Diversify and Don't Turn Your Back on This Emerging Asset Class in 2017!
Just like when you were young and wanted to have the new, cool widget that just hit the market because everyone else was buying said widget, Multifamily has emerged over the last 10-15 years and everyone (especially new investors) want to jump on the train!
Why has the multifamily asset class emerged as a top investment vehicle over the last 10-15 years? Well from an economic standpoint, there's a surplus of millennials moving out of Dad & Mom's house, there are immigrants (illegal and legal) entering the country in droves, home prices are on the rise, there is a low supply of housing, and apartment firms are building or renovating a great product with desirable amenities. From an investment stand point, you can typically gain economies of scale through time and efficiency, market liquidity, transaction costs, concentration of units, management and labor costs, tax and record keeping, and disposing of the property.
As cap rates continue to compress across commercial real estate sectors and as a residential lending environment become slightly more challenging, institutional investors have capitalized on an opportunity to acquire large portfolios of single-family home rentals in recent years. This has created the single-family home rental as an emerging asset class in real estate.
Because of these trends, owners of leased portfolios now have an opportunity to sell their properties to investors who will value their portfolio based on the underlying net operating income generated by the property, and exit out of their investments in one transaction.
SO, with all the riff about Multifamily and hard to find investment opportunities with this asset class, what are other reasons you should invest in SFRs?
Multiple exit strategies: provides a hedge on the market
When residential values are higher, the owner can exit on an individual sales basis.
If home values decrease, rental homes maintain their value with rental income.
Owners can sell the property to the tenant offering "Seller Financing" at above market interest rates and sell the loans on the open market
Homes are spread over a larger area which spreads the risk of value swings in any one submarket.
Portfolios can be sold in parts meaning you can cash out (sell) only part of your portfolio leaving you with cashflow.
Portfolios can be refinanced in parts.
Performing a 1031 exchange on a bulk sale is much more feasible than exiting one by one.
Tenants tend to be more stable than multifamily with less turnover.
In the same respect, I could list more detailed advantages about Multifamily, but my purpose in writing this is to explain why, as an investor, your shouldn't turn your back completely on SFRs in 2017 looking for the next biggest and best investment vehicle like the game of Monopoly. Diversify; it's the core of every great investment strategy.
If you are seasoned SFR investor with a large portfolio, maybe consider selling a portion in bulk to 1031 exchange into a larger Multifamily property. If you are a seasoned multifamily investor, consider hedging against the market by buying an SFR portfolio. By diversifying in asset classes and locations, you are limiting risk and are capitalizing on each asset classes advantages.
Happy Investing!
