The Multifamily Investor Expo 2023, a premier event for professionals in the alternative investment space, recently convened a distinguished panel of experts to dissect the intricate strategies of wealth development through multifamily real estate. Moderated by Andy Hagans of AltsDb and WealthChannel, the session featured insights from Ashley Tison of OZ Pros, DJ Van Keuren of Evergreen Property Partners, and James Hance of Green Bison Capital. The discussion, available in its entirety on YouTube, delved into the enduring appeal of multifamily properties as a cornerstone for building and preserving generational wealth, particularly within the current economic landscape.
The Enduring Case for Multifamily Real Estate
The panel opened by addressing the fundamental question: why multifamily? James Hance, founder of Green Bison Capital, articulated the inherent stability of this asset class. "It’s the intrinsic value of a building, and it’s where people have to live. People always need a place to live," Hance stated. He emphasized the stability offered by multiple units compared to single-family homes, the consistent cash flow potential, and the ability to drive appreciation through effective property management. Hance also highlighted the significant tax advantages, particularly depreciation, which can offset tax liabilities for direct investors and limited partners alike. This ability to force appreciation through operational improvements and strategic management, he noted, makes multifamily a robust vehicle for wealth creation.
DJ Van Keuren, co-managing member at Evergreen Property Partners and founder of the Family Office Real Estate Institute, corroborated this sentiment, drawing on extensive data from their annual family office real estate investment study. "Multifamily has continued to be the main property type for families to invest into," Van Keuren observed. He pointed to the mitigating risk associated with a large number of units, where a single vacancy has a minimal impact on overall occupancy. Furthermore, Van Keuren highlighted the macro trends driving demand, such as rising home prices and the ongoing student loan crisis, which collectively push more individuals towards rental housing. This consistent demand, particularly in growing metropolitan areas with job opportunities, solidifies multifamily’s position as a resilient investment.
Ashley Tison, founder and CEO of OZPros, known for his expertise in Opportunity Zones, underscored the scalability and efficiency of multifamily investments. "You have the ability to be able to condense an enormous amount of these people… They have to have a place to live," Tison explained. He also framed multifamily as an environmentally conscious choice, countering the notion of urban sprawl. By consolidating housing needs into denser developments, multifamily properties can reduce infrastructure requirements and promote more sustainable living patterns, aligning with growing ESG (Environmental, Social, and Governance) considerations in investment portfolios.
Navigating Tax Advantages in Multifamily Investing
A significant portion of the discussion revolved around the various tax-advantaged wrappers available to investors in the multifamily sector. Ashley Tison elaborated on the benefits of Opportunity Zones, a federal program designed to incentivize investment in distressed communities. He explained how these zones offer deferral and potential elimination of capital gains taxes when investments are made and held for specific durations. Tison noted that for investors realizing substantial capital gains from asset sales, Opportunity Zones provide a compelling avenue to reinvest those gains while benefiting from tax advantages, including the elimination of depreciation recapture. This can lead to a notable increase in Internal Rate of Return (IRR), often cited as around 3% higher than comparable investments outside of these zones.
DJ Van Keuren emphasized the widespread underutilization of the 1031 like-kind exchange, a strategy that allows investors to defer capital gains taxes by reinvesting proceeds from the sale of one investment property into another. "80% of families don’t use 1031 exchanges, which is pretty astonishing to me," he remarked, attributing this to a lack of education. Van Keuren stressed that 1031 exchanges are crucial for compounding wealth over time, enabling investors to grow their capital base tax-free. He also touched upon other less commonly known tax credits, such as Low Income Housing Tax Credits and New Market Tax Credits, as potential avenues for sophisticated investors.
James Hance shared that approximately 20% of the capital raised by his firm over the past two years has originated from 1031 exchanges, indicating a growing awareness of this strategy. He also highlighted the possibility of utilizing 1031 exchanges within syndication structures, particularly through Tenant-in-Common (TIC) arrangements. This allows investors to transition from active property management to passive participation in larger, diversified multifamily deals, offering both tax benefits and a significant return on time invested.
