide a steady positive cash flow
Many investors get into multifamily investing by seeking a consistent source of income. That’s the primary goal of a multifamily investment after all, and one way to create constant revenue is through positive cash flow.
Multi Family homes are the best long-term investments compared to single family homes or other forms of real estate. Here are a few reasons why:
- More tenants paying rent means a higher chance of securing positive cash flow.
- Multifamily properties provide the opportunity to create other sources of revenue by adding amenities, such as dog parks, playgrounds, fitness centers, and in-unit washer/dryers, that allow you to increase rents and drive up revenue.
- Multifamily properties spread out risk among tenants, the more living spaces in a building the less impact one individual renter can make and the better your chances at seeing a positive cash flow as a result.
These are just a few of many reasons that multifamily properties are great at generating a steady positive cash flow which can lead to a higher rate of return on investment.
Multifamily hedges against risk
Multifamily is considered a “safe” investment compared to other real estate investment options. This is due to the fact that even in an economic downturn, people need a place to live.
That’s why Colony Hills focuses on class A- through B multifamily assets. When the economy is on an upswing people tend to upgrade their apartments (towards the top class of assets) and during a recession people may downgrade apartments (towards the lower end). Investing in this way can help to hedge against swings in the economy in ways other investments can’t.
Multifamily investing offers tax benefits
Multifamily investment allows the syndication investor to accelerate tax depreciation through cost segregation and other methods, which can offset the investor’s current tax obligations.
How to invest in multifamily real estate
There are a number of ways you can build a long term multifamily investment strategy.
That’s one of the strengths of multifamily investing as a long term strategy, however it poses a challenge when it comes to finding the right investment strategy for your financial goals and appetite for risk.
Purchase property and manage it
One way to invest in multifamily is to purchase a property to manage yourself, or hire a property management company to handle the grunt work for you. This can work, however it comes with some downsides as well.
For one, owning and managing a property brings a great deal of overhead and increased risk with it. You’ll be responsible for filling and maintaining the building, and dealing with tenant issues at all hours of the day and night, such as clogged toilets, HVAC problems, and especially non-payment of rent. Not to mention the fact that you need to be concerned as to whether every unit is rented. You could hire a company to do this for you, but that will eat into your returns.
We didn’t even get to the high closing costs that come with purchasing a property, and the tax implications of owning a building and trying to sell. Needless to say, purchasing a property is a good fit if you’re ready for the challenge and that is a big ‘if’.
Fortunately, there are other options available.
Invest in an REIT
For those looking to get those great benefits we mentioned earlier without the overhead of managing a property, an REIT could be a good solution.
REITs (real estate investment trusts) are securities that trade on an exchange, just like your average stock. Unlike stock though you’re not investing in shares of a company, you are investing in shares of property. REITs have a reputation for delivering liquidity, diversification, and excellent overall investment returns.
REITs are not without their disadvantages though, they are sensitive to interest rate changes, can be influenced by market trends, and can have high fees associated with them.
For those looking to break into multifamily investing with less exposure than owning a building, REITs are a great option though you may want to consider a multifamily syndication instead.
Syndications
A third option for investing in multifamily real estate is a syndication.
A syndication is a real estate deal in which several investors combine their funds to buy a property. One individual (or group) is responsible for locating an appropriate property, completing thorough due diligence and coordinating the purchase, while passive investors bring the funds to make the purchase and then benefit from the ownership and eventual sale of the property.
In a way, a multifamily syndication is the best of both worlds: you receive passive income that comes from owning a property, while diluting the risk by investing in a share rather than owning a building outright. This allows potential investors to own shares in many different properties, generating a passive income stream while distributing risk and limiting their exposure to one specific property.
That’s why we follow this model at Colony Hills Capital, to provide investors with the ability to tap into the amazing opportunities that investing in multifamily properties provides.