Market Dynamics and Investment Timing in 2023
The panel also addressed the prevailing market conditions of 2023, characterized by higher interest rates. Andy Hagans posed the critical question: is now a good time to invest, or should investors hold cash for future opportunities? James Hance cautioned that the era of cap rate compression has ended, underscoring the need for investors to be highly discerning about sponsors. He emphasized the importance of vertically integrated operators with proven track records and strong capitalization, particularly as distressed properties are beginning to emerge due to refinancing challenges. "This will be a year, I think, for opportunities, particularly with debt and things that are… Properties that are under distress," Hance predicted.
DJ Van Keuren noted that many family offices, having learned from past market cycles, are strategically deploying "dry powder" rather than waiting for the market to fully rebound. He stressed the importance of fundamental analysis, including cost of living, quality of life, and market demand, as these factors are critical for success regardless of market conditions. Van Keuren also warned of a potential "reckoning" in the debt markets, suggesting that opportunities will arise for well-capitalized investors who can navigate potential negative leverage scenarios and rising interest rates. He advised investors to stress-test deals by considering worst-case scenarios, such as higher cap rates on sale and increased vacancy.
Ashley Tison acknowledged the prevailing caution but suggested that for investors within Opportunity Zones, the ticking clock of the program’s deadlines can create a bullish impetus. The need to deploy capital within specific timeframes encourages investment, often into ground-up development projects within these zones, which inherently have value-add potential.
Lessons from Family Offices for Generational Wealth
A key segment of the discussion focused on what independent high-net-worth investors can learn from the philosophies and habits of successful family offices managing generational wealth. DJ Van Keuren emphasized the paramount importance of patience and sound decision-making. He noted that while the initial wealth creation is often a testament to the patriarch or matriarch’s vision, preserving and growing that wealth across generations requires a different skillset and a long-term perspective. Van Keuren advocated for thorough due diligence on sponsors and partners, questioning their ability to navigate market downturns and demonstrating a clear understanding of risk mitigation. He also highlighted the power of referrals and strong relationships within the investment community.
Ashley Tison shared an anecdote about a client who faced significant capital gains tax challenges after a business sale. This situation underscored the critical need for professional guidance and careful planning to avoid unexpected tax liabilities. Tison’s firm helps clients navigate these complexities, often by establishing core value statements and family constitutions. These documents, he explained, not only guide investment decisions but also serve as a framework for passing down values and principles to future generations, ensuring the intentionality of wealth preservation.
Andy Hagans reinforced the idea of humility and the wisdom of surrounding oneself with expertise. He observed that many successful individuals, while adept at accumulating wealth in their primary fields, recognize their limitations in specialized areas like real estate. Partnering with trusted advisors and experienced operators who have navigated multiple market cycles is, in his view, a hallmark of effective wealth management.
Ground-Up vs. Value-Add: A Forward Look
In a rapid-fire closing round, the panelists addressed the outlook for ground-up development versus value-add strategies in the current environment. James Hance expressed a preference for value-add, citing a lower risk profile compared to the longer timelines and inherent uncertainties of ground-up construction. Ashley Tison, conversely, noted that within the Opportunity Zone framework, ground-up development has been a necessity to meet the "substantial improvement" threshold, making it his focus. DJ Van Keuren offered a more nuanced perspective, suggesting that the optimal strategy depends heavily on the specific property type, geographic location, and market demand. He pointed to sectors like cold storage, where supply is lagging demand, necessitating ground-up development, while acknowledging that stalled apartment projects or underperforming assets could present significant value-add opportunities.
The discussion at the Multifamily Investor Expo 2023 provided a comprehensive overview of multifamily real estate as a powerful tool for wealth development. The insights from industry leaders underscored the asset class’s inherent strengths, the strategic importance of tax advantages, and the critical need for informed decision-making in the evolving economic climate. The event served as a valuable platform for accredited investors to gain actionable intelligence and connect with experts dedicated to navigating the complexities of real estate investment for long-term prosperity.
